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92 Country Reports
Country Reports
Denmark
Danish PPP in the Aftermath
of the Global Financial Crisis
I. Introduction
In the aftermath of the global financial crisis short-
age of liquidity for financing of Danish PPP has
become a reoccurring obstacle. This article explores
the possibilities for financing PPP through alterna-
tive financing methods by public lending from
Nordic special credit institutions.
II. The effect of the global financial crisis
on the Danish PPP
PPP in Denmark has traditionally been financed by
private, commercial banks and lenders with only
limited public funds contributions. The financial
crisis has however had a negative effect on the pri-
vate lending markets as bank margins for private
lending have increased substantially.
This has increased the difference between the
levels of interest charged by private lenders com-
pared to those charged by semi-public lenders such
as the Nordic special credit institutions. Further-
more, in the aftermath of the financial crisis, raising
funds with long maturities has become increasingly
difficult. The limited funding options and the
increased interest rates have had a direct effect on
the possibilities of implementing large scale PPP
with very long tenors, i.e., over 25 years.
One solution to the shortage of private funds and
added expenditure for financing PPP is to consider
public funding options through Nordic special credit
institutions such as “Kommunekredit” in Denmark.
III. Traditional methods of financing PPP
in Denmark
In the traditional Danish PPP models, the private
party is the owner of the facility and financing is
provided by the private party not the public.
This is typically done by the private party provid-
ing the necessary funding and upfront funding
commitment through a commercial bank. The pri-
EPPPL 2| 2011
vate party retains the ownership of the facility
throughout the partnership but often the procuring
authority will have the choice to acquire the facility
from the private party once the operation phase has
expired. The long term private ownership through-
out the operation phase is traditionally seen as a
guarantee that the private party will provide an
optimised overall solution of good quality in a short
as well as long term perspective.
To the extent that the construction of the facility
is organised within such a traditional PPP frame-
work the liquidity of the local government will how-
ever surprisingly be affected from the outset, i.e.,
when the local government enters into the PPP con-
tract. When the PPP facility is to be owned by the
private party, Danish local government by law has
to deposit the full purchase price including VAT
(which in Denmark accounts for 25 %) immediately
once it enters into the PPP contract, even if con-
struction of the facility is likely to take a number of
years1 . The rules for deposit of full costs therefore
do not permit local government to deposit costs
concurrently with the progression of the construc-
tion of the facility. Instead, depositing of the full
costs has to be made upfront.
In a traditional Danish PPP model, the private
party will, as the recognised owner of the facility,
have the right to fiscal write down on the facility
and also the right to be registered for VAT purposes
meaning that the private party will be VAT exempt
in relation to purchases made for the purpose of
performing the VAT registered activities.
While the traditional PPP model thus necessi-
tates private funding and funding commitments
upfront it also has certain economic advantages to
the private party in relation to fiscal write offs on
buildings and VAT exemption.
IV. Financing PPP through special credit
institutions
Danish tax authorities do not recognise private
ownership over illiquid assets such as a public high-
way. Only public ownership is permitted if the facil-
1 Executive order number 1311 of 15 December 2009.
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EPPPL 2| 2011
ity in question is illiquid. Consequently, private
funding obtained through the private party in the
PPP will in some instances not be possible. If the
facility on the other hand is liquid2 the authority is
free to decide whether the new facility shall be pub-
lic or privately owned and funded and the public
authority may in such circumstances consider
financing the publicly owned facility through a spe-
cial credit institution such as Kommunekredit.
Kommunekredit is organised as an association
supervised by the Ministry of Interior and Health
under Danish law. Only Danish municipalities and
regions can be members and only Danish munici-
palities and regions can obtain loans through Kom-
munekredit.
The members are directly, jointly and severally
liable for all Kommunekredit’s obligations and
Kommunekredit has not suffered any losses while
operating for more than 110 years. Its object is to
provide loans and financial services to its members
by lending on the commercial money markets. Not
surprisingly, Kommunekredit has excellent AAA
ratings with the rating agencies and is able to bor-
row on the commercial markets at very low costs.
Even under the financial crisis Kommunekredit has
thus been able to obtain funding on the commercial
markets at preferential terms. As Kommunekredit
is operated as a non-profit organization the low
interest rates are passed on to its members in the
loan terms for funding of public projects.
An added benefit that follows from public owner-
ship is that when the local government finances the
construction of a PPP facility itself, its liquidity is
only affected to the extent and at the rate which the
local government pays for the construction. In other
words, the local government is not required to
deposit the full construction costs up front. More-
over, the local government will also save the expen-
diture of having to pay VAT upfront as VAT can be
deducted progressively on the instalments to the
private party as they fall due.
Payments to the private party will under the
public ownership model be divided into an initial
2 Such as buildings which can be used for both public and private
purposes.
3 Kommunekredit A/S (Denmark), Kommuninvest i Sverige AB
(Sweden), KBN Kommunalbanken Norway (Norway), and
Municipality Finance PLC (Finland).
4 Standard & Poor’s, Global Credit Portal, Ratings Direct, June 30,
2010.
Country Reports 93
instalment covering most of the acquisition costs
which falls due at the commencement of the opera-
tion phase followed by a number of subsequent
instalments during the operation phase. As the
ownership remains with the local government the
private party will not have the possibility to make
fiscal write offs on the buildings. Moreover, it will
not be possible for the private party to register for
VAT exemption. This disadvantage should however
be counterbalanced by the advantageous lending
terms available to local government who can
finance the facility through Kommunekredit. Over-
all, public ownership and funding of PPP may
therefore be a cheaper solution than private owner-
ship and funding.
V. Scandinavian perspective
The advantageous public lending possibilities are
not only available in Denmark as special credit insti-
tutions operate under similar terms in all the Scan-
dinavian countries3 . The special credit institutions
receive support in various forms of joint liability
and state guarantees from the Nordic governments
and local municipalities. The credit rating for all
four Nordic municipal funding vehicles is AAA
reflecting excellent asset quality and strong liquid-
ity positions4 . Consequently, they are all able to
obtain funding on very favourable terms on the
commercial lending markets.
A solution to the shortage of liquidity for funding
PPP across Scandinavia may therefore be to recon-
sider the traditional private ownership structures
and funding in PPP in the planning phase of the
competitive dialogue.
Long term quality of the facility as well as suffi-
cient commitment from the private party in the
operation phase can be ensured through other
incentives than private ownership of the facility.
Examples of such incentives may be:
– the acquisition costs are partly held back and
paid to the private party during the cause of the
operation phase rather than one lump sum at the
commencement of the operation phase;
– a contractual right for the procuring authority
to hold back instalments during the operation
phase for lack of performance; and
– up front financial guarantees from commercial
banks or parent companies for the private
party’s proper performance during the operation
phase.
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94 Country Reports
While it may not be all private contractors who
have equal difficulties providing the necessary
funds to facilitate private ownership in PPP, shifting
the ownership to the procuring authority will
almost certainly ensure a wider circle of potential
bidders. This will in itself be an advantage to the
procuring authority who will benefit from full-scale
competition between potential private suppliers
during the competitive dialogue while adequate
economic soundness of the selected bidders is
ensured by using adequate financial selection crite-
ria in the prequalification phase combined with pri-
vate lender and/or parent company guarantees for
proper performance.
Martin André Dittmer
Camilla Christiansen
Gorrissen Federspiel
Portugal
The Memorandum of Understanding (MoU)
of Specific Economic Policy Conditionality
Celebrated Between Portugal and the Troika
I. Introduction
As we have reported in the last number of this
review, after Greece and Ireland, the sovereign
debit crises has finally been hitting Portugal. The
substantial increase in the interest rates (in both the
public and the private sector) and the more limited
access to financing in general have led to a limit
situation that forced the Portuguese Government to
call for international financial assistance.
The Memorandum of Understanding (“MoU”)
entered into between the Portuguese State and the
European Commission (“EC”), the International
Monetary Fund (“IMF”) and the European Central
Bank (“ECB”) (the so called “Troika”) was announced
last May 5, 2011. The MoU details the general eco-
nomic policy conditions on granting financial assis-
tance to Portugal. Among the range of goals and
measures that are set forth by the MoU and that
shall be implemented by the Portuguese State, there
are some major decisions regarding public private
partnerships and public procurement, which will
carry significant changes in these sectors in Portu-
gal.
EPPPL 2| 2011
II. MoU – PPPs sector
According to the MoU, Portugal must avoid engag-
ing in any new PPP agreement before the comple-
tion of the reviews on the existing PPPs and the
legal and institutional reforms proposed.
The Portuguese State will also perform, with the
technical assistance from the EC and the IMF, an
initial assessment of at least the 20 most significant
PPP contracts covering a wide range of sectors,
including the major Estradas de Portugal PPPs (road
sector).
Besides, the Government committed itself to
recruit a top tier international accounting firm to
undertake a more detailed study of PPPs in consul-
tation with INE (National Statistical Office) and the
Ministry of Finance. This review will identify and,
where practicable, quantify the major contingent
liabilities and any related amounts that may be
payable by the Government. It will also assess the
probability of any payments by Government in rela-
tion to the contingent liabilities and quantify such
amounts. In addition to this, the study will assess
the feasibility to renegotiate any PPP or concession
contract and to reduce the Government’s financial
obligations. Note that, as established in the MoU, all
PPPs and concession contracts will be available for
these reviews.
As stated in the MoU, the Portuguese State also
undertook to put in place a strengthened legal
and institutional framework, within the Ministry
of Finance, for assessing fiscal risks ex-ante of
engaging into PPP, concessions and other public
investments, as well as for monitoring their execu-
tion. The Court of Auditors must be informed of
this ex-ante risk assessment and technical assis-
tance may be provided if necessary.
Lastly, the Portuguese Government will enhance
the annual PPP and concessions’ report prepared by
the Ministry of Finance in July with a comprehen-
sive assessment of the fiscal risks stemming from
PPPs and concessions. The report will provide infor-
mation and analysis sector by sector. Besides, the
annual review of PPPs and concessions should be
accompanied by an analysis of credit flows chan-
neled to PPPs through banks (loans and securities
and other than shares) by industry and impact
assessment on credit allocation and crowding
effects. This particular element should be done in
liaison with the Bank of Portugal.
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