Could Danish pension funds turn to public-private partnerships for infrastructure and property investments? Rachel Fixsen reports

After long-running debate in Denmark about the viability of public-private partnerships (PPPs), there are signs that the investment model is about to be put to wider use for infrastructure and real estate deals.

Public authorities in the country require finance for projects, and pension funds need long-term, stable investments. But can the two sides put aside their differences, iron out the details and make PPPs work?

Ulrik Dan Weuder, head of infrastructure at ATP, Denmark’s giant statutory pension fund, says there could be a number of PPP opportunities emerging in the near future for investment in infrastructure and public buildings. “The government has been very active and more specific than previously in this area in terms of what they have written in to the government programme,” he says. “Politicians are debating it a lot and there is a sense that this could be something the government could execute.”

Change has clearly begun – in attitudes, at least. Only last autumn, during a briefing on its investment activities, ATP spoke about a lack of attractive PPPs in its home territory. All of its then DKK8.6bn (€1.16bn) of infrastructure investment was outside Denmark, because this type of investment was simply not in place within national boundaries, it said. At the time, ATP said it saw no broad and long-term political will for PPPs. But this has not stopped the pensions industry from talking about them.

This summer, pensions administration company PKA, which manages five labour-market pension funds in the healthcare sector, expressed interest in investing in Danish infrastructure. Peter Damgaard Jensen, director of PKA, said PPP projects appealed to the company as investments, and pointed out that it already had experience with investments in municipal health centres.

Then, when the Danish government proposed removing the tax deduction for asset management costs within pension schemes, industry body Forsikring og Pension (F&P) said this went in the opposite direction to that needed by Denmark – increased growth and more PPPs.

F&P and pension companies managed to persuade the government to change its proposal for the new tax. Instead of the proposed levy, policymakers opted to collect the same level of revenue another way, by increasing the tax on pension revenues to 15.3% from 15%.

This levy makes more sense than the first plan, which would have taxed customers in periods when their pension provider was not making any money for them, F&P reasons.
“We thought it was a very bad proposal,” says Per Bremer Rasmussen, F&P managing director. “Setting up PPPs is really very expensive, and if you are then taxed on all the costs, there’s some skewness that will work against the partnerships.”

While players in the pensions industry believe they now see growing signs of a political readiness to use public-private partnerships to build infrastructure and public buildings, Bremer Rasmussen points to the many other conditions needed for the deals to work.

“First of all, you need to have a certain political will to do it, at least in Denmark, and then the total investment in projects has to be worth it,” he says. Already, a lot of knowledge has been gathered on how such deals should be done, and all those details will make the idea work. “The government has a positive attitude – they want to engage with the insurance business,” he adds.

Projects need to be of a certain scale for pension funds to find them interesting, and there are other factors that would make the projects more attractive as investments, Bremer Rasmussen says.

F&P has been focusing on getting the message across to the demand side – Danish local communities – that PPPs do make good economic sense for the public sector. A recent roundtable discussion on the issue involving finance ministry and pensions industry representatives had a good atmosphere.

“What we need now is something concrete,” he says. “We need the public sector to set up an infrastructure plan so we know what kind of volume we’re talking about.”

There is a lot going on at local and regional level, and one idea under consideration is for these smaller local authorities to pool their projects and work together across borders to achieve the scale of PPP necessary to attract investors.

Another idea is for the finance institutions themselves to take the initiative by creating a model for the construction of a public school, for example, in order to show public authorities what could be done. “You can sit and wait for the demand or you can come up with some ideas,” says Bremer Rasmussen.

However, as things stand, one obstacle to PPPs is the deposit scheme for local communities. The scheme was put in place to stop public authorities using PPPs to get around the rule that they must not borrow money to finance projects. Under the deposit scheme, communities seeking financing through these partnerships have to place on deposit the same amount of money they receive in investment, Bremer Rasmussen explains. However, he notes that experts have suggested this stumbling block could be overcome by fixing the amount of investment money a community could use via PPPs  to stop overspending.

Certainly, pension funds in Denmark have good reasons for wanting to push the issue of PPPs. “We have a problem finding long-term investments to match our liabilities, and some of these PPP projects are very long-term,” says Bremer Rasmussen. “We also like risk that we can either control or that we can understand and measure, and these partnerships can be designed to have different types of risk sharing between the investors and public bodies.” Generally speaking, the investment model is well-suited for the pensions business, he says.