A number of frequently used terms are explained below.
Net present value
The net present value is the final value of an amount that is disbursed not as a single lump sum, but as a series of small annual instalments. The net present value takes account both of the interest that could have been earned if the payment had been made as a lump sum and of inflation, i.e. the decline in value over the years. The net present value of a payment made in instalments is always lower than that of a lump-sum payment.
Prices change as a result of market conditions and inflation. The phrase ‘in 2001 prices’ means that we have used prices from the year 2001. Statistics Netherlands and Eurostat (the statistical office of the European Union) both keep a record of annual price inflation. They also set the rates of indexation, which indicate how much higher or lower prices are in a given year compared with previous years. These indexation rates are used to convert historical prices quoted as ‘in xx prices’ into current prices.
Planning dollar exchange rate
Many of the items in the cost estimates are expressed in US dollars, even though the estimates themselves are prepared in euros. This makes it difficult to produce accurate estimates, given that the exchange rate between the US dollar and the euro fluctuates on a daily basis. The Ministry of Defence has found a practical solution for this problem by basing the estimates on what is known as the ‘planning dollar exchange rate’. This is a set exchange rate that has been agreed for use purely for the purpose of the cost estimates.
The amount actually paid in practice depends, of course, on the exchange rate on the date on which payment is made.
Forward exchange contract
A forward exchange contract, or ‘currency swap’, is used to buy US dollars or another currency at the rate prevailing on the date of purchase, for use at a later date. The price of a currency swap is known as a ‘premium’ – not surprisingly, as a swap is in fact a form of insurance. The holder of the swap does not incur any loss if the exchange rate rises, as the dollars he or she needs have already been bought. If, on the other hand, the exchange rate falls, the premium has been paid for nothing, as it would have been cheaper to buy the dollar at the new, lower rate.
Under the Decree on legal acts under private law, ministries may enter into currency swaps only through the agency of the Dutch central bank and in accordance with the prudential rules laid down by the Ministry of Finance. The aim of these restrictions is to prevent any form of undesirable speculation. In principle, currency swaps are arranged only if both the date of payment and the amount of the payment in question are known in advance. Also, the value of the obligation for which the currency swap is required must exceed a given threshold. To date, therefore, currency swaps have been used only once an obligation has formally arisen in a ministry’s accounts.
A budget fund is part of the national budget and is intended to allow certain items of revenue from and expenditure for a particular goal to be managed on a separate basis. A budget fund is established under an act of law.
One of the better known budget funds is the Infrastructure Fund, which is the vehicle through which expenditure on infrastructure projects by the Ministry of Infrastructure and Water Management is budgeted and accounted for. In 2018, the government decided that the Ministry of Defence should get a ‘Defence materiel budget fund’. No details have yet been given as to how exactly this fund is to operate (situation as at February 2019).