The Temptation of Free Money

The first edition of Elsevier Weekblad in recent years has featured an essay by Arno Visser, President of the Netherlands Court of Audit. This year he takes a quizzical look at the billion-euro innovation funds that are currently so popular with Dutch politicians. Is the money really as “free” as they say and are they neglecting the innovation funds we already have?

Billion-euro innovation funds are popular with Dutch politicians
The President of the Netherlands Court of Audit is critical. Is the money really as “free” as they say and are the politicians neglecting the funds we already have?

Even before the King opened the new parliamentary year last September, rumours were circulating about a fund that would be fed with tens of billions of euros. The negative interest rates would provide free money for new ideas and ongoing projects. But has anyone thought about the funds we already have? Perhaps the politicians should fix the roof while the sun is shining rather than taking out a cheap second mortgage to build an extension.

The birth of a good idea

The King announced that “the government will present a proposal for an investment fund early next year” to boost the economy and strengthen the country’s earning capacity. It would “target investments in specific knowledge, innovation and infrastructure projects that strengthen the economic foundations of the future”.

Employer organisations were delighted with the news and claimed intellectual ownership. VNO-NCW chairman Hans de Boer had been calling for a Future Fund to invest in the railways, sustainable housing, climate adaptation, artificial intelligence and other technologies for many years. Money would be no problem. “The funds are available: there is a surplus on the budget and loans have never been so cheap.”

SMEs also saw themselves as the spiritual fathers: “We are pleased the business message has been heard, the timing could not be better,” read the press statement. They, too, thought the business case was compelling. “There is a budget surplus and the national debt is falling to well below EU requirements. Paying off the national debt more slowly and putting the surplus to work is the sensible way to finance investments in the infrastructure, new technology and the like. It has never been as cheap for the state to borrow money. In fact, since interest rates became negative on the capital market, the government is earning money on the bonds it issues.”

A fund for what?

For many, this is how simple the feasibility study is. Only a handful have urged caution. One is economist Mathijs Bouman. In Het Financieele Dagblad, he wondered “can this ever have a happy ending?” But he knew why it was happening. “Negative interest rates make even a stiff Calvinist bend like rubber.” Wopke Hoekstra, the finance minister, had also warned, “It’s not a fund for the frivolous”.

Despite these cautious notes, what the money will be spent on is being hotly debated even before the fund has been set up. Hoekstra’s predecessor, Jan Kees de Jager, now the financial man at KPN, was certain he had the answer. The money had to be spent on “innovation” and the head of TNO innovation research centre, former state secretary Paul de Krom, whole-heartedly agreed with him. De Jager told BNR Nieuwsradio that he also wanted to fund blue sky projects. “If all the innovative projects we finance were successful, we’d have to ask ourselves whether we were being innovative,” he lectured.

De Krom and De Jager summed up their strategy as making “smart choices” and presented a paradoxical warning: “If we don’t invest now, we won’t have much to spend in the future.”

Not only the boss of TNO, a public institution, and the financial man of a former public company wanted “smart” choices. In November, Dutch Rail and ProRail decided they knew where the money should go. They wanted 20 billion to be spent on the railways and public transport.

Bankers in turn shared their constructive thoughts. Rabobank economists Hugo Erken and Erik-Jan van Harn called for a different kind of “stimulus”. The money should be spent on education and public and private R&D. They had done their homework. “Our calculations show that investments in innovation and education earn the highest returns. (…) Investments in infrastructure are also important but at least as much money should be invested in education and innovation.”

The Rabobank economists agreed with the supranational organisations that the Netherlands needed to spend more money on account of the ageing population. Yet they were keeping their options open. “If we decide not to listen to the IMF, we will soon be adding another crisis to the ever-growing list of social challenges we have been predicting for many years.”

After the bankers, the management consultants had their turn. Investments should be made in artificial intelligence and learning the lessons of green bonds. “The new investment fund can copy the [green bonds’] methods. Spend the money on AI projects that meet strict social criteria,” said KPMG’s Sander Klous, Rob Fijneman and Wim Bartels.

Learning the lessons of green bonds was “important, as attracting private investors is unarguably one of the government’s aims for the fund,” according to the consultants. They apparently know something the government had not said. “We saw it with green bonds, institutional investors and pension funds are more likely to take part if it is clear that their investments can withstand criticism.”

Falling leaves

Last autumn will not be remembered for the seasonal fall of leaves but for the siren call of free money. Was it a coincidence that municipalities were regularly sounding the alarm about budget deficits and lack of government funding? The homeless and the young were paying the price. “More money for the municipalities!” was the rallying cry. Schools and colleges also aired their grievances and demanded higher salaries to match the higher workload and acute understaffing. Hospital staff had the same grievances. A new collective labour agreement was signed and extra money was found to pay for it. And measures to cut excessive nitrogen emissions also had financial consequences.

Extra money was regularly justified on the grounds that any investment in the future would obviously earn more than it cost. “We hold these truths to be self-evident” was the unspoken belief behind many of the proposals. Or more colloquially, “Nothing ventured, nothing gained”.


It is not the first time that such a debate has been held – and it won’t be the last. A similar fund, the Economic Structure Enhancing Fund (FES), was established in the early 1990s to turn “underground wealth” (natural gas revenues) into “overground wealth” (investment projects in the national interest). After years of austerity, the government and parliament wanted to ringfence money to invest in the economic structure during lean times.

Between the end of the 1950s and the early 1990s all natural gas revenues – the underground wealth – had been added to the national budget to finance public spending in general, from capital investments to current expenditure. The Economist magazine called it The Dutch Disease. Between 1975 and 1985, natural gas revenues rose from 10% of government revenue to nearly 20%.

 Beginning in 1995, about a quarter of the natural gas revenues and the proceeds of auctions and the sale of state-owned enterprises were placed in the FES, €33 billion in total. Unfortunately, the good intentions were quickly forgotten and management of the fund was inconsistent. The rules on the revenue sources and what the money could be spent on, for instance, were frequently changed. In the end, all the original conditions were abandoned, the fund lost all purpose and was wound up within 15 years.

However, this did not signify the end of new funds. Revolving funds are a relatively new instrument and are not as well-known as the FES. Shortly before the FES was wound up there were fewer than ten of them in the Netherlands. Since 2008 the government and regional development companies have created no fewer than 21 of them! At the end of 2017 they were administering at least €3.6 billion of public money. They include the Restoration Fund (established in 1985), the Access to Energy Fund, the Infrastructure Development Fund, The Future Credit Fund for Research Facilities and the National Energy Saving Fund.

The funds revolve: a large proportion of the euros they earn is returned to them for reinvestment. Unfortunately no single minister has been made responsible for setting the ground rules or enforcing them, and no one knows how much the funds have invested. If the funds are actually revolving, much more than €3.6 billion is being invested. But how much?

Another revolving fund is about to be added to the list: InvestNL. It is facing a Herculean task but parliament and the government will fund it to the tune of €2.5 billion. And that €2.5 billion has to make a profit so that it can be reinvested time and again.

InvestNL will facilitate high risk industrial transitions in the fields of energy, sustainability, mobility, food security and digitisation and in social domains such as care, security and education. And that’s not all, InvestNL will also fund startups and scale-ups and promote exports and foreign investment. It will help Dutch companies market their products internationally and tackle energy sustainability, climate change, water and food security and other global issues.

The common denominator in all these examples is that public money is being invested off-budget for the benefit of society. It comes on top of all the money that ministers spend every year from their regular budgets, on top of the many tax breaks to support innovation, electric cars and farmers, on top of the sustainable energy grants, on top of existing financial guarantees, and on top of the budgets the government already provides to the ministries.

It is also in addition to the budget reserves, budgeted funds that have not been applied and are not, contrary to the rules, returned to the Treasury at the end of the year but are set aside and carried over to the next year. Such “windfalls” are normally not allowed but ministers like to put some money to one side “just in case”.

Nevertheless, either not enough public money is being invested or it is achieving too little. Otherwise we wouldn’t need to set up a new investment fund in 2020.

Is it free money?

So, setting up an investment fund is not that uncommon. All the funds that have been created also have something else in common. Parliament is usually badly informed about them, their investments and how they benefit society. Yet it is public money!

Limited information was provided on the budget reserve formed to subsidise sustainable energy. By 2016, it had grown to nearly €2 billion, mainly because the money available under the renewable energy scheme was not being spent and projects were being cancelled or delayed.

 The need to set up a new fund is therefore open to question. Does it mean existing funds are performing badly or is not enough known about them? Are the criteria for a new fund the same as those applied for the 30 revolving funds we already have?

A new argument is that the money is “free”: the repayment is less than the amount loaned. But what does this mean in practice? If the fund invests, say, 50 billion, is it repaid the entire loan or only the difference between the principal and the amount repayable (the negative interest)?

In the first case, all the money loaned and invested must be repaid at some point, so the investment must in any event earn 50 billion plus the negative interest. Otherwise, it is not free.

In the second case, far less money is available for reinvestment, only 500 million (if the interest charged on the 50 billion is minus 1%). This is far less than is currently available from the funds we already have. And where do you park the 49.5 billion that has to be repaid? Surely not on an account with a negative interest rate.

Using cheap money to finance planned expenditure, for instance to buy fighter aircraft already on order, is just sensible policy. It does not need a separate investment fund.

These are difficult dilemmas. Perhaps that’s why the government was not entirely clear on Budget Day. The Budget Memorandum did not actually say there would be a new fund. It said only that “the government is studying how an investment fund can be established to strengthen the earnings model”.

According to the ministers the matter was complicated “because projects must be selected strictly for the value they generate for the earnings model. Strict selection requires good governance and the involvement of external experts”.

These weren’t the government’s only conditions: “To prevent public funds crowding out private investments, public investments must be additional to private initiatives. Moreover, a fund must have more added value than existing public initiatives, such as the Infrastructure Fund and InvestNL, and lessons must be learned from the past.”

Conspicuous absence

The most striking part of the discussion was that no one in 2019 seemed to be aware that the government had failed to spend the surplus funds that were still available from 2018. Ever since it took office in 2017, the government has had more financial resources to spend on security, infrastructure, education and care. The budget surplus will rise to nearly €13 billion a year as from 2022. In 2018 the government had formed an additional budget reserve of €5 billion and in the same year the Ministry of Defence was just one ministry that had more money at the end of the year than it had been budgeted at the beginning: €1.2 billion was still available.

Why? Investments in military ships, vehicles and barracks have to be thoroughly prepared – which takes time – tendered for by specialists – who are scarce – and delivered – which also takes time. So the money is not spent that quickly.

Defence was not the only ministry rolling in it. The government reserved an additional €543 million for new infrastructure in 2018. It was not spent during the year but is being carried over to 2020 and 2021. An extra €5 billion budgeted in 2018 was also adjusted downwards to €4 billion during the year.

Penny wise, pound foolish

It is striking that that the public debate is always about “new” investment wishes. Yet maintaining what we already have is just as important. It, too, was once a good idea.

 By way of illustration, breakdowns and unscheduled maintenance were putting a lock in the south of the Netherlands out of service at least once a month. At the beginning of 2018, it was out of service for more than a month when a resistor block burnt out. The resistor block was part of the drive mechanism necessary to open and close the lock gates. At nearly a hundred years old, it had long outlived its technical life. A periodic inspection some years previously had found that the drive mechanism was in poor condition and posed a risk. Its replacement was nevertheless repeatedly postponed when other local issues took priority. During the disruption, barges had to divert via other locks that could only handle small craft. Larger vessels could not reach their destinations.

This lock is symptomatic of a bigger problem. The Ministry of Defence and the Ministry of Infrastructure and Water Management were unable to spend their additional funding, but the cost of maintaining existing bridges and locks after many years’ postponement has risen to €414 million. Postponing essential maintenance because of budgetary restrictions inevitably leads to higher costs.

About three-quarters of the urgent measures resulting from overdue maintenance are unscheduled and there is accordingly a greater risk of failure, breakdown and disruption. Temporary speed limits have had to be introduced on roads and weight restrictions on bridges. In one case a bridge had to be closed. The cost is inevitably borne by society at large.

Furthermore, the Ministry of Defence has lacked the funds necessary to maintain its large and diverse real estate portfolio for many years. The portfolio includes army buildings, exercise grounds, offices, munition depots and many other properties. The ministry had to take urgent fire safety measures, for example, and has also had to close canteens because they became unhygienic.

Computer systems are prone to the same problems as roads and barracks. In the case of ICT, most political, public and official interest is shown in new projects, and especially in their failure. New ICT projects are certainly important and failure can cost a lot of money. The Quality and Innovation in the Judiciary project, for instance, was aborted after nearly €100 million had been spent on it.

Far less interest is shown in maintaining the ICT we already have, even though maintenance costs far less than replacement. In practice, replacement and maintenance are communicating vessels: the more money that is spent on maintaining what we have, the less there is to replace it, and vice versa.

Trimming the fat

The Minister of Social Affairs and Employment, Wouter Koolmees, recently acknowledged in NRC Handelsblad that spending cuts at the organisations that implement policy had been too deep. This was part of a bigger problem, he said. “Many government services are having to deal with outdated, interconnected IT systems that are continuously being overloaded by new laws. […] We can’t solve the problem by throwing 100 million at it. It’s too complex,” he said.

According to former senior civil servant Roel Bekker, too much is being demanded of the implementing organisations. In an interview with Het Financieele Dagblad, he said, “The Hague has to slow down, otherwise it will keep getting it wrong.” In his capacity as secretary-general, he had made proposals to shrink the government’s civil service but spare the implementing organisations. The latter objective was not achieved. “The government keeps churning out policies but no one cares about the quality of the implementing organisations. Something has to give.”

Both Koolmees and Bekker touch upon an important point that all the champions of free money for innovation overlook: the lack of funding to maintain and guarantee the continuity of what we already have. The Tax and Customs Administration, for instance, has been struggling for many years to maintain and upgrade its IT systems and a solution to its problems is unlikely in the foreseeable future.

 The reason is obvious: the severe austerity measures taken since the financial crisis in 2008. Some measures – such as a one per cent cut on all spending – were generic, others were targeted at specific organisations or policy fields. The government decided it had to scale itself down, become “compact” and work more efficiently by digitising its processes. The underlying thought was that the organisations would work more efficiently: they would do the same work with less money. “The fat has to be trimmed,” it was said. And no one cared to disagree.

Road maintenance was the same. The official policy was that problems had to be urgent before they could be addressed. In other words, regular maintenance schedules would not be followed but repairs would be made only when something broke down, like the lock and the bridge mentioned above.

This policy overlooks the fact that the potential efficiency gains are finite. Sooner or later, all the fat will have been trimmed and there will be nothing left but a skeleton. If the policy ambitions are not rolled back, spending cuts will reduce the quality of public services. You cannot continue doing the same thing with fewer and fewer people and less and less money.

 Politicians rarely consider implementation organisations until something goes wrong. They prefer to concentrate on new things: new roads, rails, trains, aeroplanes and ships. To quote two financial specialists in the House of Representatives, Joost Sneller and Bart Snels: “Politicians would rather open a new bridge than repair an existing one.” The cost of overdue maintenance on the main road and waterway networks has risen to €767 million and is increasing by €150 million a year. In response, a one-off sum of €100 million has been released.

Old or new?

This brings us to the question of whether additional money should first and foremost have additional and tangible public benefits, and should it be spent on the railways, education or science? Or should it be spent where the provision of public services is stretching the limits of what is possible? To help the unemployed, to issue driving licences or maintain infrastructure? Is additional money used primarily for renewal or for “continuity of policy”?

And when we answer this question, we have to ask whether the expenditure is a one-off outgoing and can it really be called an investment. Is it an investment in a capital asset such as a building, road or lock? If so, it will have financial consequences as extra money will be needed to cover maintenance and operating costs. A fund can pay for a new metro line to Schiphol Airport and a high speed rail link to Groningen but money must also be available to keep them running.

Is a new fund appropriate and should it fall under the direct responsibility of a minister so that decision-making is in political hands? Alternatively, should it, like many revolving funds and InvestNL, have its own legal personality and be at arm’s length from politics? The next quandary is how to ensure that parliament is properly informed about the fund’s performance, in any event better than it currently is.

The fund could also meet longer-term needs, such as supporting scientific research or assisting the unemployed.

At the end of December the government lifted the tip of the veil. The investment fund would be set up in the first quarter of the year and provide funds for research and development, innovation and infrastructure. “But it would concentrate on incidental investments,” wrote economics minister Eric Wiebes shortly before Christmas. The money would be in addition to existing budgets and it was “the government’s ambition to make the first investments during its current term”.

The government’s current term ends in 2021 and, as noted, it intends to invest an additional €13 billion before then. That ambition is facing a stubborn practical problem: the government is finding it hard to spend the money

A closer look

There are still a couple of months to think about this issue. Instead of extending cheap loans, it might be wiser to improve the way we finance what we already have. It could be more sensible to invest the money later rather than sooner. Perhaps we should first take stock of the situation at the implementing organisations, the effectiveness of tax measures and the success of existing budgets, budget reserves and funds. If they are not having the desired effect, they should be reviewed and decisions taken on their future.

Every public organisation that wants to guarantee the continuity of its services should have the budget and personnel it needs to serve the public, update its ICT security, deal with tenders correctly, replace outdated components, etc. This might not be politically exciting – it won’t win an election – but if it is not done it will cost votes and further undermine trust in politics and the government.

 A more critical approach therefore has to be taken to a fund with free money. The short-term choices first require a long-term vision that is based on more than the “earnings model” of new investments. The existing “loss capital” must also be brought under control. Where are continuity and services under pressure and where are they already a problem? What infrastructure is below standard and has to be improved? What should be terminated and what should be continued?

 As the saying goes, we must fix the roof while the sun shines, and this is the year to do it. We should not wait until it starts raining. The roof won’t be leaking if the sun is shining, but that does not mean the holes have been fixed. How sensible is it to take out a cheap second mortgage to build a new conservatory if the roof does not survive a severe winter?

The continuity of public services is a valuable asset that does not lend itself to quick fixes.