Market financing for the public sector: good idea?

For long term solutions (twenty to thirty years) the focus in the last few years has shifted from traditional bank financing to market financing. Is it a viable alternative?

A new kid on the block? More like a comeback kid, is the opinion of Wim Moesen, emeritus Professor Catholic University Leuven:

“Market financing means that authorities are financing investments via the direct issue of bonds or other debt instruments. In the past, cities and villages did that more frequently, for building roads, industrial estates, a sports centre, etc. But over the years it has fallen into disuse, mainly because of the dominant position of the 'tied bank'. This is not suitable for all authorities: you need to do it on a certain scale because of the costs involved. Or you need to bundle things, that's another option."

In any case, financing on the capital markets can be a useful solution for both parties. On the one hand, governments and social profit organisations obtain an alternative to bank credit that is sometimes also cheaper

And for pension funds, insurance companies and other institutional investors there is growing interest in debt instruments issued by public authorities. They have a more 'natural' relationship than banks to taking on very long-term commitments, according to Katherine Dior, Head of Primary Markets, BNP Paribas Fortis:

"Insurers, for example, are well able to estimate how much money they need to spend over how many years. They want to match that to long-term investments, so that they can manage the risks correctly."

In specialist finance magazines a distinction is often made between three forms of financing on the capital markets: institutional bonds, retail bonds and private issues.

  • Issuing institutional bonds is suitable for large organisations with a stable reputation (whether exchange listed or not) and high value issues.
  • For smaller organisations retail bonds could be of interest. This kind of bond is aimed at private investors who can subscribe in denominations of EUR 1,000.
  • In a private placement, the debt is offered to a limited number of institutional and/or wealthy private investors.

Katherine Dior prefers to see things from a different point of view:

"It is still about debt. You can of course choose a particular type of investor depending on what is needed for the structure of the financing. For example, it is obvious that you do not offer small savers an investment that is poorly documented and full of risk, and into the bargain has a twenty year maturity. Given the current low interest rates, retail bonds are being issued less frequently than institutional bonds or private placements. Small savers think: if I have to lock up my money for seven year for a 1.5% yield, then I might as well just leave it in a savings account. With loyalty bonuses they will probably get around 1.1%. The long term, that is so much a part or public authority investments, is mainly music to the ears of institutional or wealthy private investors."

The roles of a bank

If authorities and other organisations go directly to the capital market to finance their investments, does it mean that banks just drop out of the picture as brokers? That is happening already in some cases, it is likely to happen more often in future, provided that the market improves. But that does not mean that banks will disappear entirely from these operations. Katherine Dior lists three reasons why banks can (and often must) still have a useful role to play as intermediary.

“The first reason is the need for secondary trading. This relates to the liquidity of the debt. If an investor buys debt instruments from a public authority, then the investor will probably want to sell them again over time. At present bonds are only rarely traded on the stock exchanges. So the market players need to be able to buy and sell 'over the counter', without using the stock exchange platform. Banks can do that.”

The two other reasons relate to the role of adviser, says Katherine Dior:

 "A bank can first of all advise on structuring. This depends on the party issuing the bonds, the investor, the value, the term and so on. In some cases a one page contract between two parties defining the arrangements is ample. In other cases you need a stock exchange listing and a prospectus with hundreds of pages, a so-called European Prospector's Directive Compliant Document. It goes without saying that the latter option will cost more than the first. Things like this push up the fixed costs, but that is fine if the amount is large enough.

As well as these structural elements, a bank can advise on the price. Suppose the authority issues bonds and the investor wants 5% over a five year term. How do you know whether that is a good deal? And what is the competition offering?”



The decline in long-term loans to the public sector

Over the last few years, banks have been reluctant to grant long-term loans to government and social profit organisations. There are a number of reasons for this trend.

According to Joachim Verheyden, Head of Business Development BNP Paribas Fortis, the main reason for the decline is the creditworthiness of the public and social profit sector:

"In the past lending to an authority or social profit organisation was viewed as zero risk. Ratings did not even exist for public authorities. The assumption was that authorities would always be able to pay their debts, because if it became necessary they could always raise taxes. Thanks to the European debt crisis this perception has now changed: the view of risk for a loan to an authority has become less positive, given the position with their outstanding bad debts. This is having an impact on the term and the cost of loans."

The second reason for the reduction in long-term loans comes from the Basel III guidelines. Basel III imposes stringent rules, to reduce the "mismatch" between long and short term at the banks. Explained simply? Joachim Verheyen:

“Customers deposit money at the bank. Those are liquid funds that we can be withdrawn again at short notice. The bank uses this money to provide credit. That is therefore long-term money. The gulf between the two - the "mismatch" - is traditionally bridged using the interbank market. During the US mortgage crisis in 2008 this interbank market suddenly dried up completely: the banks no longer dared to lend each other money. All the systems threatened to grind to a halt and Europe had to intervene to fill in the gap between them. Hence the introduction of Basel III, with stricter capital requirements on the banks. They need to have more liquidity relative to their long-term commitments. The longer the term, the more substantial the liquidity has to be.”

An important consequence of the Basel III guidelines is therefore that banks are less happy to lend for a very long term. Or if so, then at a very high interest rate. Luc Zuallaert, Director of Public Banking at BNP Paribas Fortis:

"Because of Basel III banks are less competitive in the area of long-term lending. If a bank were to lend today over thirty years, then we would have to demand a much steeper interest rate. Meanwhile in the public and social profit sectors there are hardly any loan applications for thirty years. Over the last few years the banks have sent clear signals to the local authorities and organisations who have understood perfectly. For example, hospitals now finance their construction projects over twenty years, not thirty-three, adding three to five years for the drawdown period during the actual construction. The hospitals themselves are no longer asking for very long loan terms: in twenty years a medical building will in any case be ready for renovation."

And other institutions in the public and social profit sector have also reduced their demand for long-term lending, according to Luc Zuallaert:

"In the towns and villages in Flanders the vast majority of demand - a good 65 to 70% - is still around twenty years. Comparison with Brussels is difficult because it has a separate financing vehicle. In Wallonia there is apparently still demand for old-fashioned long-term loans. That is because project-based financing is still used there. In Flanders, the new policy and management cycle was introduced this year, aligning the accounting more closely to that of a company. The towns and villages in Flanders are no longer working on a project basis, but finance their own cash flow. Therefore they are less tied into longer terms.”

The stricter capital requirements of Basel III will of course play a role in the shortage of long term lending, admits Wim Moesen, emeritus Professor Catholic University Leuven. The impact of the higher risk valuation of public authorities is something he puts in perspective:

"This risk is still limited. Europe is keeping a very close eye on debt: going off the rails, as happened now and then in the past, is no longer an option. In addition, authorities do have the power to tax. In an emergency they can always increase taxes a bit. Personally I find the extremely low interest rates are the greater villain of the piece. Some day interest rates have to go back up. And that is another reason that banks are not very inclined to commit to long-term lending."



Working with the lean start-up method: the right approach

Working with the lean start-up method in an established company can mean questioning and if necessary aborting one's own business model. This is not easy, but there is little choice.

It is not easy to apply the lean start-up ideas at an existing company. They can cause disruption, and not many companies are willing to cause damage to themselves. However, there is no choice: those not engaging in disruptive innovation may end up being wiped out or eaten up by the competitors that do. In 2013, The Washington Post, a venerable institution with 180 years of experience and Pulitzer prizes galore, was simply bought by Jeff Bezos, the man behind Amazon.

The Washington Post, a venerable institution with 180 years of experience and Pulitzer prizes galore, was simply bought by Jeff Bezos, the man behind Amazon.

So what is the best approach? Cedric Donck, business angel and founder of the Virtuology Academy, lists five recommendations.

  1. Get a top management sponsor
    Real innovation means doing things differently. The team engaging in a lean start-up will certainly cause conflict with conservative forces, resisting legal and compliance departments and established departments defending their territories. Not all business structures are in the company's best interest. When the going gets tough, the team must count on the support of the top management sponsor to put their foot down when necessary.
  2. Put together a dynamic, diverse team
    The lean start-up team is preferably a mix of dynamic, internal and external people. The internal people know the company and the external people offer a fresh perspective from the outside. All company levels (production, sales and marketing, legal, etc.) must be represented. This allows any stumbling blocks to be examined and resolved quickly from all the necessary angles. A good relationship between the young and old and the different levels also helps.
  3. Start from a different place
    Engaging in innovation outside the company has no impact, but inside the company, the whole thing might collapse due to all kinds of delay mechanisms. Sometimes it is a good idea to start in a different place until a critical mass has been reached. About fifty people are often a good gauge. After that the team can be incorporated and integrated again. Processes (compliance, quality, accounting, etc.) must then be established, which will certainly benefit from the expertise of a big company. Timing is crucial: too early and you smother the new team, too late and the growth will make it explode.
  4. Train the team in a lean start-up
    Several lean start-up methods have been developed in recent years. Many of them are included in Cedric Donck's top ten books.
  5. Look for the most fertile ground for disruptive innovation
    The objective of disruptive innovation is to have as much impact as possible with as little input as possible. To do this, you need to look for fertile ground.

We can quote Nike in this respect: just do it! Note, however, that you will have to dispel two popular myths.

  • I must not make any mistakes
    Create a culture in which mistakes are not penalised: innovation is impossible without failures. Do perform a post-mortem analysis on why something was unsuccessful and what you can learn from it.
  • I can only present a perfect product
    Do not be afraid to present an imperfect product. Customer discovery and product improvement are central to the whole exercise. Your customer will be pleased to help develop your product.


E-commerce and m-commerce: a smoother system ahead

Even though there is significant interest in e-commerce and m-commerce, making payments is often perceived as cumbersome or as insecure.

E-commerce considerably increases ease of use. You can calmly consult information about services (training, holiday camp for children, etc.) and then pay for them straight away. The trend shows no signs of stopping, yet Belgium is not leading the way here. In our country, for example, only 2-3% of the total retail turnover is made with electronic sales. The figure in our neighbouring countries is already 8-9%. Gunter Uytterhoeven (Head of Marketing BNP Paribas Fortis):

“One of the reasons for lagging behind is that Belgium still does not have a good payment solution for electronic transactions. Many people perceive online payments to be complex, cumbersome and not adequately secure. Almost one-quarter of all transactions are interrupted at the time payment must be made.”

The most common way of online payment is the credit card, which is being used increasingly with the card reader and PIN. The payment requires several actions. A system that is making considerable progress is the virtual wallet or e-wallet. The customer opens a wallet on a website to which an amount can be transferred or on which payment is made by credit card. The advantage is that you do not have to release any personal details on the internet. The disadvantage is that you can only use this system in affiliated web shops. A well-known example is PayPal. The customer only needs to provide his bank account or credit card details once and can pay after that with an e-mail address and password. This also requires a number of actions that can form an obstacle for many e-shoppers.

M-commerce (buying and paying via mobile devices such as smartphones and tablets) is still in its infancy. Apps are very popular, but they are not yet used very frequently for mobile trade. Paying in the app often does not work, merchants have problems identifying customers, and there are still doubts about security and privacy.

However, there is a solution in sight to make both e-commerce and m-commerce work more smoothly and securely. BNP Paribas Fortis is currently working on a new system together with other Belgian banks and major telecom players: Sixdots.

Sixdots: smooth and secure online and mobile payments

Sixdots is a system designed to make both payment cards and card readers superfluous. These are to be replaced by a secret code that is typed into the smartphone. Online mobile payments will be smooth and secure. The system is aimed at the Belgian market and will be launched in 2015.

  • Sixdots refers to the six-figure PIN, which together with several other elements is designed to ensure the security of the system. Sixdots will be an open platform that is accessible for all organisations/companies and their customers/consumers: the app can be used by anyone with a smartphone, a payment card at a Belgian bank and a mobile data subscription with a Belgian telecom operator.
  • Sixdots offers attractive benefits to vendors, both for e-commerce and ‘in-app’ commerce. Sixdots can be seamlessly integrated into the organisation's own app. You pay a small fee for each transaction.
  • Using Sixdots is free and convenient for the payer. Payers no longer have to leave behind their card details during the payment process and the card reader also becomes superfluous. All that they need to pay for goods or services is a smartphone.

Gunter Uytterhoeven: “For commercial organisations, more is possible than just shopping and paying. The entire retail process can be combined in Sixdots, including loyalty cards and discount vouchers. Discount vouchers would then automatically appear on customers' smartphones, for example, when they are at the shop rack height of the relevant product. The till will also recognise the customer's smartphone and automatically deduct the discount vouchers from the bill. The current buzz word for this in the retail world is ‘fidgetal’, the combination of finger and digital. The aim of this is the convergence of the physical and e-commerce world, using the smartphone as the ideal binding agent. These types of applications will also prove their usefulness in the public and social profit sectors.”

A subscription to build customer loyalty, reinvent yourself in times of crisis and buy better: Emna Everard saw that as exactly the right way to launch and maintain her Brussels-based start-up.

Born into a family of dietitians, Emna Everard knows what it means to eat healthily. "At the age of 12, I was already deciphering packaging labels. My dream was to open a supermarket one day where you could shop with your eyes closed", she recalls.

And because Everard has entrepreneurship in her bones, that’s exactly what she did. In 2016, just before the end of her university studies, she launched the “healthiest online supermarket on the market”: Kazidomi. Her standards are high, both in terms of composition and taste. Kazidomi selects products carefully, enabling its customers to buy healthy, mainly organic, plant-based products with complete confidence.

The loyalty programme

Six months after its launch, Kazidomi’s growth is accelerating thanks to the launch of its loyalty programme. A 59 euro subscription offering 20–50% discounts on all food, cosmetics or care products available online. Profitability and savings guaranteed.

This was followed by a first fundraising of €50,000 in 2017. Kazidomi is growing, expanding the size of its stock and developing its marketing. Everard hired her first two employees. Sales grew rapidly and literally exploded during the COVID-19 pandemic. "Consumers suddenly had time to think about their health and well-being and were doing most of their shopping online," she adds.

How did you reinvent yourself?

The post-crisis period was a turning point. "Kazidomi had to reinvent itself. We wanted to have financial stability and avoid any dependence on external resources," continues Everard. Together with her teams, she looked at their cost structure, operational efficiency and marketing. After these reflections, the aim was no longer growth at any price, but the company's long-term viability and financial health, thanks to an intelligent reorganisation.

Two acquisitions would subsequently enable Kazidomi to boost its growth, creating significant synergies: "Smart Fooding" in August 2022 and "Bébé au Naturel" a few months later, a business specialising in healthy products for babies and their parents. "With Bébé au Naturel, we doubled the volume of orders sent out," adds Everard. "This has allowed us to get a better rate from our carriers and reduce costs."

A responsive and attentive bank

As the Brussels start-up’s bank, BNP Paribas Fortis granted it three loans for its launch, between 2016 and 2019. This support came naturally, with Kazidomi’s commitments in terms of Environmental, Social and Governance (ESG) objectives perfectly aligned with the bank’s strategy. "We joined the BNP Paribas Fortis Innovation Hub programme and our relationship manager – who knew the start-up environment extremely well – was immediately enthusiastic and very attentive. He believed in our project, followed it closely, advised us to participate in a series of events to meet other players whose background and profile would be of interest for us," explains the Entrepreneur of the Year 2019.

But the support didn't stop there. "In December 2022, it was thanks to BNP Paribas Fortis, among other things, that we were able to acquire “Bébé au Naturel”. Start-ups like Kazidomi need a high level of responsiveness from their bank. When there is a company to buy, or another opportunity, things have to move fast. Analysis of the file, provision of funds: BNP Paribas Fortis has always been responsive and enthusiastic and has supported us in 99% of our requests," says the CEO enthusiastically.

Eight years since launching, Kazidomi today has 4,000 products that it delivers across Europe. The Belgian start-up makes 90% of its sales on its website and 10% via external resellers, such as Delhaize.

Kazidomi has also launched its own brand “Kazidomi”, which has 200 products on offer. By working directly with producers, we can offer the best possible quality products at the best price.

Kazidomi is ready to change the world. Discover even more inspiring entrepreneurial stories.

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