Debt and Investment Strategy
Proposal for national investments and expenditure plan
Aningaasaqarnermut Naalakkersuisoqarfik
Ministry of Finance
April 2012
_______________________________
2012 Spring session / 46
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Contents
Preface .................................................................................................................................................. 3
1 Summary .......................................................................................................................................... 5
2 Introduction .................................................................................................................................... 17
3 The debt situation today ................................................................................................................. 20
4 Debt policy ..................................................................................................................................... 24
5 Priority needs and criteria .............................................................................................................. 28
5.1 Criterion no. 1: Economic growth........................................................................................... 30
5.2 Criterion no. 2: Fiscal sustainability ....................................................................................... 31
5.3 Criterion no. 3: Socially and environmentally sustainable development................................ 32
5.4 Criterion no. 4: National and regional development ............................................................... 33
6 Public investments ......................................................................................................................... 37
6.1 Training and education............................................................................................................ 41
6.2 Housing ................................................................................................................................... 44
6.3 Health care system .................................................................................................................. 47
6.4 Social services and culture ...................................................................................................... 49
6.5 Infrastructure ........................................................................................................................... 51
6.5.1 Phase 1 ............................................................................................................................. 54
6.5.2 Phase 2 ............................................................................................................................. 58
6.6 Waste management plan ......................................................................................................... 59
6.7 Overall assessment of the public investments......................................................................... 60
7 The municipalities .......................................................................................................................... 65
8 Companies owned by the Self-Government authorities ................................................................ 67
9 Funding and ownership .................................................................................................................. 69
10 Proposed national capital investments and expenditure plan....................................................... 72
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Preface
Throughout the world, the focus is on the development of
debts and especially the debts of the public sector. In some
EU member states, it is no longer politicians who determine
the fiscal policy. In Greenland, the situation is basically
favourable. But it is important that we learn from the
development in other countries so that we do not risk having
to implement welfare spending cuts in order to pay
instalments on a large debt. We must not limit our own or our
children's opportunities of being able to choose.
With this report, the Government of Greenland is presenting its policy on public borrowing. The
total public debt includes both the debts of the Self-Government authorities, the municipalities and
the companies owned by the Self-Government authorities. The policy presented covers two areas:
Firstly, determining the framework for the development of public debts and secondly, clarifying the
prioritisation process applied in connection with public investments.
The debt policy presented is based on a principle of prudence which is to ensure that also in times
of economic hardship, we will be able to afford to pay instalments on our debts. By determining a
clear framework for the public debt, we will have a good starting point for discussions and for
deciding on priorities. And there is indeed a need for determining priorities.
As a society, we are at a crossroads where decisions reaching far into the future must be made. We
will need to make investments in society and in our most important resource: the individual citizen.
Therefore large investments within training and education are contemplated. Education is a
prerequisite for the individual citizen's development and for a sustainable development of society.
Funds are also allocated for the purpose of boosting the entire housing area which has been
neglected for a number of years. Finally, the report sets out the course for large infrastructure
investments which can create the basis for continued growth in the economy. This report must be
seen in conjunction with the Government of Greenland's upcoming 2025 plan which will show the
way to an economically, socially and environmentally sustainable development.
The proposal presented for a national capital investments and expenditure plan is dynamic and will
continuously change up to 2025. If the preconditions in society change significantly as a result of,
for example, large-scale projects, then the priorities will also change. But the principles and the
criteria presented must still be applied.
3
With these words, I hope that you will enjoy reading the report and that we will have a fruitful
debate in the Parliament of Greenland.
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1 Summary
Greenland is at a cross roads where difficult decisions with a big impact on the future development
will have to be made. There are growing requests for public investments in order to improve the
frameworks within which society can develop. The Greenland Treasury cannot finance all the
investment requests presented in connection with the Transport Commission's report, the upcoming
2025 plan, business development, housing etc. without raising loans. Therefore priorities will have
to be set which distinguish between capital investments that are financed via the taxes and
investments that can be made as private investments and financed through user charges.
The debt and investment strategy of the Government of Greenland (Naalakkersuisut) has two
dimensions. Firstly, the framework for the future public sector debt developments is to be
determined on the basis of four debt principles. These principles form the basis of the overall
potential debt financing. As a next step, four criteria for setting priorities will be drawn up, against
which criteria all the Self-Government investments will have to be assessed. On the basis of the
debt principles and the prioritisation criteria, a proposal for a national capital investments and
expenditure plan for the coming years will be presented. The national capital investments and
expenditure plan presented is dynamic, and specific priorities will be changed if the basic
preconditions change, for example as a consequence of large-scale business projects. However, the
principles presented will not be changed.
The total public debt includes both loans raised by the Self-Government authorities, the
municipalities and the companies owned by the Self-Government authorities. The raising of public
loans always results in the subsequent payment of interest and instalments. The payment of interest
and instalments must take priority over the funding of other public expenditure such as expenditure
for schools, health care etc. Increasing the public debts is in fact a way of spreading expenditure
across several periods of time. In other words, the bill is passed on to the future generations. When
we raise loans today, we impose on ourselves an unavoidable obligation to pay certain expenses
tomorrow. The immediate effect is that future generations’ opportunity to spend future revenue is
reduced. Huge public debts are therefore basically not a reasonable distribution of the revenues
between the generations. But loans may also provide the possibility of realising projects that can
generate growth in society. If the loans are used for financing sound investments which increase the
future revenue, future generations will, on the whole, be allowed greater economic latitude. This
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seems to call for the raising of loans to a certain extent. However, such raising of loans is subject to
the investments involved being sound investments that can generate returns.
The EU Stability Pact stipulates a limit for the public debt of 60 p.c. of GDP. The Stability Pact is
based on the conditions of much larger and versatile European economies. The economy of
Greenland is characterised by a small private sector where the fishing industry is in fact the only
exporting industry and where earnings are based on a resource that varies. The first principle for the
development of debts in Greenland is the following principle of prudence:
Principle no. 1: In a normal year, there must be a surplus on partial budget balance (excluding
lending), and interest and instalments must not limit the possibilities of providing public benefits
and services during a period of low business activity.
A normal year is a year with neither economic boom nor economic recession.
The Government of Greenland is of the opinion that the future debt policy must be based on the
above principle of prudence. In order for such principle to be applied in practice, overviews of the
overall development of debts and of the cyclical development must be published on a continuous
basis.
There is a need to make societal investments which can ensure a sustainable development in
society. This leads on to the next principle:
Principle no. 2: The public authorities will only raise loans that contribute to improving the fiscal
sustainability.
Society is facing important decisions in order to ensure the future of the public sector and to create
the framework for economic growth, inclusive of improving the infrastructure. Several raw
materials-related projects are about to reach a stage which may result in large-scale projects. Both
elements will provide business and industry with a better framework and a larger potential for
growth. The third principle relates especially to the financing of this type of projects.
Principle no. 3: The public authorities will only raise loans for housing, industrial and
infrastructure projects if increased user charges can finance at least the payment of interest and
instalments on such loans.
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The modernisation of the infrastructure must ultimately be financed by the users. This is necessary
in order to make sure that the Treasury can finance the costs of capital investments without
impairing the long-term fiscal sustainability. It is also a way of making sure that the citizens
achieving the largest benefits will also pay the main part of the investment involved. Within the
area of housing, this means that loans may be raised to construct housing where the rent can also
cover the payment of interest and instalments on the loans raised. This also follows from the basic
principles on a normalisation of the housing area which are described in the housing report and
which are already now used in connection with the letting of housing through Illuut. In cases where
the citizen's income is not sufficiently high, part of the rent may be paid via housing benefits.
The limited companies owned by the Self-Government authorities raise loans themselves in order to
finance the development of their business. This is in full compliance with the objectives of the
companies and the arm's length principle. In order to ensure a healthy development of society,
major loans must be coordinated with the Self-Government authorities. As follow-up on the “Report
on ownership and development in the limited companies fully or partly owned by the SelfGovernment authorities” from the autumn of 2011, initiatives have been instituted to clarify, among
other things, the optimal capital structure of the individual companies. This and other issues will
constitute the basis of a more active dividend policy.
The public debt consists not only in the debts of the Self-Government authorities, but also includes
the debts of the municipalities and of the companies owned by the Self-Government authorities. As
the loans of the companies and of the municipalities are based on the creditworthiness of the
Treasury, it is necessary to monitor the development of the total public debt. Any uncertainty as to
the size of the debt and the interaction between the Self-Government authorities, the limited
companies owned by the Self-Government authorities and the municipalities constitutes an element
of risk which must be eliminated.
Principle no. 4: The total public debt is to be calculated on a continuous basis and coherently so
that it is easy to ascertain the size thereof at a given time.
It is proposed that, in practice, this principle be met by presenting, in the Political and Economic
Report, the total public debt and the plans for changes in this debt. Such presentation is to state the
debts of both the Self-Government, the companies owned by the Self-Government authorities and
the municipalities.
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A clarification of the size and the development of the debts will make it easier for the political
system to get an idea of the size of the debts and thus also an idea of the possible framework for the
future development of the debts.
The above four principles constitute the framework for the total borrowing, but there is a great need
for determining priorities within this framework.
Funding and ownership
The total expenditure in connection with the Self-Government's capital investments etc. must be
covered by the Treasury. The payment of interest and instalments on the loans are financed via the
current tax revenue - therefore there also is an upper limit to how large loans the Treasury can raise.
The raising of loans makes it possible to finance investments which generate a return in the long
term. However, the loans must be repaid. Only where investments are made in profitable activities,
may the raising of loans contribute to increasing the revenue accruing to the Treasury.
Loans to Nukissiorfiit are in the order of DKK 180m annually. These loans result in a drain on the
Treasury's liquidity, but will be repaid with interest and therefore have no impact on the long-term
fiscal sustainability. Large infrastructure investments can be incorporated in the Finance Acts in a
similar way. There may be a substantial drain on the Treasury's liquidity for a period of time, but
seen in isolation, the project must repay this loan through increased revenue and targeted cost-cuts.
When setting future priorities, it must also be considered whether the biggest return for society is
achieved through lending to Nukissiorfiit or whether there are any other projects which may
generate a higher return.
A separate gain must be achieved from making an investment through a limited company. Both a
limited company and a quasi-public enterprise may generate the necessary cash flow in order to pay
current operating expenditure and current payments of instalments and interest on the loans that
need to be raised in order to finance the capital expenditure. Even though the limited companies
often have to defray higher loan costs than the Treasury as well as higher pay-roll costs than a
quasi-public enterprise, the corporate form of a limited company may in some cases create efficient
operation and better exploitation of commercial opportunities. Regardless of the form of
8
organisation chosen, it is important that revenue and expenditure in connection with infrastructure
investments are distributed in such manner that the fiscal sustainability is not impaired.
As was emphasized in the “Report on ownership and development of the limited companies fully or
partly owned by the Self-Government authorities” from the 2011 autumn session of Parliament, the
establishment of a limited company is only justified if the task in question can be solved more
efficiently within such organisation.
Investments made by the Treasury will have a negative impact on the overall budget balance
(including lending), and at first sight it looks like a deterioration of the public finances. But the
relevant public borrowing takes place only subject to an expectation that revenues will increase in
the future. Therefore a deterioration of the overall budget balance as a result of public investments
is not in itself a deterioration of Treasury finances. Sound investments improve Treasury finances
and contribute to growth in society in general. Unsound investments impair Treasury finances and
do not contribute to growth in society in general. Unsound investments may potentially maintain
undesirable structures in society and thus impair the future growth opportunities in society.
Maintenance and renovation
The renovation backlog on a major part of the housing owned by the Self-Government authorities is
substantial. At the same time, there is a growing need for investments in maintenance and
renovation of the infrastructure, especially harbours and airports. Within the institutional area,
especially in elementary schools, there is also a large accumulated need for renovation. In addition
to this, there is a need for renovation because of mould in both residential housing and public
institutions. So far there has been too little focus on current maintenance and renovation, and
consequently a great need for clearance and renovation has accumulated which could have been
avoided with more extensive maintenance initiatives.
The fiscal sustainability model forecasts the development of public expenditure in the event that we
maintain the current structures, while altering the demographics. The result is that expenditure
increases much more rapidly than revenue. This problem has been underestimated as the fact that
the public expenditure today is artificially low has not been taken into account since insufficient
funds are allocated for renovation and maintenance. Expenditure may be kept low for a while, but
this results in the deterioration of housing, institutions and infrastructure. The current situation
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requires the introduction of systematic maintenance and renovation to make sure that we do not end
up in a similar situation in future. At the same time, the accumulated backlog is to be reduced
through a mix of renovation and construction of replacement residential housing, institutions etc.
At the end of 2011, the Greenland Self-Government owned 6,512 housing units, equalling 426,252
square metres. The Ministry of Housing, Infrastructure and Traffic has calculated the total
renovation burden to amount to nearly DKK 6bn. No similar calculations have been made of the
renovation backlog on other public institutions and facilities. There is a need for identifying the
overall backlog and for overall initiatives to reduce the scope of the renovation backlog.
Maintenance and renovation principle: Funds must be allocated for renovation and maintenance
in order to maintain the economic value and the value-in-use of the assets.
It is difficult to determine the value of public assets. In places where it is impossible to determine a
market price for properties, the rebuilding costs must be used as a basis. The maintenance and
renovation principle means that statements of the total capital stock are to be worked out.
In the housing report, a more detailed plan is presented for the future structuring of the maintenance
and renovation works within housing.
Assessing and prioritising public investments
Even though the raising of loans and consequently the increase of debts involve risks, some loanfinanced investments may contribute to boosting the economy and to improving the living standards
in the long term. Also in future, it will therefore be necessary to determine priorities among the
potential public investments and to assess whether they can be financed through borrowing.
Deciding what projects are to be given high priority is a political process. A number of calculations
of the economic return must be made in order to ensure that only sound and profitable investments
are made. The figure below illustrates the four prioritisation criteria that are to be applied to all
projects.
Figure 2: Criteria for prioritising new projects
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Criterion no. 1
Economic growth
Criterion no. 2
Fiscal
sustainability
Criterion no. 3
Socially and
environmentally
sustainable development
Criterion no. 4
National and regional
development
List of
initiatives
Overall basis for
making a political
decision on
implementation
Source: Ministry of Finance
The above figure illustrates that all initiatives are to be assessed on four parameters. This means
undertaking an assessment of the socio-economic return which indicates whether a project
contributes to increasing the overall prosperity in society. It is a prerequisite for implementing a
project that the investment provides a positive a socio-economic return.
There also a need for assessing how a project affects the fiscal sustainability. In other words,
analyses to clarify whether an investment impairs or improves the long-term sustainability. If the
Self-Government authorities finance, for example, the construction of the harbour of Nuuk through
loans to a publicly owned enterprise, the problem of fiscal sustainability is negatively affected, if
the Self-Government authorities do not receive interest and instalments on such loans. If the set-up
entails repayment of the loan plus interest, the impact on the fiscal sustainability will be neutral. It
should be noted that an investment may generate a positive socio-economic return while at the same
time contributing negatively to the fiscal sustainability. Therefore it is important that investments
are assessed according to both parametres. Finally, it is necessary to ensure a sustainable
development. This means that the prioritised projects must contribute to regional development and
be environmentally and socially sustainable.
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Figure 3: Example of prioritisation
Criterion no. 1:
Economic growth
Criterion no. 2:
Fiscal sustainability
Criterion no. 4:
National and regional
development
Criterion no. 3:
Socially and environmentally
sustainable development
Project 1
Project 2
Source: Ministry of Finance
The figure above illustrates how all projects must be assessed in relation to the four criteria. This
assessment provides an overall picture of how a project will contribute to the societal development
and constitutes the framework for a political prioritisation. These criteria must be clarified in a
business case providing an overall assessment based on the four dimensions.
Proposed national capital investments and expenditure plan
The future educational strategy sets an ambitious objective for improvement of the educational
level, which requires considerable resources. The area of children and young people is a highpriority area and supports the educational initiatives. Better initiatives within the area of children
and young people are to lead to a situation where more children and young people are given good
opportunities to complete a training or education programme. The initiatives for children, young
people as well as for training and education will be given a higher priority in the national capital
investments and expenditure plan. In addition to that, the Government of Greenland proposes that,
over the coming years, extraordinary tax revenues from the exploration of raw materials and
extraordinary revenues from the limited companies owned by the Self-Government authorities will
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be reserved mainly for the expansion of student housing and educational buildings. The first step in
this direction was taken in 2011 when extensive exploration activities took place and when
extraordinary works of building student housing were commenced. Extraordinary revenues are
expected from oil exploration activities and derived effects on mainly the companies owned by the
Self-Government authorities. The companies owned by the Self-Government authorities exceeded
the results budgeted for, mainly as a result of the oil exploration and the downstream industries over
the last two years. It may be considered whether the companies should be asked to distribute
extraordinary dividends to the Treasury in order to finance investments within the area of education.
In that case, such revenues are to be spent on increasing the capacity of the educational sector and
thus on creating a basis for a higher educational level and future welfare development.
The housing area is of great importance to the structures of society. Proper housing is the basis for
the individual, and a housing supply that matches the housing demand provides opportunity for the
labour force to settle in areas with growth and employment. A number of housing projects are
planned for the years 2013-15, and funds have already been allocated for these projects in the 2012
Finance Act. Throughout the estimate years in the budget, substantial funds are still allocated for
the housing area. The principles governing public borrowing stipulate that public loans are to be
raised only if the rent can finance the payment of interest and instalments on such loans. This
reflects the principle of the rent model applied when housing is let through Illuut A/S.
Up to 2025, the number of elderly citizens is expected to increase, which will result in a growing
need for investments in elderly-friendly housing and institutions for the elderly. In order to address
these tasks, the construction of new housing and capital expenditure within the social sector will
have to meet certain requirements. The major part of the funding within the area of elderly citizens
must therefore be financed through the funds allocated for housing.
There is a need for continuous expansion of the capital stock of the health care system as a result of
the changing demographics and the growing expectations as regards types of treatment. In the
proposed national capital investments and expenditure plan, a major renovation of ward sections at
the national hospital in Greenland in 2020-2021 has been included.
Investments in infrastructure may create a better framework for economic development. The
Transport Commission has made detailed calculations showing that several projects are socioeconomically profitable. This proposed national capital investments and expenditure plan presents
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suggestions for projects to be examined in order to obtain a proper basis for making decisions.
These projects are:
•
Drafting of a business case for an expansion of the harbour of Nuuk.
•
Drafting of a business case for an airport at Qaqortoq, location 2, inclusive of closing-down
of Narsarsuaq.
•
Drafting of a business case for a combined road and boat access connecting Uummannaq
and Qaarsut.
•
Study of the possibility of using Thule Air Base for civil purposes and subsequently closing
down the airport in Qaanaaq.
•
Drafting of a business case for expansion of the airport of Ilulissat.
The presented proposal for a national capital investments and expenditure plan will boost the
overall construction activities over the next four years. This will have a positive impact on the
overall employment in the building and construction sector. From 2017 onward, the capital
expenditure will stabilise at a level where no loan finance is required.
As from 2013-2015, there is an uncovered funding requirement of approx. DKK 300 compared to
the desired capital investments stipulated in the educational strategy. Part of the funding for this
purpose is expected to be procured through extraordinary revenues from the limited companies and
from taxes in connection with raw materials exploration activities, and part will have to be found
through cuts in the operating expenditure budgeted for in the Finance Act. Investments in student
housing and educational buildings are not to be financed through borrowing as they do not generate
any cash flow in the short or medium-long term which will be able to pay interest and instalments
on such loans. Investments in training and education are sound investments for society, but the
gains cannot be reaped until many years later and do not contribute to the payment of interest and
instalments on any loans. Depending on the funding possibilities, some investments may therefore
have to be postponed for a year or two. The final funding framework for educational construction
works depends on the budgetary negotiations over the next years and on the size of the
extraordinary revenues arising during this period.
If the said investments in the infrastructure are financed by raising loans, the total public debt will
increase by DKK 900m up to 2016. If the projects are to be initiated in 2013, a parliamentary
resolution must be made during the 2012 autumn session of Parliament. From 2012 to 2015, the
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companies owned by the Self-Government authorities are expected to reduce their interest-bearing
debt by approx. DKK 750m. Illuut A/S expects to raise loans of around DKK 600m up to 2015.
Given these circumstances, the total interest-bearing debt will increase by DKK 577m. A further
increase in the interest-bearing debt of DKK 150m is expected in 2016, arising from the
construction of the airport at Qaqortoq, which does not appear from the table below.
As the loans will be raised only if in compliance with the above principles, such increase in debts
could be justified.
Depending on the choice of final ownership models in the individual projects, the debts of the
Treasury or the debts of the publicly owned limited companies will increase. During the same
period, a reduction of debts in the five largest limited companies owned by the Self-Government
authorities is expected. The overall development of the debts is illustrated in the table below.
Table 13: Expected development of debts, including the financing of infrastructure
investments
Interest-bearing debt
The five largest companies owned by
the Self-Government authorities
Illuut A/S
The municipalities
Infrastructure investments
The Self-Government authorities
In total
Net interest-bearing debt
The five largest companies owned by
the Self-Government authorities
Illuut A/S
The municipalities
Infrastructure investments
The Self-Government authorities
In total
2008
2009
2010
2011
2012
2013
2014
2015
3,892
109
4,091 3,509 3,616 3,496
23
338
402
109
196
196
196
0
4,001
0
250
250
600
4,200 3,978 4,400 4,694
3,025
492
196
45
800
4,558
2,958
547
196
317
1,000
5,018
2,744
602
196
729
1,000
5,271
3,561
-350
3,162 2,657 2,648 2,586
17
328
392
-350
-68
-68
0
2,177
482
0
40
200
2,899
2,080
537
0
277
400
3,294
1,767
592
0
649
400
3,408
-2,092 -1,320 -797 -677
0
1,119 1,492 1,809 2,231 2,978
Source: Ministry of Finance
Note: The five largest limited companies owned by the Self-Government authorities are Royal Arctic Line A/S, Royal
Greenland A/S, KNI A/S, TELE A/S and AirGreenland A/S.
An increase of the total public net interest-bearing debt may be expected over the next years. The
large companies owned by the Self-Government authorities are planning a reduction of their burden
of debt, but on the other hand, the Self-Government authorities and Illuut A/S are planning to
15
increase their debts, and moreover, the infrastructure investments in harbours and airports will give
rise to an increase of the total debt.
A business case is to be worked out for each single project, in which the project is assessed in
compliance with the above principles and criteria. Subsequently, a final decision will be made
whether to commence the project.
As loans are raised only for the purpose of investments generating a cash flow for the payment of
interest and instalments, the development of the debt level is in compliance with the above debt
principles. But at the same time it is clear that, if the occasion arises, the Treasury will be more
exposed to fluctuations in the profitability of the projects and changes in the level of interest.
Moreover, a larger burden of debt will reinforce the requirements for structural improvements that
can generate overall fiscal sustainability up to 2025.
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2 Introduction
With this report, the Government of Greenland is presenting its policy on public debt, which policy
is to contribute towards a stable development in society and at the same time ensure that we do not
risk having to cut down on welfare spending in order to pay instalments on a large debt.
The fact is that in a number of other countries, a large share of the revenues has been allocated to
payment of interest and instalments on loans and thus to such revenues cannot be spent on welfare
services. In nearly all other European countries there is a need for determination of tough economic
priorities in order to ensure that the financial markets remain confident that the big public loans will
be repaid. The economic freedom of action is therefore restricted by public debt.
Public debts include loans raised by the Self-Government authorities, by the municipalities and by
the companies owned by the Self-Government authorities. Such raising of loans renders it possible
to make investments in housing, infrastructure, machinery etc. that may contribute to increasing
growth in society. Such loans have been obtained from various financing institutions. The
assessment of Greenland's creditworthiness by these institutions determines the terms on which
loans can be obtained. If the creditworthiness declines, it becomes more expensive to raise loans
and, in the extreme, it will no longer be possible to raise further loans.
In this way the financing institutions set a maximum limit for the public sector’s total borrowing.
Such assessment includes the total debts of the Self-Government authorities, the municipalities and
the companies owned by the Self-Government authorities. Therefore the presentation of a public
debt policy must include all three units: the Self-Government authorities, the municipalities and the
companies owned by the Self-Government authorities.
The situation of the public sector in Greenland differs from that of most other countries in Europe
and the USA. The Self-Government authorities have net assets, and as the net debts of the
municipalities are not significant, the starting point of the entire public sector is favourable.
The actual financing possibilities depend on the assessment by the financing institutions of the
public sector's ability to repay loans. The bigger the expected revenues, the better the position to
repay the loan. In this context it is important to note that borrowing itself does not increase public
revenues. It is merely a question of a temporary liquidity improvement which may enable the
financing of profitable investments. Sound investments can contribute to increasing public revenues
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in the future and growth in society. Poor and unsound investments can reduce the public revenues in
future and may in certain cases maintain an undesirable structure in society that limits the
possibilities of growth.
As previously described, the total public debt consists of the debts of the Self-Government
authorities, the municipalities and the companies owned by the Self-Government authorities. This
entails a risk that investments are made that favour the individual enterprise or municipality, but are
not the best solution to society as a whole. This emphasizes the need for coordination of
investments across the units involved. The debt principles in this document should therefore be
applied in all public units, and a strict assessment based on the following criteria must be
undertaken:
•
Economic growth
•
Fiscal sustainability
•
Sustainable development
•
National and regional development
All public investments must be accompanied by calculations of the socio-economic return from
which it will appear whether the investment in question is profitable. It is important that such
calculations include the ongoing operating and maintenance costs.
Even in case of a socio-economically profitable investment, the costs must be defrayed by the
public purse whereas the revenues are more widely distributed across society. Therefore efforts
must be made to ensure that public investments contribute both to growth in society and to a healthy
economy of the Treasury.
The Government of Greenland also wants to generate a sustainable development within the social
and environmental area. Unlike the economic criteria described above, the gains achieved within
the social and environmental area are difficult to measure. This does not mean, however, that such
dimension is less important when the overall priorities are to be set.
The future trend in the total demand must also be clarified. This goes especially for the future
business opportunities and the trend in the settlement pattern of the population. Large public loans
must be repaid over a long period of years. The dynamic settlement pattern and the demographic
development entail a risk that the same demand will not exist in, for example, 20 years. Therefore
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investments should to the greatest extent possible only be made in places where future economic
growth is expected. At the same time, the number of elderly citizens with special needs is expected
to increase. The entire demographic development must thus be included in the planning of what
institutions are to be built.
There is a need to focus sharply on public expenditures and especially Treasury finances. There is a
growing pressure on the public finances. This has been substantiated by the chairmanship of The
Economic Council. Sustainable structures must be found in the manner in which the public
revenues and expenditures are distributed if we want to maintain the current level of welfare. At the
same time there is also a need to focus on economic growth. It is possible for the Self-Government
authorities to influence the economic development in society in general through investments in
infrastructure etc. which provides a better framework for growth in the private business sector.
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3 The debt situation today
It is important to monitor the debt situation as large private debts may turn into a problem for the
public sector in the event of low business activity or recession. Internationally there have been
examples of private citizens who have had difficulties in meeting the demands for payment of
interest and instalments. The result has been that banks and other financing institutions have had
difficulties in procuring liquidity and have had to write down their assets. In order to avoid banks
turning insolvent or going bankrupt, public authorities (both national governments and international
bodies) have provided extensive rescue packages to banks in order to ensure the banks' survival and
stability in the lending market. In this way, the large private debts have become a burden to the
public finances.
In its 2011 report, the chairmanship of the Economic Council reviewed the debt situation. The
report includes a calculation of the total net debts in Greenland, i.e. a calculation including both
public and private debts as well as public and private assets. The same mechanisms that have
become clear in the international financial crisis also exist in Greenland, and large private debts can
potentially turn into a burden for the Treasury, especially the debts of the publicly owned
companies. The aim of the debt policy is a reduction of such risks.
The total net debt amounts to approx. DKK 2.7bn which equals approx. DKK 50,000 per citizen.
This in itself is not a high level of debt, and there is no immediate risk that private debts constitute
an unbearably large burden for the citizens; consequently, the risk that this should become a burden
to the public finances is accordingly small. The assets registered with the Danish Securities Centre
are part of citizens' and enterprises' funds invested in shares and other securities.
Table 1: Net lending in Greenland, mid-2011, DKK million
Net lending by commercial and savings banks
Debt to mortgage banks
Nordisk InvesteringsBank
Danmarks Skibskredit
Vestnordenfonden
Other foreign creditors1
Total net debts
Securities registered with the Danish Securities Centre as owned by residents in
Greenland2:
Net debts of residents in Greenland
300
2,740
250
60
60
2,040
5,450
-2,730
2,720
1: "Other foreign creditors" cover debts of companies owned by the Self-Government authorities to foreign
creditors.
20
2: The calculation does not include foreigners' shareholdings in the listed companies Grønlandsbanken and
NunaMinerals as debt and does not include Grønlandsbanken's own portfolio of securities.
Source: 2011 report by the Economic Council
The loans raised have been spent on financing investments in various assets. Citizens have typically
invested in housing whereas enterprises have invested in business assets (machinery etc.). The
public sector invests in the expansion of hydro-power stations, public institutions etc. Part of the
public capital expenditure has also been spent on supporting citizens' acquisition of their own
housing. No overall calculation has been made of the value of such assets, and big problems are
involved in calculating especially the value of the public fixed assets.
No overall statement of the value of the public assets is available. Such statement would provide a
managerial advantage when it comes to assessing the level of an optimal maintenance strategy, and
it would be possible to record the value of public investments.
It is difficult to determine the value of the public assets. This is due to, among other things, the fact
that assessing the value of public housing and public facilities is complicated. The costs of
construction are not an indication of the value in case of a resale. Generally, the markets in
Greenland are small and sensitive to changes in the general economic development. The value of
public assets can change rapidly. Often no market price exists at all because there are no interested
purchasers. In some cases the value of an asset depends on whether public subsidies are still
granted. Some of the publicly owned airports are of one value if the service contracts ensuring
regular flights are continued and of a different value if such service contracts are discontinued.
Investments of this kind do not contribute to building up the stock of assets, but only to the current
operating expenditure.
The 2011 report by the Economic Council also included a description of the public sector's debts.
The debt of the Self-Government authorities is very small, the cash and cash equivalents of the
municipalities are roughly of the same size as their debts, and most publicly owned companies have
a sound equity ratio. However, Royal Greenland is singled out as a company attracting special
attention. This company has built up large debts and operates in a competitive market that is
sensitive to economic fluctuations. In 2009, this brought about a need for a capital injection by the
Self-Government authorities into Royal Greenland. As the conditions have not changed
significantly since then, it is not unlikely that a similar situation may reoccur. However, Royal
Greenland has officially stated that one of the company's strategic objectives is to reduce its debts.
21
Table 2: Expected development of the debt situation, exclusive of infrastructure investments,
DKK million
2008
2009 2010 2011 2012 2013 2014 2015
Gross interest-bearing debt
The five largest companies owned by
the Self-Government authorities
3,892 4,091 3,509 3,616 3,496 3,025 2,958 2,744
Illuut A/S
The municipalities
The Self-Government authorities
In total
23 338 402 492 547 602
109
109 196 196 196 196 196 196
0
0 250 250 600 800 1,000 1,000
4,001 4,200 3,978 4,400 4,694 4,513 4,701 4,542
Net interest-bearing debt
The five largest companies owned by
the Self-Government authorities
Illuut A/S
The municipalities
The Self-Government authorities
In total
3,561 3,162 2,657 2,648 2,586 2,177 2,080 1,767
17 328 392 482 537 592
-350 -350
-68
-68
0
0
0
0
-2,092 -1,320 -797 -677
0 200 400 400
1,119 1,492 1,809 2,231 2,978 2,859 3,017 2,759
Sources: 2010 financial statements of the Treasury, 2010 financial statements of the municipalities and miscellaneous
annual reports.
Note: Compared to the 2010 financial statements of the municipalities, the liquidity of the municipalities has been
reduced by DKK 37.5m in the table as a result of tax liabilities owed to the Self-Government authorities.
The five largest limited companies owned by the Self-Government authorities are Royal Arctic Line A/S, Royal
Greenland A/S, KNI A/S, TELE A/S and AirGreenland A/S.
The above table illustrates the development of the total debt level, both historically and as
estimated.
Royal Arctic Line has decided to invest in a renewal of its fleet, and the loans will be raised as the
new vessels are supplied. Consequently, the company's debts are expected to increase by
approx.DKK 540m. In the 2012 Finance Act, public borrowing of DKK 800m up to 2015 has been
included in the budget. If loans are to be raised in order to finance infrastructure investments, such
loans will be in excess of those already included in the budget. Decisions have already been made
which result in a decline of the total public debts up to 2015. At the same time it should be noted
that only the increased debts known today have been included and that the figures reflect some
overall estimates intended to illustrate the extent of the debts. Any loans raised by municipal
property companies may, for example, contribute to increasing debts, but have not been included
here.
22
The overall conclusion is that the public finances are exposed to a limited risk as far as Royal
Greenland is concerned, but the overall situation is stable. Nevertheless, a debt policy is required
owing to several factors:
1. There is a need to invest in educational institutions in order to improve the general
educational level.
2. The housing stock is old and run-down in many places, and mould is a growing problem.
3. Loans will have to be raised order to finance the development of society. The Transport
Commission has presented a number of profitable infrastructure investments, there is a
continuous need for investments in the housing stock, and there is a need for continuously
expanding the public institutions. Such investments may each be individually profitable, but
it is not possible to finance all of them and not at the same time. Therefore a strict political
prioritisation is required.
4. There is a growing pressure on public expenditure. The demographic development is
expected to result in increasing expenditure for welfare services, but will not result in any
corresponding increase in tax revenue. Interest and instalments on loans must be paid prior
to welfare expenses. Large payments of interest and instalments limit the scope of action
when it comes to welfare expenditure. This is problematic when, at the same time,
expenditure for welfare is expected to increase significantly up to 2030.
5. The international debt crisis will have the effect that access to public loans will be more
difficult, and the interest level for public debt is expected to increase.
6. A dynamic business sector which is a prerequisite for higher economic growth requires
investments and consequently the raising of loans. The debts of the companies owned by the
Self-Government authorities affect the overall public debt, and consequently the SelfGovernment authorities are exposed to a risk which may eventually have the effect that the
expenditure for welfare services must be reduced.
Even though, as described above, Greenland has a favourable starting point, experience from, for
example, Ireland shows that even a modest debt can rapidly turn into a burden on the public
finances. In 2008, Ireland's public debt amounted to 25 p.c. of GDP, but soared to 110 p.c. of GDP
following the activation of guarantees furnished for Irish banks. A large share of the banks' assets
consisted of housing that turned out to be unsaleable, and the public guarantee meant that the Irish
Treasury had to pay. The Greenland Treasury is both directly and indirectly liable for the debts of
the companies owned by the Self-Government authorities. Therefore it is necessary that such
companies are taken into account when assessing the total public debts.
23
4 Debt policy
The raising of loans always entails a subsequent outflow of payments of interest and instalments.
Loans must be repaid before funds are available for other public expenditure such as schools, health
services etc. Increasing the public debts is in fact a way of spreading expenditures across different
periods of time. In other words, the bill is passed on to the future generations. When we raise loans
today, we impose on ourselves an unavoidable obligation to pay certain expenses tomorrow. The
immediate effect is that the future generations' opportunity to spend future revenue is reduced. Huge
public debts are therefore basically not a reasonable distribution of the revenues between the
generations. But loans may also provide the possibility of realising projects that generate growth in
society. If the loans are used for financing sound investments which increase the future revenues,
future generations will, on the whole, be allowed greater economic latitude. This seems to call for
the raising of loans to a certain extent. However, such raising of loans is subject to the investments
involved being sound investments.
There has been a long period with very low interest rates which has made the raising of loans
relatively cheap. It is uncertain whether the interest rate will stay at this low level for a longer
period of time. Other things being equal, a higher interest rate will in the long term make it more
difficult to finance the loans, and the demands in terms of return on investments will increase. To
the extent that the debt consists of floating-rate loans, this may entail a risk that the expenses for
interest payments will increase significantly.
The proposed debt policy is based on a number of principles setting out the framework for public
borrowing. Since the adoption of the Stability Pact, the EU member states have been subject to a
limit on public gross debt of 60 p.c. of GDP. The effect of this was that several countries raised
loans up to this limit (and in some cases in excess of the limit) up to 2009 while the economies were
booming. When the economic recession hit us, most countries ended up with debts exceeding the
limit of 60 p.c. of GDP.
If Greenland were a party to the EU Stability Pact, this would mean that, in 2010, the public gross
debt must not exceed DKK 7.4bn. But when comparing Greenland's economy with European
economies, you should compare disposable GNP in order to also include block grants from
Denmark and transfers from the EU in Greenland's revenues. In most EU member states, GDP and
24
disposable GNP are roughly the same. If the limit for the public debt is set at 60 p.c. of disposable
GNP, this would be equal to DKK 9.6bn in 2010.
Table 2 above illustrates that in 2012, the total public gross debt amounts to DKK 4.7bn.
The Stability Pact limit is based on the conditions of much larger and versatile European
economies. The economy of Greenland is characterised by a small private sector where the fishing
industry is in fact the only exporting industry and where earnings are based on a resource that
varies. This seems to call for a limit on the total public debt which is lower than the limit
determined by the EU. But contrary to the uncertain elements caused by the narrow business
structure, the block grant works as a stabilising factor in the economy and ensures a certain
continuity in the development of the public revenues. Overall, this illustrates that determining a
maximum amount for the public debt in Greenland is complicated, and copying the level set out by
the Stability Pact does not at first sight seem to be an appropriate approach.
The first principle for the development of debts in Greenland should, on the contrary, be based on
the following principle of prudence:
Principle no. 1: In a normal year, there must be a surplus on the partial budget balance (excluding
lending), and interest and instalments must not limit the possibilities of providing public benefits
and services during a period of low business activity.
A normal year is a year with neither economic boom nor economic recession.
The appropriate level of debt is continuously changing and is affected by the development in
society - both positive and negative fluctuations. If a large-scale project is initiated, this may
generate a pressure for making public investments or for participating directly in such project. A
large-scale project will have such big impact on the entire economy that it will raise the ceiling for
loans that can be raised by the public authorities. In principle, it must be possible to finance public
investments in connection with large-scale projects without exceeding such raised ceiling. The
Government of Greenland is of the opinion that the future debt policy must be based on the above
principle of prudence which sets the framework for the maximum loans that can be raised.
There is a need to make societal investments which can ensure a sustainable development in
society. This leads on to the next principle:
25
Principle no. 2: The public authorities will only raise loans that contribute to improving the fiscal
sustainability.
Expenditure is expected to increase over the coming years, but loans are to be raised only if this
does not result in a situation where the possibility of financing future expenditure is restricted.
Society has to make some important decisions which must ensure the future of the public sector. At
the same time, there is a valid request for improving the infrastructure, and several raw materialsrelated projects are approaching a stage which may result in large-scale projects. Both elements will
provide business and industry with a better framework and a larger potential for growth. The third
principle relates especially to the financing of this type of projects.
Principle no. 3: The public authorities will only raise loans for housing, industrial and
infrastructure projects if increased user charges can finance at least the payment of interest and
instalments on such loans.
The modernisation of the infrastructure must ultimately be financed by the users. This is necessary
in order to make sure that the Treasury can finance the costs of capital investments without
impairing the fiscal sustainability. It is also a way of making sure that the citizens achieving the
largest benefits will also pay the main part of the investment involved. Within the area of housing,
this means that loans may be raised to construct housing where the rent covers the payment of
interest and instalments on the loans raised. This also follows from the basic principles on a
normalisation of the housing area which are described in the housing report and which are already
now used in connection with the letting of housing through Illuut. In cases where the citizen's
income is not sufficiently high, part of the rent may be paid via housing benefits.
The limited companies owned by the Self-Government authorities raise loans themselves in order to
finance the development of their business. This is in full compliance with the objectives of the
companies and the arm's length principle. In order to ensure a healthy development of society,
major loans must be coordinated with the Self-Government authorities. As follow-up on the “Report
on ownership and development in the limited companies fully or partly owned by the SelfGovernment authorities” from the autumn of 2011, initiatives have been instituted to clarify, among
other things, the optimal capital structure of the individual companies. This and other issues will
constitute the basis of a more active dividend policy.
26
The public debt consists not only in the debts of the Self-Government authorities, but also includes
the debts of the municipalities and of the companies owned by the Self-Government authorities. As
the loans of the companies and the municipalities are based on the creditworthiness of the Treasury,
it is necessary to monitor the development of the total public debt. Any uncertainty as to the size of
the debt and the interaction between the Self-Government and the limited companies owned by the
Self-Government authorities and the municipalities constitutes an element of risk which must be
eliminated.
Principle no. 4: The total public debt is to be calculated on a continuous basis and coherently so
that it is easy to ascertain the size thereof at a given time.
It is proposed that, in practice, this principle be met by presenting, in the Political and Economic
Report, the total public debt and plans for changes in this debt. Such presentation is to state the
debts of both the Self-Government, the companies owned by the Self-Government authorities and
the municipalities.
A clarification of the size and the development of the debts will make it easier for the political
system to get an idea of the size of the debts and thus also an idea of the possible framework for the
future development of the debts.
These four principles constitute the framework for the total borrowing, but there is a great need for
determining priorities within this framework.
27
5 Priority needs and criteria
Even though the raising of loans and consequently the increase of debts involve risks, loan-financed
investments may boost the economy and, in the long term, generate the framework for improving
the living standards. Therefore it will also in the future be necessary for the public sector to raise
loans and incur debt.
Deciding what projects are to be given high priority is not a simple process. In each single project,
the economic return must be assessed in order to ensure that only sound and profitable investments
are made.
Figure 1: Criteria for prioritising new projects
Criterion no. 1
Economic growth
Criterion no. 2
Fiscal
sustainability
Criterion no. 3
Socially and
environmentally
sustainable development
Criterion no. 4
National and regional
development
List of
initiatives
Overall basis for
making a political
decision on
implementation
Source: Ministry of Finance
The above figure illustrates that all initiatives are to be assessed on four parameters. This means
undertaking an assessment of the socio-economic return which indicates how a project contributes
to increasing the overall prosperity in society. It is a prerequisite for implementing a project that the
investment generates a positive socio-economic return.
There also a need for assessing how a project affects the fiscal sustainability problem. In other
words, analyses must be carried out in order to clarify whether an investment impairs or improves
the long-term sustainability. If, for example, the Self-Government authorities finance the
construction of the harbour of Nuuk through loans to a publicly owned enterprise, the problem of
fiscal sustainability is negatively affected, if the Self-Government authorities do not receive interest
28
and instalments on such loans. If the set-up entails repayment of the loan plus interest, the impact
on the sustainability will be neutral. It is worth noticing that an investment may generate a positive
socio-economic return while at the same time contributing negatively to the fiscal sustainability.
Therefore it is important that investments are assessed according to both criteria. Finally, it is
necessary to ensure a sustainable development. This means that the prioritised parametres must be
geographically balanced, and they must be environmentally and socially sustainable.
Figure 2: Example of prioritisation
Criterion no. 1:
Economic growth
Criterion no. 2:
Fiscal sustainability
Criterion no. 4:
National and regional
development
Criterion no. 3:
Socially and environmentally
sustainable development
Project 1
Project 2
Source: Ministry of Finance
The figure above illustrates how all projects must be assessed in relation to the four criteria. This
assessment provides an overall picture of how a project will contribute to the societal development
and may constitute the framework for a political prioritisation. On the basis of the above example,
project 2 would be given first priority as this project obtains the best assessment on most criteria.
As project 1 even has a negative impact on the fiscal sustainability, its assessment rating would
have to be much higher on the remaining criteria if this project were to be realised. These criteria
must be clarified in a business case providing an overall assessment based on the four dimensions.
A more detailed description of the four criteria follows below.
29
5.1 Criterion no. 1: Economic growth
When a private enterprise is to assess the economic return on an investment, for example the
internal interest rate and the present value are calculated. Such calculations compare all expected
revenues with all expected expenditures. In a typical scenario, most money is invested at the
beginning and consequently the expenditures peak during the first year(s) whereas the revenues
peak during the last years.
Public investments are best assessed by looking at the socio-economic return as investments in, for
example, roads, schools and other infrastructure impose expenditures on the public sector whereas
the gains accrue to especially the citizens. The individual citizen benefits from obtaining a better
education, and the business sector profits from a good and well-functioning infrastructure. It is
important to include both the public and the private revenues from public investments in order to
obtain a true and fair picture of the profitability of a project.
Criterion no. 1: The internal interest rate must at least be equal to the current market interest rate.
The calculation of the internal interest rate must take into account the socio-economic effects.
The Transport Commission has performed calculations of the socio-economic return which include
both derived revenues and current operating and maintenance costs. This is a good model that can
also be used for other investment projects. It is important that the calculation of the total
expenditures includes the current operating costs, including especially maintenance costs.
Moreover, public investments must be planned in such manner that we do not risk overheating the
economy and thereby increasing the expenditures unnecessarily. If many projects are initiated
simultaneously, the pay level in the construction industry may escalate which means that, in the
end, implementation of the projects will be more expensive.
Investments generating a high socio-economic return increase growth in society and thus contribute
to improving prosperity in general. It is important to implement this kind of investments, but at the
same time it is important to make sure that the development of the public finances is sustainable.
30
5.2 Criterion no. 2: Fiscal sustainability
The Economic Council has established that there is a need to change the structure of the public
finances if we want to maintain our current welfare level. The organisation of the public sector is
based on a situation where a relatively large share of the population is of working age. With a high
degree of certainty it can predicted that this share will decline up to 2040. In other words, we will
not be able to sustain the current welfare level unless the public sector is restructured.
New investments must therefore be assessed in the light of whether they contribute to reducing or
aggravating the fiscal sustainability problem. Public investments resulting in cheaper plane tickets
provide citizens and enterprises with an economic gain from which society also benefits and which
sets out the framework for more growth. But equivalent revenues do not flow to the Treasury as a
result of lowering the price of plane tickets. Generally, the fiscal sustainability problem cannot be
reduced by making investments and thus achieving higher growth in society. But investments that
can contribute to changing the underlying structures are necessary in order to ensure fiscal
sustainability.
Public investments must be used as a structural policy instrument for creating the framework for a
sustainable development. In the Government of Greenland's upcoming 2025 plan, a number of
objectives are set which will jointly contribute to a sustainable development. Investments in public
institutions etc. may be a means of achieving these objectives. Capital investments in, for example,
educational institutions will generate socio-economic growth and prepare the ground for an
improvement of the fiscal sustainability in the long term.
Criterion no. 2: Public investments within building and construction must be used as a tool for
creating the framework for the necessary structural changes ensuring fiscal sustainability.
The Economic Council has worked out a model calculating the sustainability of the fiscal policy
pursued. The model calculates a fiscal indicator which indicates whether the fiscal policy pursued
today generates a surplus or a deficit in the long term. The fiscal indicator indicates the size of the
expenditure cuts required from 2010 up to 2040 in order to balance public revenues and
expenditures. The Economic Council has calculated that the indicator is -7.4 p.c. of GDP, equalling
DKK 960m in 2010. This may be interpreted as a demand for reducing expenditures by 7.4 p.c. of
GDP, and this reduced level - in relation to GDP - must be maintained until 2040 if the public
31
revenues and expenditures are to balance in the long term. The model can be used for evaluating the
individual investment proposals. In practical terms this means that major, new public investments
must be assessed on the basis of whether they contribute to increasing or reducing the fiscal policy
indicator. Investments increasing the indicator to, for example, -9.0 p.c. of GDP and thus
aggravating the fiscal sustainability problem are not to be initiated. On the other hand, investments
reducing the fiscal sustainability problem must be given a high priority.
Public investments must be seen as a means of achieving other objectives and not as an end in
themselves. Public investments must not be used for, for example, maintaining a certain
employment level within the construction industry for a longer period of time.
This criterion is closely tied to the debt policy principles of not raising any loan unless such loan
contributes to improving the long-term fiscal sustainability.
5.3 Criterion no. 3: Socially and environmentally sustainable
development
A sustainable development also includes elements other than economic ones. The inequality that
can be observed in society today is largely due to the fact that not everybody has equal
opportunities. It is the Government of Greenland's objective to boost society by providing such
opportunities to the individual citizen. It strengthens both the individual and society as a whole if
everybody has equal access to training and education. Through investment in training and
education, a sustainable development in society is supported. At the same time there is a need for
helping citizens back on track when citizens have encountered obstacles on their way. A socially
responsible society also contributes to a sustainable development where everybody is included in
society - and where everybody is given the opportunity to exploit his or her potential.
A sustainable development can be enhanced by, for example, public contracts for building and
construction projects stipulating as a requirement that apprenticeships must be established. This can
be seen as a cross-sectional instrument ensuring that the public initiatives pull in the same direction.
The use of apprentices makes the individual project more expensive, but also contributes to
ensuring an improvement of the level of skills of the labour force. In the long term, this provides for
a more efficient labour force, and it contributes to a sustainable development.
32
Public investments can also be used for promoting a sustainable environmental development. The
Self-Government authorities have invested in hydro-power stations for more than 20 years. This has
some attractive economic effects as the electricity prices decline in the long term and the
dependence on oil is reduced. At the same time, reduced overall CO2 emissions have some
beneficial environmental effects. Other environmentally sustainable investments could, for
example, be a waste incineration plant exploiting the heat for heating housing facilities. Whether
such solution is also an economically attractive investment is more uncertain.
Criterion no. 3: Public investments must be assessed on the basis of the extent to which such
investments contribute to an environmentally and socially sustainable development of society.
The Government of Greenland wants all public investments to be assessed on the basis of a
sustainable development. We want to reduce the inequality in society which is caused by the fact
that not everybody has the same opportunities. This goes for financial opportunities as well as for
the opportunity of social mobility.
We also have a responsibility for providing future generations with a healthy environment in which
they can grow up. The decisions we make today may affect our environment, and therefore all
public investments should also be assessed on the basis of environmental aspects.
Just as debts affect future generations, it is also our responsibility that future generations will be
able to enjoy a healthy environment to the same extent as we do today.
5.4 Criterion no. 4: National and regional development
In order to achieve a sustainable development of society, a distinction must be made between
national and regional investments.
Investments in infrastructure and housing are long-term investments. Therefore it is natural to make
an assessment of what the society structures look like in the long term. Population movements are a
good starting point for assessing the future need for public institutions and infrastructure.
33
The figure below illustrates that the proportion of the population moving to the bigger towns has
been steadily increasing. This has happened regardless of the policy pursued or the economic
situation in general. Such trend is found in all other countries, inclusive also of other Arctic regions.
The 2009 mobility survey shows that the population is generally mobile, and every year a lot of
people move in Greenland. Just over 40 p.c. of the citizens questioned in the survey replied that
they expected to move within the next five years. The survey also shows that job and housing are
the two decisive factors when deciding on whether or not to move.
Figure 3: Historical development and trend in the settlement pattern
70
60
50
P.c.
40
30
20
10
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Proportion
of citizens
residing
the four big towns
Andel
bosiddende
i fire
storeinbyer
Proportion
of citizens
residingbyer
in the other towns
Andel
bosiddende
i øvrige
Proportion
of citizens
residing in villages
Andel
bosiddende
i bygder
Note: The status of Kangerlussuaq changed to village in 2001. The four big towns for the entire period are Nuuk,
Sisimiut, Ilulissat and Qaqortoq.
Source: Statistics Greenland, Statistical Office and the Danish Ministry for Greenland: The labour force in Greenland,
1975-95, 1978.
The above figure illustrates that in 2010, half the population lived in the four big towns and the
other half lived in smaller towns and villages. Forecasts of this development up to 2025 show that
40 p.c. of the population will continue to reside outside the four biggest towns. Consequently, there
will also be an actual need outside the four biggest towns for making public investments in modern
housing facilities and access to a proper school. These investments, however, should be balanced
against the local possibilities of business development. There may also be regional differences
where the population increases and the composition of the population changes. The figure below
34
shows that there has been a steadily increasing growth in the population in Tasiilaq which has had
an impact on the entire East Coast.
Figure 4. Tasiilaq’s share of the total population on the East Coast, 1980-2012
60,0
55,0
Pct.
50,0
45,0
40,0
35,0
30,0
1980
1985
1990
1995
2000
2005
2010
Source: Statistics Greenland, Statistical Office, March 2012
The public investments must give all Greenland's citizens the opportunity to take part in the
development. But there is a limitation in terms of what is economically profitable, and it is not
possible to relocate the development to the outlying districts. Similarly, it is important to eliminate
bottlenecks preventing people from moving closer to the areas with prospects of development.
The Government of Greenland wants society in general to become better at removing barriers that
obstruct the population's possibilities of settling in places offering jobs as well as training and
education.
Criterion no. 4: Public investments that are economically profitable and which contribute to a
sustainable development must be made where business development and population growth are
also expected in the long term.
Below a proposal for a national investments and expenditure plan is presented, based on the
information and preconditions that apply in 2012. The preconditions in society may change - and
35
change significantly - if oil is discovered or if an iron mine or an aluminium smelter is opened. Both
the above debt principles and criteria for making priorities, however, are robust when it comes to
such changes. The specific priorities may change, however, if the basic preconditions change.
36
6 Public investments
It a core task for the public sector to ensure a modern infrastructure providing citizens and
enterprises with the basis for developing their potential. Public investments in facilities and
infrastructure are a means of achieving political and economic objectives. It is not an objective in
itself to initiate public construction of housing, airports or institutions. Public investments must
basically be spread over time as well as geographically to ensure stable activity in the construction
industry which can also establish a basis for employment in this industry. During periods with low
business activity, it may be considered whether some construction projects can be brought forward.
Major infrastructure projects frequently involve public (co-)ownership. This means that a
coordinated effort is required between the municipalities, the Self-Government authorities and the
companies owned by the Self-Government authorities concerning an overall strategy for the
infrastructure area so that silo thinking and sub-optimisation are reduced.
Over the next years (the estimate years in the budget), the capital investments budget has already
been allocated to approved and initiated construction projects. Housing has been the area given
highest priority in recent years.
Figure 5: Distribution of the Self-Government authorities' capital expenditure (2006-2015),
p.c.
120
100
80
60
40
20
0
2006
2007
Uddannelse
Education
2008
2009
2010
Boligområdet
Housing
2011
2012
2013
2014
2015
Familie
sundhed
Familyog
and
health
Source: Finance Act 2012
37
The figure above illustrates the expenditure defrayed and budgeted for by the Self-Government
within the construction area over a period of 10 years. In addition to such direct expenditure, the
Finance Act also includes in the budget loans to Nukissiorfiit, which can basically borrow up to a
maximum of DKK 180m from the Treasury. Moreover, in recent years bigger loans have been
raised to expand hydro-power stations. As no further loans to hydro-power stations have been
included in the budget, such construction activity will decline to DKK 180m in 2014 and 2015. The
construction activities undertaken by Nukissiorfiit are paid for by the users as the payments to the
quasi-public company are loans from the Treasury and must therefore be repaid. As at the same
time, Nukissiorfiit pays interest and instalments on loans taken out in preceding years, the net
expenditure in the overall budget balance (including lending) is approx. DKK 30m in 2014 and
2015, and in the long term, the net expenditure will turn into net revenue for the Treasury.
The capital expenditure is mainly financed through current revenues in the form of taxes, duties and
block grants from the Danish State. However, a loan of DKK 250m has been raised for expanding
hydro-power stations. The budget provides for additional loans to be raised in the sum of DKK
800m during the years 2012-2015 in order to finance a hydro-power station at Ilulissat and a
gradual reduction of the Construction and Renovation Fund.
Figure 6: Share of capital expenditure in relation to the operating expenditure in the Finance
Act, p.c.
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2001
2002
2003
2004
2005
2006
2007
Capital expenditure,
Finance Act
Anlægsudgifter,
Finanslov
2008
2009
2010
2011
2012
Activity
Aktivitet
Source: Finance Act 2012, Ministry of Finance and the Construction and Renovation Fund
The figure above illustrates the capital expenditure as budgeted for in the Finance Act and as
outflow from the Construction and Renovation Fund. The difference between the two lines is due to
38
the fact that there is a time lag between the time when the funds are allocated and the time when
such funds have an (employment) effect in society.
It is characteristic of the construction projects that they have a duration of several years, and most of
the funds budgeted for during the estimate years 2014 and 2015 are tied to projects in progress or to
projects already approved. In the estimate years, a deficit in the partial budget balance (excluding
lending) has been forecast.
Table 3: Partial budget balance (excluding lending), DKK million
Partial budget balance
(excluding lending)
Finance
Finance
Budgetary
Budgetary
Budgetary
Act 2011 Act 2012 estimate 2013 estimate 2014 estimate 2015
13
1
-94
-53
-113
Source: Finance Act 2012
A deficit in the partial budget balance and an increased need for capital investments create a double
squeeze which makes it more difficult to finance new capital investments and at the same time
achieve a balanced partial budget (exclusive of lending). This underlines the need for determining
priorities.
In the Finance Acts, the overall capital investment amounts are distributed among settlements for
the individual years. As for the year 2011, it should especially be noted that additional funding was
granted for student housing and boarding facilities in the sum of DKK 141m, allocated as DKK
40m to Uummannaq, DKK 7m to Tasiilaq, DKK 45m to Aasiaat, DKK 45m to Sisimiut and DKK
4m to Qaqortoq. The table below sums up the funds actually spent during the individual years. The
above additional funding will not take effect until the years after 2011 as the construction projects
are gradually developing.
Table 4: Geographical distribution of capital investment funds, budget figures, DKK million
2008
2009
2010
2011
28
Nanortalik
3
5
19
29
Qaqortoq
29
46
27
11
Narsaq
11
17
26
1
Paamiut
27
23
31
362
Nuuk
62
188
275
3
Maniitsoq
8
9
21
29
Sisimiut
239
145
62
5
Kangaatsiaq
14
7
4
21
Aasiaat
15
1
2
1
Qasigiannguit
29
31
8
39
Ilulissat
Qeqertarsuaq
Uummannaq
Upernavik
Qaanaaq
Ammassalik
Ittoqqortoormiit
Non-municipal allocated capital
expenditure
Total capital expenditure
6
0
14
33
2
6
3
22
0
23
22
0
2
2
146
0
2
21
0
0
3
363
864
227
770
250
879
219
0
3
10
0
0
0
152
874
Source: Report on the Construction and Renovation Fund, 2008-2010
Note: The 2011 figures are preliminary figures prior to audit.
Maintenance and renovation of public buildings and facilities
The Self-Government authorities are facing a growing problem as a substantial renovation backlog
has accumulated on a major part of housing owned by the Self-Government authorities. At the same
time, there is a growing need for maintenance and renovation of the infrastructure, especially as far
as harbours and airports are concerned. As for institutions, especially elementary schools, a big
need for renovation has also accumulated. Moreover, there is a need for renovation because of
mould in both residential housing and public institutions. For many years, society has accepted the
postponement of such expenditure, and the bill is soon to be paid. This development is
unsustainable.
The fiscal sustainability model forecasts the development in public expenditure in the event that we
maintain the current structures, while altering the demographics. The result is that expenditure
increases much more rapidly than revenue. But the problem has been underestimated as the fact that
the public expenditure today is artificially low has not been taken into account since insufficient
funds are allocated for renovation and maintenance. Expenditure may be kept low for a while, but
this results in the deterioration of the public assets, i.e. housing, institutions and infrastructure.
The Government of Greenland wants to break with the tradition for many years of passing on the
burden to future generations. There is a need for changing the approach to the public assets, which
goes for both institutions, housing and infrastructure. Therefore the principle below is set up for
renovation and maintenance in connection with public investments.
40
Maintenance and renovation principle: Funds must be allocated for renovation and maintenance
in order to maintain the economic value and the value-in-use of the assets.
It is difficult to determine the value of public assets. In places where it is impossible to determine a
market price for the assets, the rebuilding costs must be used as a basis. In continuation of the
maintenance and renovation principle, there is a need for working out statements of the public
sector's total capital stock. In new projects, the increased operating costs are to be included in the
basis for making decisions, cf. criteria 1 and 2 above.
As for investments in public institutions, it is important that the basis for making decisions includes
considerations as to which public units are to undertake the obligation to subsequently run and
maintain such institutions. The municipalities and the Self-Government authorities have jointly set
up a working-group for the purpose of establishing a new procedure for construction projects
financed fully or partly by the Self-Government authorities.
In the upcoming housing report, a more detailed plan for the future structuring of maintenance and
renovation work will be presented.
6.1 Training and education
The Government of Greenland's objective is that, by 2025, 70 p.c. of a year group of young people
must acquire a job-qualifying education. This is an ambitious objective requiring a big, overall
effort. An important element of the effort is an expansion of student housing and boarding facilities
as well as an expansion of the existing educational institutions.
Investments in training and educating the workforce provide a clear advantage to the individual
citizen and to society as a whole. The provision of access to qualified education for all citizens is an
important objective for the Government of Greenland. Education is a powerful tool for reducing
inequality and contributes to a sustainable society where each individual has the best chances of
choosing his or her own life cycle. The effects of training and education are long-term effects, but
there is a huge potential in raising the educational level. The gains achieved from investments in
training and education are both human and economic.
41
Today the educational system is not geared to educating many more citizens, and there are
bottlenecks preventing or impeding the way to acquiring an education. The educational strategy
presents an overall plan for how the education system can be expanded to include more active
students. The Ministry of Education has made a forecast of its need for capital investments in order
to achieve the objective by 2025. The total requests for capital investments in student housing and
educational institutions amount to DKK 1.17bn.
The Finance Act also budgets for expenditure for renovation and expansion of elementary-school
buildings. DKK 80m has been allocated for this purpose annually. In the Finance Act, funds have
also been allocated for an educational reserve for financing expected increased activities. As the
upcoming educational strategy will present an overall plan for boosting the level of education, the
need for an educational reserve will not be the same in future. The funds from the educational
reserve are therefore included in the financing of the capital expenditure of the educational strategy.
The table below illustrates the total funding requirement within training and education.
2024
2025
180 110 110 170 140 140
130
47
175
200
125
100
100
100
30
30
90
60
60
50
0
0
0
80
80
80
80
80
80
80
80
80
80
5
77
121
121
121 121 121 121 121 121
121
42
98
79
84
59
0
0
49
2023
205
59
2022
200
59
2021
175
121 121
2020
47
180 180
2019
2016
2018
2015
2017
2014
Total capital
expenditure
The educational
strategy
Municipal schools
The educational
reserve
Funding
requirement for
training and
education, net
2013
Table 5: Capital expenditure in connection with implementation of the educational strategy,
DKK million
19
19
9
Source: Ministry of Education
Note: DKK 80m has been allocated annually in the Finance Act 2012 and in the estimate years. Consequently, there
is no need for further funding for this purpose up to 2015.
The table above illustrates that part of the funding of the capital expenditure resulting from the
educational strategy can be raised by applying funds from the educational reserve. However, there
will still be an uncovered funding need.
42
The subsequent operating expenditure and the increased expenditure for study grants etc. will be
incorporated in the overall educational strategy. In addition to the new initiatives, there is a need for
continued efforts to renovate and expand the elementary schools. DKK 80m is allocated for such
work annually.
Part of the funding of the very extensive requests for capital investments resulting from the
educational strategy can be raised through the educational reserve budgeted for, where, as from
2015, approx. DKK 121m has been included in the budget for the educational sector, which funds
have not yet been allocated. In 2012 and 2013, part of the educational reserve has already been
allocated.
Assessment of the investments on the basis of the listed prioritisation criteria
Investments made in educational institutions must be assessed according to the four prioritisation
criteria. It is well-documented that education generates a positive return for the individual in the
form of a higher income, seen over a lifetime. Most recently, an analysis in Denmark from February
2012 conducted by the Economic Council of the Labour Movement substantiated that the private
financial gain (disposable income after tax) from acquiring an education is between 12 and 42 p.c.
The biggest return is achieved from the long-term education programmes, but all education
programmes generate a direct financial gain for the individual citizen when you consider the total
income throughout a full working life. The analysis also shows that as the individual earns more,
productivity and tax payments increase. Expressed as a percentage, the total socio-economic return
from acquiring an education ranges from 26 to 63 p.c. In Greenland, similar analyses conducted by,
among others, the Economic Council in 2010 show that acquiring an education provides between 46
and 105 p.c. higher business income for the individual citizen.
It may be concluded that the economic return from education is positive and extensive. In its report,
the Tax and Welfare Commission has calculated that the recommended education effort will
generate extra revenue of DKK 100m in the form of increased tax payments by 2030.
Education is a powerful tool for reducing inequality and contributes to a sustainable society where
each individual has the best chances of choosing his or her own life cycle. If seen in isolation, an
improved level of education does not reduce the fiscal sustainability squeeze, not even if 80 p.c. of
the workforce had a job-qualifying education. This is due to the fact that when the level of
43
education rises, productivity increases and consequently also the pay level. As pay increases are
included in the basis for adjustment of transfer incomes, the pay increases also result in growing
public expenditure. On the other hand, moving people from welfare dependency to employment
improves the fiscal sustainability. Even though it is easier to find a job if you have acquired an
education compared to having no education, reforms are also required within other areas to ensure
fiscal sustainability.
Investments in education are generally a good business for society and for the individual, but not all
investments in educational institutions will raise the overall level of education accordingly.
Therefore there is a need for a continuous assessment of the funds spent on training and education
compared to alternative investments.
6.2 Housing
The supply of modern housing does not match the demand for housing today. Therefore reforms of
the entire housing market are required, and the dominant role of the public sector in the housing
market is to be revised. It is a public-sector core task to make sure that everybody has access to
decent housing, but this does not mean that the public sector must build residential housing for
everybody.
A huge renovation backlog on the public housing stock has accumulated. This means that relatively
big investments are required in order to maintain the value of the housing. The backlog is due to the
fact that previously too few funds have been allocated for maintenance and renovation. These
expenses are to be paid now, and they affect the fiscal sustainability negatively, but are necessary
for a continued sustainable development in society.
In its follow-up on the Tax and Welfare Commission's report, the Government of Greenland has
pointed out that housing reforms are required. The vast majority of citizens live in flats or houses
that are fully or partly financed by the Self-Government authorities. Public investments in housing
will also be needed in the future, but it is the Government of Greenland's vision that private homeowners and private landlords should also enter the scene.
A well-functioning housing market does not exist all across Greenland, and when no stable housing
market exists, there are fewer possibilities of financing a housing purchase solely through private
funds. In such areas, the public sector must see to providing access to decent housing for citizens.
44
When expanding the housing stock, analyses must be undertaken to establish where the biggest
increase in demand will be in future. It must be assumed that the demand will increase most
significantly in the regions where there is a possibility of finding a job or getting an education. The
expansion of the housing stock is to match the labour force mobility - and consequently also the
employment and education policy.
Today subsidies are granted to all citizens, and a major part of the housing benefits are granted to
households that do not need public subsidies. In total, subsidies of approx. DKK 400m are granted
each year to subsidise the citizens’ housing expenses, of which approx. DKK 110m is direct
subsidies in the form of housing benefits. The rest is indirect or "hidden" subsidies granted to both
high-income and low-income groups. In order to fund this system, the Self-Government authorities
have had to levy higher taxes and more duties.
The Government of Greenland wants to reform the housing area so that only citizens with a real
need will be granted financial support to cover their housing expenses. Every citizen who cannot
afford proper housing must receive the necessary financial support. At the same time, the
Government of Greenland wants that citizens who can afford to pay for proper housing in fact also
pay for such housing.
The housing area is a significant economic and strategic area which will also be dealt with
separately in a housing report, in which the Government of Greenland's overall housing policy
principles will be presented.
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
Table 6: Requests for capital investments in housing, DKK million
In total
249 248 250 251 254 247 251 256 250 256 252 254 253 248
Construction
of
replacement
housing
234 162 151 162 150 163 150 162 161 162 161 168 177 162
Clearance of
housing
15 40 53 43 58 38 55 48 43 48 45 40 30 40
Renovation
0 46 46 46 46 46 46 46 46 46 46 46 46 46
Source: Ministry of Housing, Infrastructure and Traffic
45
The table above shows the proposed distribution of expenses for replacement housing, clearance
and renovation up to 2025 which brings about the fastest construction of replacement housing in the
long term. During the years up to 2016, funds equalling the amounts in the table have already been
allocated in the Finance Act. Whether this expenditure level will continue within housing is
uncertain. The table provides an estimate of the distribution and size of expenditures, but the figures
of such long-term forecasts are subject to some uncertainty.
The table above shows that investments of approx. DKK 1bn for replacement housing has been
budgeted for over the next 5 years and nearly DKK 2.5bn up to 2025. Moreover, each year around
DKK 100m is allocated for financing clearance and renovation of housing. The total capital
expenditure within housing up to 2025 is approx. DKK 3.5bn. Overall, this means a radical renewal
of the housing stock all across Greenland. This is also described in further detail in the housing
report. The financing of the housing area is not solely a public-sector task, and it must be attractive
for private citizens to invest in housing for themselves, for selling and for letting.
Assessment of the investments on the basis of the listed prioritisation criteria
The economic return on investments in housing depends on whether the demand for housing is
sufficiently big compared to the supply of housing. In some towns, the demand is bigger than the
supply whereas in other towns, the reverse applies. If the demand is big, people are willing to pay a
higher rent or higher monthly interest and instalments.
The economic return on a housing investment is reflected in the return on capital which is
determined as part of the total rent. Whether the rate of return on the investment is attractive,
depends on the level at which the return on capital is determined. In the towns where the demand is
big and the ability to pay exists, it is also possible to fix the rent at such level that the return on
capital equals the current market rate of interest, cf. criterion no. 1. In areas where the income level
is insufficient to cover the housing expenses, the internal rate of interest within housing
construction will be negative.
As the rules are today, the return on capital in most of public rental housing has been determined at
such a low level that the investment cannot be described as healthy. Demanding such low rent is
that same as granting everybody living in public rental housing a subsidy every month. This scheme
is the result of due consideration for those who cannot afford to pay rent at true cost, but the scheme
46
has some unfortunate consequences. Not everybody living in public rental housing actually needs
public support. Maintaining the requirement for return on capital at an artificially low level is an
expensive and inefficient way of helping those who are in need.
The availability of sufficient housing in areas with possibilities of education and jobs is a
prerequisite for a sustainable development of society. In order to ensure fiscal sustainability it is
necessary to move people from welfare dependency to employment. We know from the mobility
survey that a lot of people would like to move if there is a job and if housing is available.
A big need for renovation and in many cases for clearance and replacement of housing owned by
the Self-Government authorities has been documented. It is important that replacement housing is
built where there is also a demand in the long term. The clearance of housing in towns with a
declining population may give rise to the construction of replacement housing in towns with a
growing population.
In future, there will be more elderly citizens with special housing needs, and consequently there will
be a growing demand for a specific type of housing. In order to ensure a sustainable development
with room for everybody, such development must be taken into account when planning the housing
supply. This can be done, for example, by ensuring that all new housing is designed in a manner
enabling also the elderly to use such housing.
6.3 Health care system
The Ministry of Health has submitted requests for an expansion of the health care system's
buildings. The expansion of the buildings must take place on a continuous basis to ensure that the
health care system is equipped to handle the expected increase in the activities as a result of the
altered demographics and the mobility of the population.
The health care system investments will be made over a period up to 2020 and across all of
Greenland. The majority of the investments is planned in relation to the national hospital of
Greenland in Nuuk.
47
Table 7: Requests for capital investments in the health care system, DKK million
2012 2013 2014 2015 2016 2017 2018 2019
In total
24
34
84
70
46
231
76
21
2020
29
Source: Ministry of Health
The total investments up to 2020 amount to DKK 641.8m, of which DKK 257.6m concerns planned
renovation of the wings containing wards at the national hospital of Greenland during the period
2016-2018. This equals annual capital expenditures of DKK 68.3m.
Assessment of the investments on the basis of the listed prioritisation criteria
The request for an increase of the building stock of the health care system is first of all caused by
the fact that the drain on the health care services will increase as the demographics are changing.
No internal interest rate has been calculated on these investments, and it is uncertain whether the
internal interest rate is positive in case of an expansion of the buildings of the health care system. It
is difficult to measure the gains of an efficient health care system. The biggest gains accrue to the
individual citizen in the form of improved health and a healthier everyday life. The biggest socioeconomic gains are presumably in the form of fewer sick days, which is important for the overall
production in society. The Government of Greenland sees it as a public core task to ensure that all
citizens are given efficient and modern health treatment. Continued investments in the health care
system are necessary to meet the citizens' reasonable expectations of an efficient health care system.
The expected demographic development alone means that investments must be made to expand the
health care system in order to maintain the same level of treatment that we know today. Moreover,
the constant development of treatment methods continues, providing better results, but in many
cases also at a higher price. In order to ensure modern treatment, additional investments in the
health care system may be required. The public investments which are a consequence of the
expected demographic development have been incorporated in the fiscal sustainability model.
Therefore investments that can be related directly to the altered demographics are neutral when it
comes to the sustainability model. Efficient operation of the health care system may, for example
through improved treatment of abuse, have a positive effect on the fiscal sustainability if individuals
are moved from passive welfare dependency to active employment.
48
In a broader understanding of sustainable development, current investments in the health care
system will have a positive effect in terms of longer life expectancy and improved public health.
The investments are to be made where they contribute most effectively to ensuring effective
treatment. The supply of health-care services must be adjusted to the demand. Consequently there is
a continued need for investments in construction activities throughout all of Greenland, but at the
same time, the work on telemedicine solutions must continue, in which field Greenland is now one
of the leading nations. The results have been good, and telemedicine is a powerful tool ensuring
good and uniform treatment which is at the same time flexible in relation to the development in
society: If the demand changes, the health care system can rapidly adapt.
6.4 Social services and culture
Ensuring a social security net for the weakest groups in society is a public task. For such purpose,
modern physical settings are needed for this group of citizens. The demographic development
means that, in future, the needs will change, especially the need for institutions and housing for the
elderly, but also for other social institutions. The area of social services is handled in close
cooperation between the Self-Government authorities and the municipalities.
Elderly citizens
The construction of institutions for the elderly or expansion thereof is a municipal task, and
therefore such construction works are basically only initiated when requested by the municipalities.
The responsibility for allocations for elderly care, inclusive of construction works, has already been
taken over by the municipalities. The allocations for old-age pensions remain the responsibility of
the Self-Government authorities.
The division of responsibilities between the municipalities and the Self-Government authorities
within the area of elderly citizens means that the drafting of a national elderly citizen strategy,
inclusive of expansion plans within this area, must take place in close and coordinated cooperation
between the municipalities, the Self-Government authorities and other relevant stakeholders.
The Self-Government authorities may at a maximum pay up to 50 p.c. of the capital expenditure
within the area of elderly citizens, which means that if all requested construction projects are be
49
implemented, the Self-Government authorities will have to allocate funds in the sum of approx.
DKK 76m for elderly citizens in the Finance Act 2013 and in the estimate years in the budget.
Disabled citizens
The finances and the decision-making power within the area of disabled citizens have been taken
over by the municipalities, whereas the Government of Greenland is responsible for the
construction and operation of the institutions for disabled citizens. This means that the
municipalities define the number of residents and the type of such residents. The task of the SelfGovernment authorities is to provide a place in an adequate institution.
Children and young people
As for children and young people, the Self-Government is responsible for the area of construction
as well as for the operation of the Self-Government authorities' 24-hour care centres. The area is
financed by the municipalities, and all capacity expansion within this area takes place on the basis
of negotiations with the municipalities. The municipalities also refer children and young people to
institutions for a stay.
Church and culture
At this point in time it is expected that within the next years, solutions must be found to address the
state of the ecclesiastical facilities in Qaanaaq and Ittoqqortoormiit. Moreover, a request has been
made that a new church be built in Nuussuag, Nuuk, in Ittoqqortoormiit and in Qaanaaq.
Within the area of culture it is expected that a solution to the current press facilities must be found.
The newly established National Theatre would like a domicile other than the current lease. The
building of a house which can accommodate both the National Theatre and the drama school would
result in capital expenditures of approx. DKK 30m.
The extent of the mould problems has not been clarified, but there may potentially be a need for
allocation of funds to cover capital expenditures for renovation of public institutions in connection
with these problems.
50
Table 8: Requests for capital investments within the area of social services, DKK million
2013 2014 2015 2016 2017 2018 2019 2020
In total
32
90
118
41
10
25
20
0
Source: Ministry of Family, Culture, The Church and Equal Rights
Assessment of the investments on the basis of the listed prioritisation criteria
No socio-economic return has been calculated on these investments. To the extent that the efforts
generate increased labour market participation, there may be a positive effect on both the societal
return and the fiscal sustainability. However, this is not the main purpose of all social efforts, and it
must be assumed that there is no positive socio-economic return on these investments.
The economic sustainability model already budgets for increasing expenditure as a result of
demographic changes and a continuous modernisation of the public services reflecting the general
development of society. But no new initiatives have been budgeted for in addition to those already
existing today.
The Government of Greenland wants a socially sustainable society, and a socially sustainable
society is a prerequisite for maintaining our ability to offer an adequate solution to citizens with
special needs. Regardless of where the individual citizen is domiciled, an offer must be provided,
but it is also necessary to provide a variety of offers. In the end, it must be up to the individual to
decide whether the local offers provided are sufficiently good or whether, overall, it is more
attractive to move to a bigger place with a wider range of offers.
6.5 Infrastructure
A well-functioning infrastructure is the prerequisite for a functional everyday life for the individual
citizen, but also a prerequisite for the functioning and cohesion of society. It is therefore a public
core task to ensure that Greenland has an efficient infrastructure. Therefore it is natural to spend
part of the public investments on expanding and improving the infrastructure.
The two factors that may particularly make the infrastructure more expensive are a large
geographical area and a small population. The capital expenditure will often be the same regardless
of whether the infrastructure is to serve 50,000 or 500,000 inhabitants. A small population will thus
51
result in large capital investments per inhabitant. In Greenland both factors are relevant, and
therefore it is necessary to make relatively big investments per inhabitant.
An expansion of the infrastructure does not in itself contribute towards the fiscal sustainability. If
the public sector is not ensured revenue from the infrastructure project, the project may in fact
aggravate the development. It is therefore a prerequisite for investments in infrastructure that the
revenues flowing to the Treasury will increase accordingly, cf. debt principle no. 3 above. This may
take place by charging payment from the users or through cost savings as a result of the new
investment replacing the former investment. Whether an infrastructure project contributes to solving
or aggravating the economic sustainability problem therefore depends on how the revenues are
distributed between the Treasury and the users.
A considerable renovation backlog on, among other things, harbours and airports has accumulated.
Consequently there is a growing need for renovation which means that in some cases it might be
more profitable to build new harbours and airports etc.
The Transport Commission has presented a number of calculations of possible improvements of the
current infrastructure. These calculations make it possible to assess the capital requirement and the
societal return. This is a very good starting point for determining priorities. The Transport
Commission presents 23 projects, of which 11 projects are assessed to generate a positive socioeconomic return, cf. criterion no. 1 above. DKK 5m has been allocated for examining these projects
in the Finance Acts for the coming years.
Assessment of the investments on the basis of the listed prioritisation criteria
The Transport Commission has calculated and presented detailed calculations of various
infrastructure investments. Similarly, detailed calculations must be made of the contribution to the
fiscal sustainability, describing revenues and expenditures flowing to and from the Treasury. There
is a need for analysing the possibilities of funding the large infrastructure investments in such way
that they do not impair the fiscal sustainability. This may take place through user charges or
targeted cost savings resulting from infrastructure facilities that will be rendered superfluous. At the
same time, there is a need for additional descriptions of the individual projects in order to assess the
environmental consequences and any distortions in terms of what groups will benefit from the
investments.
52
With this report, the Government of Greenland presents an overall plan for its further work with the
infrastructure projects described by the Transport Commission. The projects are divided into two
phases, where the work in phase 1 is first initiated, and phase 2 covers projects which require
further consideration and studies.
Phase 1:
•
Drafting of a business case for an expansion of the harbour of Nuuk.
•
Drafting of a business case for an airport at Qaqortoq, location 2, inclusive of closing-down
of Narsarsuaq.
•
Drafting of a business case for a combined road and boat access connecting Uummannaq
and Qaarsut.
•
Study of the possibility of using Thule Air Base for civil purposes and subsequently closing
down the airport in Qaanaaq.
•
Drafting of a business case for expansion of Ilulissat airport.
Phase 2:
The final work of the study of turbulence around Nuuk and subsequently a decision on the
location of an Atlantic airport and expansion of the existing runway in Nuuk.
Performance of preliminary studies for Tasiilaq airport.
Combined road and boat connection between Qaqortoq and Narsaq.
Simple runways in Nanortalik and Paamiut.
Expansion of the harbour of Sisimiut: The results from the working group are expected in the
spring of 2012.
Expansion of the harbour of Ilulisaat: The results from the working group are expected at the
end of 2012.
The Transport Commission also recommended that internal conveyance of passengers in South
Greenland be restructured so that transport by boat and transport by helicopter are combined. Steps
will be taken to incorporate this solution in the new service contracts for the passenger area taking
effect on 1 January 2013.
53
6.5.1 Phase 1
Below the public investments listed under phase 1 will be reviewed.
Harbour of Nuuk
The Transport Commission has discussed the construction of a new container harbour in Nuuk in
detail and recommended the construction of a new harbour at Qeqertat (Admiralty Islands). In mid2011, the Government of Greenland decided to allocate funds for a number of preliminary studies
as a follow-up on the Transport Commission's recommendation.
The development in the volume of goods to, from and internally in Greenland is, of course, crucial
for assessing the requirements for harbour capacity and the profitability of new harbour facilities.
The expected big increases in the volume of goods will result in growing costs of transporting
goods to and from Greenland. This has a huge effect on the overall expenditure level in all of
Greenland, and society in general will benefit from an enhancement of the efficiency of such
transport.
54
Figure 7: Overview of the development in the volume of goods 1993-2020, cubic metres
Volume
of goods 1993
1993 -- 2020
2020
Godsmængder
KBM
1.000.000
900.000
800.000
700.000
600.000
500.000
400.000
300.000
200.000
100.000
0
Nordgående
Northbound
Sydgående
Southbound
Kystlangs
Along the coast
Total
Totalkoncessionsgods
goods transported
Lineær
(Nordgående)
Linear (Northbound)
Lineær
Linear (Total
(Totalkoncessionsgods)
goods transported
under concession contract
under concession contract)
Source: Ministry of Housing, Infrastructure and Traffic
The above figure illustrates the development in the volume of goods during the period from 1993
until today and the expected development in the volume of goods up to 2020. There is a clear trend
that the volume of goods is expected to increase up to 2020.
Figure 8: Volume of goods to towns in Greenland, cubic metres
Source: Ministry of Housing, Infrastructure and Traffic
The above figure clearly illustrates that Nuuk stands out as accounting for the biggest volume of
goods by far. The Transport Commission's overall conclusion on the basis of these facts is that the
drop in the efficiency which must be expected from the combination of the assumed increase in the
55
volume of goods and unchanged harbour capacity in Nuuk will cause such considerable cost
increases that, overall, the increases will exceed the costs of constructing a new container harbour at
Qeqertat. Or in other words, the freight rates will increase if no investments are made in a new
harbour. It is necessary to work out a business case illustrating cost savings and additional revenues
compared with a scenario where no new harbour is constructed,
An expansion of the container harbour in Nuuk will increase the strategic importance of this
harbour for goods imported into Greenland. It is therefore essential to maintain a certain degree of
control over future decisions, ensuring the necessary strategic freedom to develop new business
areas in the long term. This should be included as an element in the assessment when the final
ownership model is determined.
A precondition for commencing the construction of a container harbour in Nuuk is that the
subsequent operation, inclusive of payment of instalments and interest, must not impair the fiscal
sustainability.
The most significant source of funding of a new harbour which is also decisive in the Transport
Commission's analysis is the costs savings internally in Royal Arctic Line (RAL) resulting from a
new harbour. The costs savings are expected to amount to approx. DKK 30m annually. Specifically,
RAL would be able to go from 3 minor vessels to 2 major vessels, and as the costs per vessel are
basically identical regardless of size, the cost savings will be considerable. If the harbour is not
expanded, RAL will in the long term have to invest in yet another minor vessel as the capacity of
the existing fleet is nearly fully exploited. It is important that such cost savings are included in the
financing of the new harbour. Operating transport by ship in Greenland by means of fewer vessels
will have a positive effect on the emission of CO2, SoX and NoX. Bringing more vessels into
operation as a result of infrastructure shortage will, on the other hand, have a negative impact on the
environment.
Part of the funding may also come from increased user charges and possibly increased freight rates.
It should be noted that if no investments are made in a new harbour, the freight rates will increase
even more.
The working group set up to deal with the new container harbour has had a programme of
construction works prepared for the project. According to this programme, the total costs of
construction will be approximately DKK 400m. The Transport Commission had included
56
infrastructure arrangements, warehouse and workshop facilities in its calculations. Moreover, costs
of a gantry crane which is a prerequisite for reaping the full gains of new sailing logistics must be
added – the costs of such crane have been estimated at DKK 75m. The total costs of harbour
construction, inclusive of crane and infrastructure arrangements, are expected to amount to approx.
DKK 500m.
Harbour in Qaarsut
A relatively modest investment in Qaarsut may create the basis for a combined road and boat
connection between Uummannaq and Qaarsut. This will generate costs savings for the Treasury as
no helicopter will be required during the summer period when it is possible to operate passenger
boat services. Such cost savings can finance the small investment in a harbour and a road at
Qaarsut.
Airport at Ilulissat
The Transport Commission has calculated that an extension of the airport at Ilulissat is profitable
from a socio-economic point of view. This will provide a more efficient exploitation of existing
aircraft and will enable bigger aircraft from both Iceland and Kangerlussuaq to land. An extension
of the landing strip at Ilulissat does not depend on any overall decision on the location of an
Atlantic airport. A final business plan for an extension of the landing strip at Ilulisaat is to be
presented, in which the four above prioritisation criteria are commented on. A final decision on
whether to initiate the project will depend on the results in such business case.
Airport at Qaqortoq
A special aspect of the project involving an airport at Qaqortoq is that the construction of an airport
is only profitable if you include cost savings generated from closing down Narsarsuaq. There are
several alternative locations where the cheapest solution reduces the future possibilities of
extending the landing strip. By choosing a more expensive solution, the possibility of an extension
is maintained. As the population in the region is declining, it is not immediately attractive to
maintain an expensive possibility of extension. Only in case of minerals extraction to a significant
extent, will there be a basis for a business development in the area which may necessitate a bigger
airport. In such case, the preconditions are altered, and the possibilities of finding private funding
increase significantly.
57
Qaanaaq
The Transport Commission has calculated that the socio-economic profit will be even very good if
the airport at Qaanaaq is closed down and if, instead, Thule Air Base (TAB) is used for civil
purposes. This requires, however, that an agreement is concluded with the American authorities
concerning access to TAB. The Government of Greenland suggests that talks are initiated between
the USA and Denmark concerning the possibilities of using TAB for civil purposes.
6.5.2 Phase 2
Future location of an Atlantic airport
The Transport Commission has calculated that a positive socio-economic return may be generated
by closing down Kangerlussuaq and establishing an Atlantic airport at Nuuk. However, this
depends on whether or not the regularity of service can be maintained in Nuuk. The Government of
Greenland has launched turbulence studies which are to clarify these issues. When the results of
these studies are available, decisions must be made to establish where the future Atlantic airport is
to be located. Therefore it is not expedient to commence an extension of the airport at Nuuk until a
decision has been made on the location of the future Atlantic airport. The necessary technical
studies are to be conducted so that an overall basis can be prepared for making a decision on the
location of the future Atlantic airport. Such decision may be of decisive importance to other airport
expansions as well, inclusive of extension of the landing strips at Nuuk and Tasiilaq and the
construction of simple landing strips at Nanortalik and Paamiut.
Organisation of the civil aviation administration
The strategy presented for the airport structure in Greenland also includes considerations on the
structuring of the public sector. In its report, the Transport Commission points out that it is relevant
to explore new forms of ownership and funding for future construction projects on Greenland's
airports. This will make it possible to bring external, private partners into the projects. On this basis,
and in cooperation with Mittarfeqarfiit, the civil aviation administration in Greenland, and Rambøll
A/S, the Self-Government authorities are in the process of examining the possibility of restructuring Mittarfeqarfiit.
One possibility of attracting external project funding is to isolate profitable airports in a separate
company. In this way the operation and funding of the upgrading of such airports are separated
from the Treasury and from Mittarfequarfiit's loss-making activities. A division into profitable and
58
non-profitable companies might potentially facilitate the procurement of capital for the extension
and renovation of existing runways and for the construction of new runways that are necessary.
Airport at Tasiilaq
The Transport Commission has calculated that an airport at Tasiilaq will significantly boost the
possibilities of expanding tourism and will generate a positive socio-economic return. The
construction costs have been estimated at DKK 270m. An airport will also set the structural
framework for a continued business development in the area. At the same time, there is a significant
growth in the population, which makes this project particularly interesting. The Government of
Greenland wants a business case to be worked out, clarifying whether the establishment of an
airport can generate sufficient cash flow to pay interest and instalments on the loans that need to be
raised to fund the construction costs. Part of the funding is to be found by closing down the airport
at Kulusuk and through efficiency improvements and cost savings at the operators. If the Treasury
is to finance the construction of the airport, part of these cost savings must be converted into
Treasury revenue.
Combined road and boat connection between Qaqortoq and Narsaq
The decision on a combined road and boat connection between Qaqortoq and Narsaq depends on
the outcome of additional studies, and the profitability will be affected by a decision to establish an
airport at Qaqortoq.
Other harbours
Working groups have been set up to assess an expansion of the harbours in Sisimiut and Ilulissat.
These results are expected to be ready in the spring of 2012. Subsequently a decision must be made
whether an actual business case is to be worked out for the projects.
6.6 Waste management plan
In June 2010, the Government of Greenland approved the waste management plan as a basis for the
initiatives on waste over the next years. At the same time it was decided that, as a rule, the party
generating the waste should be the one paying the costs of disposal of such waste. The waste
management plan sets out the guidelines for the Government of Greenland's waste policy. The
59
waste management plan is a corner stone in the authorities' future work within the area of waste and
sets out the framework for the municipalities' future local waste management.
The waste management plan is to ensure coordinated management of waste and to make possible a
long-term socio-economic planning of future facilities for handling waste in towns and villages in
Greenland. Implementation of all activities under the waste management plan results in an
investment requirement of approx. DKK 400m as well as in an increase of DKK 75m in the costs of
operation and administration compared to today.
Assessment of the investments on the basis of the listed prioritisation criteria
A clarification project is in progress: Waste incineration plants - Strategy and organisation. The
clarification project is to contribute to the determination of a strategy for incineration solutions in
medium-sized towns, smaller towns and villages as well as in Nuuk (sub-objective no. 5 of the
waste management plan). The best solution from an environmental and socio-economic point of
view must be found. When a more detailed plan is available, such plan is to be assessed on the basis
of the above criteria.
At this stage it is not possible to state precisely whether the waste management plan will generate a
socio-economic return. It depends on the funding possibilities and the technological possibilities of
exploiting the heat generated from waste incineration.
If the waste management plan is implemented, this contributes to an environmentally sustainable
development and reduces our impact on nature. Phase one of the work to assess the conditions in
further detail has been initiated.
6.7 Overall assessment of the public investments
Below the individual areas have been assessed according to the four prioritisation criteria. In the
table below, the requests for capital investments within the social sector have been divided into the
following sub-sectors: Children and young people, Elderly citizens and Other requests for capital
investments.
60
The presented priorities and the presented proposal for a national capital investments and
expenditure plan describe the Government of Greenland's overall assessments, but there is also a
need to work out separate business cases for all the investment proposals before a decision can be
made to commence a project.
61
Table 9: Overall assessment, Finance Act
Children and young
people
Training and
education
Criterion no. 1
Socio-economic
return
Criterion no. 2
Fiscal
sustainability
Positive return
Negative return
Negative
contribution
Positive
contribution
Positive, if
contribution
towards labour
force mobility
Neutral
Negative return
Neutral
Negative return
Negative
contribution
Positive return
Neutral
Housing
Elderly citizens
Health
Other requests for
capital investments,
cultural sector
Waste management
plan1
Criterion no. 4
National and
regional
development
Overall
assessment
National
High
priority
High
priority
High
priority
Negative
contribution
Criterion no. 3
Contribution
towards
sustainable
development
Positive
contribution
Positive
contribution
Positive, if
contribution
towards labour
force mobility
Positive
contribution
Positive
contribution
Positive
contribution
Negative
contribution
Positive
contribution
National
National
National
National
National
National
Medium
priority
Medium
priority
Low
priority
Low
priority
1: No fully completed business case is available, therefore the Ministry of Finance has estimated that the economic return is
negative, but the environmental contribution towards sustainability is positive.
Source: Ministry of Finance
The investments in an expansion of the educational institutions and student colleges are a
prerequisite for the implementation of the future educational strategy. Investments in training and
education may generate a positive return to the individual citizen and to society. At the same time,
better training and education provide more equal opportunities for the individual to exploit his or
her personal potential. Moreover, a more well-educated labour force is a prerequisite for Greenland
getting a share in a possible large-scale project.
The structural problems within housing constitute a bottleneck for initiatives within both the social
sector and the labour market area. This has been described in both the Tax and Welfare
Commission's report and in the mobility survey. In order to solve the future fiscal sustainability
problems and to ensure a socially sustainable development it is necessary to eliminate the
bottlenecks within housing.
In the long term, there will still be a need for investments in the health sector, especially as a result
of the growing needs for health services resulting from the demographic development. Especially
for the main account 87.00.88: Building and construction strategy for villages and outlying districts,
funds have been allocated to special initiatives in villages and outlying districts. Such funds are to
62
be spent in compliance with the same criteria as applying to the rest of the costs of capital
investments. This means that these funds are to be spent especially on fulfilling the educational
strategy or on housing renovation.
In addition to the above public investments in public institutions, priorities must also be decided
among a number of infrastructure projects. The Transport Commission has calculated that a positive
socio-economic return will be generated from a number of infrastructure investments, but generally
there is a need for further analyses of the other prioritisation criteria before an overall assessment of
the projects can be made. All projects must therefore be assessed on the basis of their impact on the
fiscal sustainability. Here it is necessary to obtain information on the distribution of revenues and
expenditures from the construction of, for example, an airport.
The Government of Greenland will initiate the work of clarification of the five projects constituting
phase 1 - inclusive also of an assessment of the total effect on the development of the debt situation
if the project is implemented.
In this report, no decision has been made on specific large-scale projects. This is first of all due to
the fact that there are no approved large-scale projects. If and when relevant, such projects will be
assessed on the basis of the same principles: cf. debt principle no. 3 stating that public borrowing in
connection with business projects can take place only if the activity can finance interest and
instalments.
In the event of implementation of a large-scale project, the basic preconditions will also change, and
there may be a need for changing the investment strategy. The principles in the debt policy
presented and the prioritisation criteria presented, however, are robust to changed preconditions.
The results of the prioritisation process may very well be different in a situation with, for example,
an aluminium smelter at Maniitsoq.
Moreover, no direct costs in connection with Nunaoil have been included either. The Government
of Greenland is working on a report on Nunaoil in which the Government of Greenland's policy on
Nunaoil is described in further detail. From an overall point of view, this policy does not differ from
the above principles of prudence where it must be taken into consideration that revenue from
Nunaoil is to be included as raw materials revenue and will consequently affect the block grant
from Denmark. The specific model for Nunaoil may change over time. The first project will involve
a big risk, and public participation will be subject to a similar, big risk. If, at a later point in time,
63
more discoveries are made and if considerable funds have accumulated in the Mineral Resources
Fund, the preconditions are different, and Nunaoil might play a more active role in connection with
a later discovery.
The prioritisation described in the tables above indicates which projects are deemed to contribute
most to a sustainable development. However, it should be pointed out that the development in
society is dynamic and that the priorities made in this report may change. However, the principles
and the criteria are robust to changes.
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7 The municipalities
The four municipalities have thorough knowledge of the local needs for investments in public
institutions, infrastructure and other facilities. Such knowledge must be exploited in the best
possible way. The conditions in the individual municipalities are decisive when it comes to
establishing what capital investments contribute to a sustainable economic development. If the
municipalities use criteria like those listed here, they will to a higher extent be able to achieve a
situation where the entire public sector pulls in the same direction. This also goes for land
development which is a municipal task that is to ensure the physical framework for the construction
of housing as well as for other long-term investments.
Every year before 1 March, the municipalities file their requests for building and construction
projects with the Ministry of Housing, Infrastructure and Traffic. Some of these are 100 p.c.
financed by the Self-Government authorities - others are 50 p.c. financed by the Self-Government
authorities. The Ministry of Housing, Infrastructure and Traffic collects all the requests and passes
them on to the responsible ministries for prioritisation and funding.
The distribution of tasks and burdens between the municipal authorities and the Self-Government
authorities within the area of construction is in some respects unclear. As for elementary schools
and boarding facilities, the construction and renovation obligation is, however, unclear to a certain
extent. The responsibility for the area has been fully taken over by the municipalities, but the SelfGovernment authorities have to some extent or other undertaken to improve the state of the
buildings to a certain standard. Often no transfer of responsibility for the renovated or newly
constructed buildings has taken place which unambiguously places the municipality in question
under the obligation to finance future renovations itself.
The municipal authorities and the Self-Government authorities have set up a working group for the
purpose of creating a new procedure for construction projects fully or partly financed by the SelfGovernment.
Table 10: The municipal capital expenditure budgets, DKK 1,000
Account name
Budget 12 Estimate 13 Estimate 14 Estimate 15
Total capital expenditure
334,200
316,900
243,966
183,099
Sermersooq
187,713
191,666
168,766
138,400
Kujalleq
12,000
10,700
12,150
4,900
Qeqqata
66,385
54,749
18,085
11,300
Qasuitsup
68,102
59,785
44,965
28,499
Source: KANOKUKA
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The municipal capital expenditure budgets cover general, minor construction projects such as
renovation of sewers, playgrounds, old people's homes. Kommuneqarfiik Sermersooq has budgeted
for construction of housing in the sum of DKK 247m during the years 2012-2015. It is expected
that during 2012 a bill will be passed that allows the municipalities to establish municipality-owned
housing associations. The intention is that such associations will be able to raise mortgage loans for
funding the construction and renovation of housing. In order to avoid an unintended increase in the
overall public debts, steps must be taken to ensure that municipal plans to raise loans are
coordinated with the Self-Government plans and that the municipalities apply criteria for raising
loans equalling the criteria applied by the Self-Government authorities.
The municipality of Qeqqata has initiated an expansion of the harbour of Sisimiut and budgets for
expenditure in the sum of DKK 56m in 2012 and 2013. This initiative is financed by raising the
municipal tax by 1 percentage point. Considerations concerning expansion of the harbours of
Ilulissat and Nuuk are also in progress. The role of the municipalities in respect of funding and
operation of the harbours has not been clarified, but the Government of Greenland wants a dialogue
on how to make sure that all major investments affecting the overall public debts are coordinated. In
the case of an expansion of the harbour of Sisimiut, a decision must also be made on how the part of
the harbour currently owned by the Self-Government authorities is to be included in the overall
harbour concept. The municipalities' knowledge of local needs is a necessary precondition for
assessing a project, but at the same time efforts must be made to ensure that a situation where the
municipalities compete with each other for the same projects is avoided.
The municipalities play a central role within housing. In its report from 2005, the structural
committee recommended that the municipalities be allowed under law to raise loans for renovation
purposes so that the renovation of the existing housing stock is speeded up. The return on capital
must be adjusted to the expected instalments on the loans so that, subsequently, a lasting balance is
created between rental revenue and expenditure relating to the operation and maintenance of the
housing stock. This will also be discussed in the housing report.
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8 Companies owned by the Self-Government authorities
It appears from the section on the total debt that the development in the companies owned by the
Self-Government authorities is to be taken into account when considering future investments. Big
debts in the companies reduce the Self-Government authorities' access to funding the necessary
public investments. At the same time, the companies owned by the Self-Government authorities
must be given the opportunity to operate in their markets and to make the necessary investments.
Another important reason for looking at the companies' capital investment and construction
activities is that a major part of their activities are financed and commenced by the companies
themselves.
Overall, the limited companies owned by the Self-Government authorities have not published plans
for any major loans to be raised over the next years. On the contrary, Royal Greenland has
announced that the company is working actively to reduce its total debts. As it appears from table 2,
the total debts in the companies are expected to decline up to 2015.
The companies have stated that they have planned capital investments of DKK 460m in 2012. The
investments cover equipment, buildings etc. which are necessary for continued operations. This
means that the companies are investing at the same level as the municipalities invest. In this
connection it should be mentioned that not all the companies' investments are turned directly into
increased construction activities. The acquisition of vessels and aircraft, for example, does not
contribute towards activities in the construction sector, but contributes especially to increasing
imports.
As the companies indirectly draw on the creditworthiness of the Treasury when raising loans, it is
important to coordinate the raising of major loans. In its "Report on ownership and development in
the companies fully or partly owned by the Self-Government authorities" from 2011, the
Government of Greenland described the strategic considerations concerning ownership of the
limited companies. In this report it was mentioned that the raising of major loans should be
coordinated with the Self-Government authorities without this restricting the companies' freedom of
action in the pursuit of their objectives. Coordination is required in order to ensure that the SelfGovernment authorities' possibilities of raising loans are not restricted by decisions taken in the
companies owned by the Self-Government authorities.
67
Work has been initiated to determine some clear measuring points for the companies’ performance.
Moreover, the five biggest companies have been asked to review their capital structure. This work
is a prerequisite for assessing where to invest the working capital with maximum effect.
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9 Funding and ownership
The total expenditure in connection with the Self-Government's investments in facilities etc. must
be covered by the Treasury. The expenditure may be funded through current revenue or through
public borrowing which increases liquidity and extends payments over a longer period of time.
Chapter 6 above describes how the Self-Government authorities' capital expenditure in the budget
estimate years amounts to approx. DKK 500m annually when including the educational reserve.
This is not sufficient to fund the many requests for projects listed above. Therefore it may be
necessary to raise loans in order to finance certain projects that comply with the criteria listed in
chapter 5.
In addition to such loans, the budget continues to include loans in the order of DKK 180m annually
to Nukissiorfiit. These loans result in a drain on the Treasury's liquidity, but will be repaid and
therefore have no impact on the long-term fiscal sustainability. It is a requirement that large
infrastructure investments can be incorporated in the current budgets in a similar manner.
Substantial investments may be required, and consequently loans have to be raised over a period of
time, but seen in isolation, the projects must repay such loans through increased revenue and
targeted cost savings.
If the ownership of, for example, a container harbour in Nuuk is placed in a limited company, this
company must generate the necessary cash flow to pay the current operating expenditure and the
current payments of instalments and interest on the loans raised in order to finance the capital
expenditure. It is important that revenues and expenditures are distributed between the limited
company and the Treasury so that the fiscal sustainability problem is not aggravated. As was
emphasized in the “Report on ownership and development of the limited companies fully or partly
owned by the Self-Government authorities” from the 2011 autumn session of Parliament, the
establishment of a limited company is only justified if the task in question can be solved more
efficiently within such organisation.
The list below provides an overview of the areas where private ownership and public ownership
respectively in Greenland are advantageous.
69
Table 11: List of areas where private operation and public operation respectively are
advantageous
Private ownership
Public ownership
Infrastructure
+
+
Public institutions
+
Business projects
+
Housing
+
+
Health care system
+
Elderly care
+
Training and education
+
Source: Ministry of Finance
The above table provides a general assessment, and a specific project may differ from the table.
Generally, it may be concluded that private ownership is basically more expensive than direct
public investments. This is due to the fact that the Treasury has a better credit rating and can borrow
money more cheaply as well as to the fact that the private investor requires payment of his own
expenses plus a profit margin. The Treasury will also have to pay the private investor for assuming
a risk.
Still, private funding may be more attractive if the private investors can facilitate more efficient
operations. Such efficiency gain must exceed the increased costs described above if it is to be more
advantageous overall to let private enterprises take over an area.
The Treasury has an obligation towards the companies owned by the Self-Government authorities,
and the companies' debts also have an impact on the Treasury. Investments made by the Treasury
that are financed through loans will have a negative impact on the overall budget balance (inclusive
of lending), and at first glance it looks like a deterioration of the public finances. But the loans are
raised only subject to an expectation that revenues will increase in the future. Therefore a
deterioration of the overall budget balance as a result of public investments is not in itself a
deterioration of Treasury finances. Sound investments improve Treasury finances and contribute to
growth in society in general. Unsound investments impair Treasury finances and do not contribute
to growth in society in general.
The Government of Greenland wants to improve the transparency of the funding of public
investments and has therefore established as a principle that the total public debts must be
calculated and stated every year. As also commented by the Tax and Welfare Commission in its
report, there is a need for checking the various refund schemes etc., inclusive of funding schemes
within the construction sector. Elementary schools are a good example of the inappropriateness of
70
the incentive structure, cf. chapter 7 above. The Government of Greenland will work to increase the
transparency and improve the incentive structure under the various funding schemes between the
Self-Government authorities and the municipal authorities. In future, efforts must be made to ensure
that the responsibility for funding and for the subsequent maintenance must basically rest with the
same unit.
There is a need for close coordination between the Self-Government's activities and the
infrastructure investments undertaken by the municipal authorities. First of all it is necessary to
assess the total public debts on an ongoing basis. Secondly, it is important to assess infrastructure
investments in relation to the overall plan for all of Greenland.
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10 Proposed national capital investments and expenditure plan
In order to obtain an overall prioritization, the requests for capital investments listed in chapter 6
must be assessed according to the described criteria. Investments contributing to a sustainable
development are given a high priority. Below a rough draft for a national capital investments and
expenditure plan is presented.
The future educational strategy sets an ambitious objective for improvement of the educational
level, which requires substantial resources. The area of children and young people is a high-priority
area and supports the educational initiatives. Better initiatives within the area of children and young
people are to bring about a situation where more children and young people are given good
opportunities to complete a training or education programme. The initiatives for children and young
people as well as for training and education will be given a higher priority in the national capital
investments and expenditure plan. In addition to that, the Government of Greenland proposes that,
over the coming years, extraordinary tax revenues from the exploration of raw materials and
extraordinary revenues from the limited companies owned by the Self-Government authorities will
be reserved for the expansion of student housing and educational buildings. The first step in this
direction was taken in 2011 when extensive exploration activities took place and when
extraordinary works of building student housing were commenced. Extraordinary revenues are
expected from oil exploration activities and derived effects on mainly the companies owned by the
Self-Government authorities. The companies owned by the Self-Government authorities have
exceeded the results budgeted for, mainly as a result of the oil exploration and the downstream
industries over the last two years. It may be considered whether the companies should be requested
to distribute extraordinary dividends to the Treasury in order to finance investments within the area
of education. In that case, such revenues are to be spent on increasing the capacity of the
educational sector and thus on creating a basis for a higher educational level and future welfare
development.
The housing area is of great importance to the structures of society. Proper housing is the basis for
the individual, and a housing supply that matches the housing demand provides opportunity for the
labour force to settle in areas with growth and employment. A number of housing projects are
planned for the years 2013-15, and funds have already been allocated for these projects in the 2012
Finance Act. Throughout the estimate years in the budget, extensive funds are still allocated for the
housing area. The principles governing public borrowing stipulate that public loans are to be raised
72
only if the rent can finance the payment of interest and instalments on such loans. This reflects the
principle of the rent model applied when housing is let through Illuut A/S.
Up to 2025, the number of elderly citizens is expected to increase, which will result in a growing
need for investments in elderly-friendly housing and institutions for the elderly. In order to address
these tasks, the construction of new housing and capital expenditure within the social sector will
have to meet certain requirements. The major part of the funding within the area of elderly citizens
must therefore be financed through the funds allocated for housing.
There is a need for continuous expansion of the capital stock of the health care system as a result of
the changing demographics and the growing expectations as regards types of treatment. In order to
be able to finance the initiatives within the area of training and education, the renovation of the
ward sections of the national hospital in Greenland is postponed from 2017 to 2020.
Investments in infrastructure may create a better framework for economic development. The
Transport Commission has made detailed calculations showing that several projects are socioeconomically profitable. The proposed national capital investments and expenditure plan presents
suggestions for infrastructure investments to be examined in order to obtain a proper basis for
making decisions.
The Government of Greenland gives priority to investments in the construction of a new harbour at
Nuuk provided that the final business case renders it likely that this will not impair the fiscal
sustainability. Moreover, a business case on an extension of the airport in Ilulissat is to be prepared.
The construction of a passenger harbour at Qaarsut is a small investment compared to the other
investments, but it may generate costs savings on the service contracts by replacing summer flight
services with transport by ship. The Government of Greenland also wants to work out a final
business case for the construction of an airport at Qaqortoq at location no. 2. Such business case
must take into account that Narsarsuaq is closed down, and a funding model must be worked out to
ensure that implementation of this project will not impair the fiscal sustainability. A core principle
of the infrastructure investments is that, seen over a number of years, such investments must not
weaken the fiscal sustainability. In other words, reductions in costs of operation and increased user
charges must be sufficient to pay interest and instalments on possible loans, cf. debt principle 3
above.
73
Funding
Over the next three years, no funds are available for commencing new projects as a decision was
made in the 2012 Finance Act to commence a number of multi-annual projects. This means that
additional funding must be found for possible new initiatives that are to be commenced before
2015. This must take place through the re-prioritization of the operating funds, the use of
extraordinary revenues and the raising of loans in compliance with the above principles. From 2016
up to 2025, no capital investment funds have been allocated.
Public funds must be injected in order to finance the future infrastructure investments. Regardless
of whether, for example, the construction of the harbour of Nuuk takes place through a limited
company or directly through the Treasury, the Treasury will be affected by the loan. Whether a
limited company is to be established therefore depends on whether a more efficient operation can be
achieved through a limited company. If a limited company is established for the operation of, for
example, the harbour of Nuuk, the cash flow from the harbour must be sufficient to finance the
costs of construction. If the loan is raised through the Treasury and re-lent to a quasi-public
enterprise, the quasi-public enterprise is to pay interest and instalments to the Treasury equalling the
loan granted by the Treasury. A similar model has been used for the construction of hydro-power
stations through loans granted to Nukissiorfiit.
Inatsiartut has allocated DKK 20m annually over the next 3 years for targeted efforts in villages and
outlying districts. Such funds must be spent in compliance with the same assessment criteria as
other potential investments. It is still a principle that priorities must also be made among towns and
outlying districts so that the efforts are concentrated where the prospects of growth are best in the
long term.
In section 6.6 above, the waste management plan is described as a possible investment object. At
the moment, insufficient information is available to incorporate the waste management plan in the
national capital investments and expenditure plan. However, it is still a possible investment object,
and when a more detailed plan is available, such plan must be assessed according to the principles
listed above.
The table below illustrates how the capital expenditures are distributed up to 2025. Over the next
years from 2013-2015, a number of construction works have already been decided and commenced
as a result of the 2012 Finance Act.
74
Moreover, the table illustrates input to the upcoming 2025 plan which specifies expenditures in
excess of what has already been budgeted for in the 2012 Finance Act. For example, no further
expenditure for housing is budgeted for in excess of what has already been included in the budget
up to 2015, but subsequently funds are continuously allocated to housing.
The net financing need is approx. DKK 300m over the first 3 years. Subsequently, the capital
expenditure must be at the same level as the last estimate year in the budget and can be financed via
the current capital expenditure in the Finance Act. The distribution as from 2016 and onward
reflects an assessment made on the basis of the above prioritisation criteria.
The Government of Greenland also wants to commence infrastructure projects in continuation of
the Transport Commission's recommendations. In the proposed national capital investments and
expenditure plan, the construction of a new harbour at Nuuk, an airport at Qaqortoq, a new
passenger harbour at Qaarsut and an airport at Ilulissat have been included as priorities. Finally, the
possibilities of closing down the airport at Qaanaaq are to be clarified in cooperation with the
Danish and the American authorities. Moreover, technical surveys constituting part of the decisionmaking basis concerning the future location of an Atlantic airport are pending.
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Table 12: Rough draft for a national capital investments and expenditure plan, expenditures in DKK million
Finance Act 2012
Construction activities, inclusive of loans to
Nukissiorfiit
Capital expenditure budgeted for, exclusive of lending
2013
2014
2015
947
582
557
569
402
377
- Training and education, Finance Act 2012
160
80
80
- Housing, 2012 Finance Act
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
377
59
377
59
377
59
377
-11
377
-11
377
49
377
19
377
19
377
9
298
279
264
- Family and health, Finance Act 2012
42
10
0
- Villages and outlying districts, Finance Act 2012
20
20
20
- Other capital expenditures, Finance Act 2012
49
13
13
Input to the 2025 plan (preliminary figures)
72
138
119
Funding requirement for training and education, net
42
98
79
377
84
- Educational strategy
47
175
200
205
180
180
180
110
110
170
140
140
130
- Educational reserve
-5
-77
-121
-121
-121
-121
-121
-121
-121
-121
-121
-121
-121
Children and young people
10
10
10
10
10
10
10
10
10
10
10
10
10
0
0
0
253
278
258
248
239
239
278
308
308
318
Health
20
30
30
30
30
50
60
139
139
40
40
40
40
Net funding requirement
72
138
119
0
0
0
0
0
0
0
0
0
0
33
196
232
Housing*
Infrastructure investments
Harbour of Nuuk
Harbour of Qaarsut
5
Airport of Qaaqortoq
4
34
150
Airport of Ilulissat
3
42
30
45
272
412
150
0
0
0
0
0
0
0
0
0
1,188
1,171
1,305
929
789
781
781
769
769
789
801
801
805
Total funding requirements for infrastructure
Total construction activities**
150
Source: Ministry of Finance. Note: In the table, revenues are indicated as negative with a minus sign, whereas expenditures are indicated as positive.
*Funds have been allocated for housing in the Finance Act 2012, and therefore no additional funds have been allocated in connection with input to the coming 2025 plan.
** Construction activities, Finance Act 2012 + input to the 2025 plan + the educational reserve + infrastructure investments + 40 p.c. of the expenditure for housing (equalling the lending by mortgage credit institutions).
76
The table above constitutes a rough draft for a national capital investments and expenditure plan
describing the Government of Greenland's overall construction priorities. The expenditure figures
are subject to some uncertainty. Especially because deviations may occur when specific
construction plans are to be prepared for the individual projects, but also because the strategy
presented is dynamic. Even though the figures in the table cover the period up to 2025, there will be
ongoing changes. The basic conditions may change, and the long-term objectives may be adjusted.
However, the principles listed will still apply, and altered preconditions as a result of, for example,
large-scale projects, may alter the underlying basis. A possible large-scale project, however, will
not change the necessity of making priorities in compliance with the four criteria described above in
chapter 5.
The presented draft for a national capital investments and expenditure plan will boost the overall
construction activities over the next four years. It will have a positive impact on the overall
employment in the building and construction sector. From 2017 onward, the capital expenditure
will stabilise at a level where no loan finance is required.
As from 2013-2015, there is an uncovered funding requirement of approx. DKK 300m. Part of the
funding may be procured through extraordinary revenues in the coming years and part must be
procured through cuts in the operating expenditures in the Finance Act. Investments in training and
education are sound investments for society, but the gains cannot be reaped until many years later
and do not contribute to the payment of interest and instalments on possible loans. Depending on
the funding possibilities, some of the investments may therefore have to be postponed for a year or
two. This means that the year when the objectives will be achieved is postponed accordingly. The
final funding framework depends on the budgetary negotiations over the next years and on the size
of the extraordinary revenues arising during this period.
If the said investments in the infrastructure are funded by the raising of loans, the total public debt
will increase by DKK 900m up to 2016. If the projects are to commence in 2013, a parliamentary
resolution must be made during the 2012 autumn session of Parliament. From 2012 to 2015, the
companies owned by the Self-Government authorities expect to reduce their interest-bearing debt
by approx. DKK 750m. Illuut A/S expects to raise loans of around DKK 600m up to 2015. Given
these circumstances, the total interest-bearing debt will increase by DKK 577m. A further increase
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in the interest-bearing debt of DKK 150m is expected in 2016, arising from the construction of an
airport at Qaqortoq, which does not appear from the table below.
As loans will be raised only if in compliance with the above principles, such increase in debts could
be justified. Depending on the final ownership model, the debts of either the Treasury or the debts
of a limited company owned by the Self-Government authorities will increase, and during the same
period, a reduction of the debts in the five largest limited companies owned by the Self-Government
authorities is expected. The overall development of the debts is illustrated in the table below.
Table 13: Expected development of debts, including the financing of infrastructure
investments
Interest-bearing debt
2008 2009 2010 2011 2012 2013 2014 2015
The five largest companies owned by
the Self-Government authorities
3,892 4,091 3,509 3,616 3,496 3,025 2,958 2,744
547
602
Illuut A/S
23
338
402
492
196
196
The municipalities
109
109
196
196
196
196
317
729
Infrastructure investments
45
The Self-Government authorities
0
0
250
250
600
800 1,000 1,000
In total
4,001 4,200 3,978 4,400 4,694 4,558 5,018 5,271
Net interest-bearing debt
The five largest companies owned by
the Self-Government authorities
3,561 3,162 2,657 2,648 2,586 2,177 2,080 1,767
537
592
Illuut A/S
17
328
392
482
0
0
The municipalities
-350
-350
-68
-68
0
0
277
649
Infrastructure investments
40
400
400
The Self-Government authorities
-2,092 -1,320 -797 -677
0
200
In total
1,119 1,492 1,809 2,231 2,978 2,899 3,294 3,408
Source: Ministry of Finance
Note: The five largest limited companies owned by the Self-Government authorities are Royal Arctic Line A/S, Royal
Greenland A/S, KNI A/S, TELE A/S and AirGreenland A/S.
An increase of the total public net interest-bearing debt may be expected over the next years. The
large companies owned by the Self-Government authorities are planning a reduction of their burden
of debt, but on the other hand, the Self-Government authorities and Illuut A/S are planning to
increase their debts, and moreover, the infrastructure investments in harbours and airports will give
rise to an increase of the total debts.
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A business case is to be worked out for each single project, in which the project is assessed in
compliance with all the criteria listed in chapter 5. Funding through the raising of loans must also
comply with the principles listed in chapter 4.
As loans are expected to be raised only for the purpose of investments generating a cash flow for
the payment of interest and instalments, the described development of the debt level is in
compliance with the above debt principles. The increase in the level of debt in the public sector,
inclusive of the companies owned by the Self-Government authorities, does not contribute to any
significant increase of the total risk to which the Treasury is exposed. When at the same time,
efforts are made to ensure that interest and instalments are paid, the investments presented are
deemed not to threaten the funding of the welfare benefits and services.
79