INTOSAI Working Group on the Audit of Privatisation

Papers for the Eighth Meeting
Budapest, 11 and 12 June 2001

Issues arising on the disposal of Danish state owned harbours to their respective municipalities: Paper by the National Audit Office of Denmark

1. Background

In 1997, the EU Commission presented a "Green Book on Harbours"; the Green book primarily dealt with the future role of the harbours in the context of EU’s policy of transport, including the guarantee of free and equal competition.

On the basis of a debate that started before the Green Book, the price fixing of the Danish harbour tariffs became unrestricted in 1995.

In 1999, the Danish harbour legislation was amended. For instance the new harbour legislation opened up for the possibility of converting municipal harbours into private limited companies.

In 1999, the Danish Parliament (the Folketing) decided to sell the state owned harbours. Previous to this decision, a Commission on which parts of the state-owned infrastructure could be transferred to the counties/municipalities such as airports and "private" railways of which the state was a co-owner had made a report. The report of the Commission recommended that the harbours were to be turned over to the municipalities where they were situated or to a plurality of municipalities.

During the summer 2000, the Danish Minister of Transport successfully made agreements to turnover 10 of the 12 state owned harbours to their respective municipalities.

The harbours that were sold and their placing may be seen in voucher 1,

From the press coverage, it appeared that the harbours had been turned over at approximately 518 million DDK (app. 70 mill. USD), the ministry’s originally price calculations however being 1.432.million DDK (app. 200 mill. USD)

2. The NAOD preliminary study

In the preliminary study, it has been assessed whether the Ministry of Transport received the "right" price when turning over the state owned harbours. The price of the turnover has been judged on the basis of two themes, respectively competition and price setting, which are somehow linked.

A. Competition, including tender and state subsidy at the implementation

The harbour law gives the Minister of Transport authority to turn over a state owned harbour to a municipality, or to convert it into a limited company (partly or completely owned by the municipality or, as according to civil law, a privately organised harbour). The law does not specify how the turnover or the tender is going to take place.

The prices of the harbours were not established on the basis of a public tender. It was obvious from the political work (before the adoption of the harbour law) that the harbours were to continue being within the public sector. Furthermore, it was anticipated that the turnover should take place after negotiations with the local community and that the turnover should take place voluntarily. In accordance with the Danish rules the sales of the harbours were presented to the Finance Committee; therefore the sales were authorised. However, it was not explicitly stated in the documents to the Finance Committee that public tenders had not been arranged.

The prices of the harbours were thus not subject to any market mechanisms in spite of the fact that some of the harbours yielded a profit. These could – at least in theory – be potential objects of investments for others than the municipalities. The new harbour owners could resell the harbours, and as a consequence of the lack of tender, the municipalities could gain an unintended profit.

The lack of tenders, however, is basically in accordance with the Danish Law on Competition because the turnover has taken place on the basis of public regulations (authority in law). Hereafter, the Danish Competition Authority (the Danish authority monitoring the circumstances for competition on the Danish market) shall solely assess whether the Ministry of Transport has distorted the competition among the turned over state owned harbours respectively between the turned over and the existing harbours when setting the price. The matter seems quite difficult to assess, as the two administrations of the state owned harbour apparently have not attributed the expenditures for common administration on the location that is – on the individual harbours. In stead the individual harbours’ expenditure withdrawal were relatively distributed according to a key. The Ministry of Transport has not as yet accounted for the problem concerning the attribution of the expenditures which may have led to incorrect prices as the expenditure were not attributed in accordance with reality.

On behalf of the Ministry the turn over of the state owned harbours has been reported by the Junior Counsel to the Treasury (the private lawyer which the state uses in judicial decision) to the Danish Competition Authority.

The assessment of the Danish Competition Authority still remains to be seen, and according to received information, it will not include an assessment of the sale of the harbours’ seen in relation to the EU legislation. The Junior Counsel to the Treasury has informed the Danish Competition Authority that the Ministry assesses that the turnover of the harbours did not have to be notified to the EU commission, in spite of recommendations from the Danish Competition Authority to show precautionary measures. The Minister of Transport bases his opinion on the fact that "neither harbours nor the size of the amounts paid" have given reason to believe that the sale of the harbours would effect the intra-community trade". It is thus still uncertain whether the turnover of harbours needs to be notified in relation to EU legislation. The reports of the Junior Counsel to the Treasury included an extensive statement seen in relation to the Law on Competition, but only a minor note to the matter concerning article 87. (In the case concerning private railways’ transition to counties, the Ministry of Transport changed its point of view and notified this after the adoption of the document of the Finance Committee).

The NAOD has in its report "Report on the State’s Purchase and Sale of Real Estate" accounted for EU’s rules of competition in relation to state subsidy. However, it cannot be disregarded that the turnover falls within these EU rules regardless that for instance the lower level of value – "de minimis rules" – has not been examined in this particular area.

The subject "competition" has not been clarified until the Danish Competition Authority has made a statement on the conditions of Danish competition, and until the NAOD has obtained an explanation from the Ministry of Transport and an assessment from the Junior Counsel to the Treasury.

B. Price determination

The preliminary examination has given an overall understanding of the method in price determination. The Ministry of Transport’s however has so far not been able to account for in detail how the method was applied and there are several factors indicating that the Ministry of Transport has not taken sound financial considerations into account when determining prices and when financing the construction.

The price has been calculated by using the cash flow method and the financial situation of the harbour has been based on 3 years of accrual. The development in fishing quotas, which always shows fluctuations over a period of time, has had great influence on the price determination. Therefore, the NAOD still needs to examine whether the price was set at an – for the state – unfavourable moment of the harbours’ financial situations, whereto the Ministry of Transport (in theory) could have suspended the sale.

In addition, it should be noted as mentioned above that the expenditures to the common administration are relatively distributed; therefore they are not necessarily true and fair.

The construction of the financing has been made with due consideration to the significant precautionary measures in relation to the long termed profit possibilities, therefore the short period of accrual – for price determination – is understandable.

The problematic part of the construction of the financing is the "risk-sharing-loans". In 5 harbours the purchases were completed by the state granting 5-year loans, bullet loans for half the agreed turnover amount (risk-sharing-loans). After a period of 5 years, the risk-sharing-loan is adjusted – depending on whether or not the result of the harbour is more or less than anticipated at the time of the price determination. However, the new harbour owner shall always pay 25 % of the loan. The Ministry of Transport assumes a risk of 75% of half of the turnover amount, if a poor development in both residual profit and contribution takes place.

In a worst-case scenario this means that the Government will only receive approximately 310 mill. DDK (app. 40 mill. USD)

If the municipality collects higher revenues than expected then the state will receive no part herein.

3. Problems/ potential criticism
  1. The Ministry of Transport has used cash–flow method to determine the price of the harbours. The method is probably suitable, but the period of 3 years may turn out to be too short as the harbours´ profit fluctuates.
  2. The distribution of expenditures in the individual harbours when calculating the price may not give a true and fair view, as the two state run harbour administrations have failed to enter the amount on the location in the accounts – in other words – the individual harbour has entered the amount on the type of activity in the accounts. The calculation is therefore incorrect.
  3. Reduction in price in the negotiation period is possibly based on a non-financial rationale (for instance, that the harbour was sold at the price which the municipality wanted to give, because the minister was under pressure – the harbour had to be turned over – or that a reduction in price was not financially quantified but set at a lump sum).
  4. The final price on 6 of the harbours is still not settled. For 5 of the harbours the price may be as low as 62,5% of the agreed price, if the harbour over the next 5 years period obtains a poorer result than presumed in the calculations. This was explained in a technical very complicated and opaque way in the document to the Finance Committee.
  5. If the harbours obtain a better result than presumed in the calculations or are resold partially or completely, then the state has not ensured any part in the profit (the so-called claw-back stipulation, which the INTOSAI standards recommend that the State uses).
  6. The ministry has not outlined "before and after calculations". Before – the state had a revenue of approximately DKK 60 million a year (deducted expenditure of operation). In the future, the state will only have expenditures. It is not possible to separate expenditures on the Finance Act 2001. Therefore – the question is: "Will the one time revenue, which the state receives from the sale of the harbours, be able to yield interest between the revenue so far and the future expenditure", or in other words – has the state made a financially sound or poor business agreement. Such an analyses should have been presented to the Finance Committee as an important part of the basis of decision.
  7. The EU commission has not been notified of the turnover in spite of the advice given by the Danish Competition Authority. The Ministry has stated that it is not necessary but the authorities – the Danish Competition Authority – feels that the Ministry of Transport should take its advice, even though the Junior Counsel to the Treasury has referred to the ministry’s point of view to the Danish Competition Authority without adding anything to the report. (In the case of transferring private railways, the Ministry of Transport has subsequently followed the recommendations of the Danish Competition Authority to notify due to precautionary measures).
  8. It is uncertain whether the Danish Competition Authority may determine that there are problems with the price determinations. If this is the case, then the business agreement is probably not lawful. This circumstance should therefore have been clarified in advance of a document or at least as a minimum it should be stated as a necessary precondition for the approval of the Finance Committee.

4. Report to the Public Accounts Committee.

Due to fact that several questions still lack an answer it has not yet been decided whether a report to the Public Accounts Committee will be produced.