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The Danish State Guarantee
Model for Infrastructure
Investment

2

The Danish State Guarantee
Model for Infrastructure
Investment

Kaj V. Holm
Thomas Horstmann Nielsen

Sund & Baelt Holding A/S, Denmark

Working Group Paper
2018

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Cite as: Holm, K. and T. Horstmann Nieslen (2018), "The Danish State Guarantee Model for Infrastructure
Investment", Working Group Paper, OECD Publishing, Paris.

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Foreword
Transport infrastructure is a major enabler of economic development. In the drive to refurbish or build
more, governments worldwide have turned to the private capital market to help finance it. The primarynarrative behind this push is that there huge stocks of private capital available, while public financing
capabilities are said to be limited and insufficient.
The almost exclusive vehicle of private investment in transport (and social) infrastructure are
Public-Private Partnerships (PPPs). In the context of PPPs, two important aspects have received little
attention.
First, sufficient attention has not been given to the role of suppliers. The focus of, governments andIntergovernmental Organisations has been on resolving the challenges to private investment from theviewpoint of investors; a key part is reducing uncertainty they face and enabling them to price risk more
efficiently (establishing infrastructure as an asset class).
Yet looking at the investors only gives an incomplete view of the total cost of the risk transferred fromthe public to the private sphere. In PPPs investors transfer some of the major risks they are not
comfortable bearing (e.g. construction risk) to design, construction, maintenance, and operations
contractors.
As investors, suppliers too face uncertainties and can’t price risk efficiently. In such a case, the base costof the initial investment (and of subsequent services) will be much higher than they could be, and notjust the cost of their financing.
Uncertainty arises from the difficulties to accurately estimate the cost of construction, maintenance,
operations, and financing. But it also stems from “unknown unknowns” (the so called Knightian
uncertainty), for instance changes in weather patterns or paradigmatic technological shifts the timing
and impact of which are unclear but will influence what infrastructure is needed and where.
So what can policy makers do to reduce the cost of inefficient risk pricing of suppliers? Where does thisput PPPs? How can public decision makers reconcile long-term uncertainty with private investment ininfrastructure? Who should bear long-term uncertainty in projects, the public or the private sector?
These were some of the guiding questions for a Working Group of 33 international experts convened by
the International Transport Forum (ITF) In September 2016. The group, which assembled renowned
practitioners and academics from areas including private infrastructure finance, incentive regulation, civilengineering, project management and transport policy, examined how to address the problem of
uncertainty in contracts with a view to mobilise more private investment in transport infrastructure. As
uncertainty matters for all contracts, not only those in the context of private investment in (transport)
infrastructure, the Working Group’s findings are relevant for public procurement in general.
The synthesis report of the Working Group was published in June 2018. The report is complemented by aseries of 19 topical papers that provide a more in-depth analysis of the issues. A full list of all Working
Group papers is available in Appendix 1.

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Acknowledgements
The authors are grateful for valuable comments from the members of the ITF Working Group on Private
Investment in Transport Infrastructure and from Dejan Makovsek and Stephen Alchin in particular.

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Table of contents
Executive summary ........................................................................................................................................... 6
Introduction ...................................................................................................................................................... 8
Description of different organisational models................................................................................................. 8
The finance act model .................................................................................................................................. 9
The state guarantee model......................................................................................................................... 10
Detailed description of the state guarantee model ........................................................................................ 12
The company ............................................................................................................................................... 12
Construction and financing ......................................................................................................................... 13
Guarantees and loan terms ........................................................................................................................ 14
On budget, off budget ................................................................................................................................ 14
Operational phase ....................................................................................................................................... 15
Self-financing............................................................................................................................................... 16
Repayment period ...................................................................................................................................... 16
Political interference and control ............................................................................................................... 18
Other aspects of the state guarantee model ............................................................................................. 18
References ...................................................................................................................................................... 20
Appendix 1. Research questions and outputs ................................................................................................. 21© OECD/ITF 20185

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Executive summary
What we did
This paper analyses the Danish (and partly Swedish) experiences with the so-called state guarantee
model (SGM). In the field of transport infrastructure megaprojects, the model dates back to 1987 when
the Store Bælt (Great Belt) project was decided by the Danish parliament. The model was replicatedtogether with Sweden in the Øresund project, in the Copenhagen Metro project and will be used in theplanned Femernbelt project as well.
The basic concept of the SGM is quite simple: A special purpose vehicle (SPV) is established for eachproject, and all construction costs are financed by the SPV and backed by a strong government
guarantee. The costs are recovered (i.e. the debt is repaid) by toll income, collected by the SPV andpayed by the users of the specific infrastructure.
In the context of this report, the SGM can be seen as an alternative to privately-financed, toll-funded
infrastructure (a public-private partnership [PPP] with demand risk). This paper describes theexperiences with the model, based on up to 20 years of operation, and identifies the model’s pros andthe cons.

What we found
The SGM is a financing tool which can be relevant for fully or partially toll-funded projects. As such it is apotential alternative to both the traditional tax-funded public procurement model and to the PPP modelwith demand risk. Compared to the public procurement model, the main advantage of the SGM is thatthe costs of the project are paid by the users of the project (i.e. those that are actually benefiting fromthe investment) and not by all taxpayers in the country. The model also allows more efficient project
management than normally found in a public procurement project.
Compared to PPPs, the SGM’s main advantage is that its financing costs are substantially lower. This ispartly explained by the fact the state ultimately bears the risks (especially the demand risks) in the
project. But as described elsewhere in this report, private investors in transport infrastructure also
require an uncertainty premium, which makes the total financing costs too high compared to the realrisk transfer from the state to the private sector (the risk-pricing failures of private financing). On arisk-adjusted basis, the financing costs in the SGM are therefore lower than in the PPP model.
Furthermore, the SGM can lead to efficiency gains by transferring knowledge and experience from one
project to another.
Regarding the question of having a project´s financing on or off the public budget, the SGM is subject tothe same rules as the PPP model. In both cases a market test is performed in which the main criterion iswhether or not the project generates income that cover a minimum of half of the costs.
The main disadvantage of the SGM is the lack of incentives for efficiency, which is often associated withprivate ownership and risk-taking.

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What we recommend
Consider the SGM as an alternative to PPP financing with transfer of demand risk
The SGM has proven to be effective, especially in countries with a stable political environment, and is anefficient financing tool.
Identify and disclose the risk of a project
Each project is unique and the use of the SGM should therefore be based on thorough investigations anda strict due-diligence process. It is important that the model is not seen as easy money. Risks should be
identified and disclosed during the decision-making process, for instance, in parliament
Compensate for the lack of private-sector incentives
To the extent possible, the lack of private-sector incentives should be compensated by a comprehensive
governance model, including clearly defined financial goals for the special financing vehicle for which theboard of the company is held responsible.

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Introduction
This report provides a detailed description of the Danish state guarantee model (SGM), which over the
past two decades has been successfully used for financing large-scale transport infrastructure projects in
Denmark, such as the fixed links across the Storebælt and the Øresund. It will also be used for the
Femernbelt project. It specifies the working principles and relevant factors of the SGM and includes
references to the experiences Denmark has had with the Storebælt and Øresund projects.
The project’s self-financing capacity is the key element in the SGM: it means that even if certain
parameters in the project should change for the worse – e.g. lower initial traffic volume or higher
interest rates than anticipated in the original financial calculations – this does not require new policy
decisions or mean the risk of ongoing capital injection by the owner. Such variations during the actual
operation of the project can instead be absorbed in the form of adjustments to the repayment period, aslong as the project does not reach a point where the net profit is not able to cover the interest paymenton the debt.

Description of different organisational models
Before the SGM is described in detail, it is necessary to clearly distinguish it from other organisationalmodels for funding and financing transport infrastructure. The table below therefore lists four models:Table 1. Overview of four pure financing models for transport infrastructure
Model types
Funding
Tax payment

Financing method
PublicFinance act model

PrivatePublic-Private Partnership model (availability payment)

User payment

SGM

Concession Public-Private Partnership model (incl. demand risk)

The SGM is therefore only a model used when funding comes from user payment, which separates itfrom budget constraints from the government’s annual finance act.
The reason for this simplified division should be viewed in light of the debate, which often mixes themodels together and the issue of funding and financing, and therefore dilutes their concepts. For
example, you often see a mix of Public Private Partnership (PPP) and user payment, but as the tableshows, they are actually not identical in their pure forms.
Another reason to keep the models separate is the ability to assess the characteristics of each. This is
only possible if they are kept in their pure forms.

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A brief description of each organisational form follows, after which the SGM will be analysed in detail.
The description is based on the Danish context but can be applied to other countries with high credit
ratings.

The finance act model
In this model, the state offers the project as a turnkey contract following the adoption of a construction
act for the specific project in the Danish parliament. The construction costs are raised in the annual
finance acts and settled with the contractor through milestones during the construction phase. Aftercompletion, the state is the owner of the facility, with responsibility for its operation. In practice,
however, this can be undertaken by a private partner through fixed-term operational contracts. The purefinance act model is illustrated in Figure 3, where a project run by the Danish Road Directorate (a stateagency operating under the Ministry of Transport) is used as an example.
Figure 1. The pure finance act model

The main advantage of this model is that it is relatively simple, with the costs of contract preparation,etc., being low as a consequence when compared to most PPP models. The model also offers theopportunity for economies of scale with regard to the operation of other publicly-owned roads.
The fundamental challenge for the finance act model is the fact that the mega-infrastructure projects areboth large in scale and span a great number of years, often exceeding a decade. In general, a decision toproceed with such projects puts constraints on public funds available for infrastructure for many years
and thus influences and limits the public prioritisation of public money over several election periods. Thiscan lead to either stop-go decisions for projects or to political inability to cope with project changes
along the way.
A potential disadvantage of this model can be that there can be a distinction between contracts for theconstruction works and the subsequent operations and maintenance phase. Thus, there is no incentive
for the contractor to view the project in the context of its entire life cycle. However, it is possible toresolve this issue if the contract covers both construction and the early years of operation. This is thecase in Copenhagen’s metro project, for example. The Danish Road Directorate has developed the
traditional procurement method and are trying to strengthen the life-cycle perspective through adifferent approach to contracting.
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Whether this approach has produced better results remains to be evaluated. Another major
disadvantage is that maintenance of all public infrastructure is subject to the budget constraints in thefinance act, and this can lead to suboptimal maintenance as this is often a less prioritised area forpoliticians than investing in new infrastructure. As ITF statistics show, during the recent financial crisis
most countries significantly cut back spending on maintaining transport infrastructure.

The state guarantee model
The SGM was used for the development of the fixed links across Storebaelt and Øresund and will also be
used for the upcoming Femernbelt link. It is characterised by transferring the responsibility for Design,
Build, Finance, Maintain and Operate (DBFMO) in the PPP model contract to a 100% state-owned
company, with its own board of directors and management.
Financing is based on the company raising loans in financial markets or from the state and can also be
equity supported by the state (this has only been applied for a smaller Danish project). The state
guarantees the loans through a guarantee commission. With the Danish state's high credit rating,favourable loan terms are obtained. Toll charges are collected, which, after covering operating andmaintenance costs, are used to pay interest and loan instalments. The model is illustrated in Figure 2.
Figure 2. The state guarantee model

The main benefits of the SGM, when compared to the traditional finance act model, is that it allows bothfull and partial user payment. This means the project is less of a burden on public finances, and it has aself-reliant organisational structure, where the company operates without asking parliament for
permission on specific projects. Furthermore, concentration and retention of knowledge and experience
with these large scale projects are highly valuable assets.
As with the finance act model, the SGM is relatively simple, and the costs of legal preparation of financial
contracts, etc., are thus quite modest. For an infrastructure project with high capital costs and a long
timeframe, financing costs are important for the economics of the project. The SGM secures the lowest
possible finance costs, which are only marginally higher than the state’s own finance costs, which, inturn, are significantly lower than for private financing.

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Figure 3. Project characteristics
Storebaelt Fixed Link

Øresund Fixed Link

Femernbelt Fixed Link

• 100% Danish project• Joint-owned and guaranteed with
Sweden• 100% Danish project except
German hinterland• Debt at opening (in 2000):
EUR 2.6 bln• Construction Act passed by Danish
Parliament April 2015

• Annual turnover: EUR 240 mln• Final Danish approval March 2016

• Expected final repayment in 2034

• Expected debt at expected opening(2028) EUR 7.1 bln• Debt at opening (1998): EUR 4.9 bln• Annual turnover: EUR 480 mln• Expected final repayment in 2033

• Expected final repayment in 2064

The state continues to bear the residual risk in the project. If it turns out that the project does not live up
to expectations and that revenue from user payment is not sufficient to repay the debt, the state will
ultimately have to cover the resulting shortfall.
An advantage of the SGM is that the state can maintain control of a number of strategic decisions in the
project, such as the tender strategy and fixing toll charges. Meanwhile, the company can act more freely
than a government agency (e.g. in relation to the state authorisation procedures). This is currently not
the case for concessions. However, Vasallo (2018) is proposing a solution for separating thecost-recovery function of user charges form their role in the efficient use of infrastructure. The
experience from the Storebælt and Øresund projects shows that an independent project company with
its own financing is better placed to optimise operations and maintenance, including reinvestments, thanis the case with a government body that is dependent on appropriations in the annual finance acts.
Compared with a PPP concession, with a fixed contractual period the SGM provides the opportunity oflooking at the full life of the asset, where a private operator with a fixed contract period will have an
incentive to look at the value of the asset only in the length of the contract. And for large complex
infrastructure constructions, the life cycle is most often beyond this contract period. As an example ofthis, the Danish fixed links have developed an innovative way of prolonging the expected life of theassets by corrosion protection of the cables with dehumidification techniques. A private operator will nothave the same incentive to continuously optimise for a lifespan beyond the contract period.
A possible disadvantage when compared with PPP models can be the division of contracts between
construction on the one hand and operations and maintenance on the other. In the same way, as withthe finance act model, however, it is possible to alleviate this problem if a contract is entered into thatcovers both construction and the early years of operation as will be the case on the Femernbelt project.
Furthermore, the model offers good opportunities to integrate construction and operation. For example,
the design phase can take account of operational considerations, including experience drawn fromequivalent facilities already in operation. In the case of Denmark, the Storebælt, Øresund and future
Femernbelt, links are owned by the same group (Sund & Belt Holding), which in turn is owned by the
Ministry of Transport.
Another possible disadvantage is the possibility of political interference in the SPV, which could lead toless than optimal solutions and a difficult work environment. As the SPV is 100% state-owned, it would
be possible for the government to put pressure on the company.

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Box 1. Main characteristics of the SGM
 Paid for by users
 State guarantee on all loans
 Low financing cost
 Organised through a private company entity comparable to the SPV in a PPP setup
 Full-state ownership of the company entity
 Full-state control and insight

Detailed description of the state guarantee model
The company
The particular company that will be responsible for designing, constructing, financing, owning andoperating the project is fundamental to the model. In Denmark, this company is established under theauthority of a special construction act that is adopted in the Danish parliament (Folketing) and is specificto the project. The company is set up as a private entity and limited company but owned wholly by theDanish state. The act is specific to the project and sets out a clear framework and restrictions on thecompany. Thus, it is only authorised to undertake the specific task, which ensures maximum control of
the company.
The company is run by a board of directors and a management board under the auspices of common
corporate legal standards. However, the Danish Minister of Transport has certain special instructional
powers that go beyond ordinary shareholder powers. This ensures that certain strategic decisions (forexample, regarding tolls) must be made or be approved by the minister of transport, who also appoints
the company's board. Tolls will primarily be determined based on the requirement for repayment of thedebt (see below). In addition, social considerations will play a role in setting the tolls.
The company's finances are separate from the state’s budget and authorisation procedure (i.e. thefinance act). Thus, it is the board's responsibility to ensure appropriate and efficient use of its resources(see Minister of Transport's special powers above). The company's audit is carried out by a regularprivate audit company. Denmark’s National Audit Office, however, also has the opportunity to examine
all aspects of the company’s business. The project company is thus under double oversight and must
report frequently and transparently to its public owners. Public control in this model is therefore strong.
At the same time, the company has freedom to act and optimise in the same way a private projectcompany would.
A state-owned project company does not necessarily have an incentive to optimise the economics andensure a robust risk assessment of the project. This, however, can largely be compensated for by anappropriate governance structure and an efficient organisational setup. In Denmark, the state has
implemented an active ownership policy, which sets a clear framework for state ownership incompanies. Financial targets have been set for all companies to give specific goals for long-run value

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creation and support the supervision of the individual company. The goals will be regularly adjusted andupdated and an annual monitoring is implemented.
A majority of the infrastructure projects organised using the Danish SGM are part of the Sund and BæltHolding. This is illustrated in Figure 4. The holding company is owned wholly by the Danish state (ministryof transport). In turn, it has full ownership of a number of subsidiaries, including Femern Landanlæg A/S
and Femern A/S, plus the companies responsible for the Danish landworks for the Femernbelt tunnel andthe tunnel itself.
Figure 4. The finance act model as applied to the Sund and Bælt project

Each project company has its own board of directors, its own accounts and double oversight from its
private auditor as well as the state auditor. There is an intentional overlapping in general management
and the board of directors to ensure knowledge is shared between companies. Furthermore, money
cannot be transferred between projects without a specific political decision to do so.
The organisational description above applies to fully Danish-owned companies. The situation is slightly
different with regard to Øresundsbro Konsortiet, which owns and operates the fixed link across Øresund
and is owned equally by the Danish and Swedish states (the Danish A/S Øresund subsidiary of the Sund &Bælt Holding, which therefore represents 50% of the Øresundsbro Konsortiet, owns the Øresund Danish
land works). The two governments appoint four directors each to the board of directors, granting it all
powers of direction, including regarding tariffs.

Construction and financing
The above construction act sets out the project's design in outline (such as a combined road and rail linkwith two railway tracks and two/two motorway lanes) and establishes certain general requirements,
e.g. for environmental and safety considerations
Within this framework, the project company is responsible for implementing the project design,
environmental and regulatory approvals, tender of construction contracts and performance of the clientrole during the construction process, etc. A crucial element in this process is the tender strategy, which
includes the need to establish the allocation of risk between the contractor and client (the company).
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always been a top priority for all the fixed links. On the Femern project, Design and Build and competitive
dialogue are used in the tendering process, with the expectation that this will drive innovation, harness
the skills in the private construction sector and replicate some of the advantages of the PPP model.
Because of the size of the projects and the company's publicly supported financing, the tender process isin accordance with the EU’s public procurement directives.
The cost of all these activities is financed through borrowing. Normally, companies have some equity
capital, invested by the state when the company is formed. In the case of Danish companies, however,this constitutes less than 1% of the total capital requirement (this is the case of the Øresundsbro
Konsortiet). The balance is loan financing through the capital markets, which of course is only possible
because of the state guarantees.
The borrowing is typically undertaken by the company issuing bonds, which are purchased by pension
funds or other investors. Both the Danish companies and Øresundsbro Konsortiet have special
programmes for bond issues, often referred to as the EMTN (Euro Medium Term Note) programme.
Apart from short-term drawings on credit facilities, bank loans are not usually taken out. Banks have,
however, an important role arranging the bond issues and as counterparty in the accompanying financial
contracts.

Guarantees and loan terms
As mentioned, the state guarantees the company's borrowing, including any refinancing of previously
raised loans. The state also guarantees the companies’ other financial contracts used in connection withthe financial management, such as swaps. Finally, the state guarantees non-financial obligations without
further notification (e.g. fulfilment of the signed construction contracts).
Loans are raised as the liquidity need arises during the construction phase. There is a range of maturities
in order to avoid too high a concentration of refinancing needs in certain years. The company's total debt
comprises, therefore, a large number of loans with varying maturities and associated financial contracts.
The guarantees referred to are legally strong. They are, of course, irrevocable and ensure
investors/lenders receive payment of all interest and instalments, etc., which arise from the company's
original obligation. It should be noted that investors/lenders cannot put the company into receivership or
liquidation and thereby trigger an accelerated repayment of the debt.
The guarantees are issued by the Danish state and for the Øresundsbro Konsortiet the Danish andSwedish states. This means the companies have the same credit rating as the state, which in Denmark’s
and Sweden’s cases is an AAA rating from the international rating agencies. Companies can therefore
obtain virtually the same loan terms as the state itself. Since the companies’ bonds are less liquid thangovernment bonds, however, a small liquidity premium accrues to the investor.
The Danish companies pay a guarantee premium of 15 basis points per annum to the state. Øresundsbro
Konsortiet pays no guarantee premium.

On budget, off budget
According to Eurostat rules ESA (2010), all debt in the general government sector is on the budget. The
general government sector is defined within these rules as being all government units and all non-market
non-profit organisations controlled by government units. Whether a state-owned company is part of the
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general government is decided by the market/non-market test. Only non-market producers are part of
the general government sector. Market producers are part of the corporate sector, and the debt in thesecompanies should be off budget.
ESA 2010 states the distinction between market and non-market producers depends on whether or not
prices charged for sales of goods and services are economically significant (see ESA 2010). In practice,
this would be assessed through whether the sales of the producer cover a majority of the production
costs. In distinguishing market and other non-market producers, a quantitative market/non-market test
(50% criterion) is used, comparing sales and production costs. The sales should cover at least 50% of thecosts over a sustained multi-year period.
According to the 50% criterion, in Denmark each project is not considered a part of the general
government, and the debt is off budget. That said, most loans in Danish companies are provided by theDanish state, and this type of loan is automatically on the budget, as opposed to having the companies
issuing in their own name, with the state guarantee.

Operational phase
When the fixed link opens to commercial traffic, the project moves to the operational phase. However,
the original project company still owns it and remains responsible for operation and maintenance,
although many of the actual tasks can be outsourced to private companies. Again, the EU procurement
directives apply, which in practice means that a number of major operational tasks are put to tenderunder them.
The company's revenues are comprised of user payments for passage across the fixed link. The abovementioned construction act will usually regulate this. With the Storebælt link, it is the minister oftransport who sets tolls on the recommendation of the company, while the toll rates on the Øresund linkare left to the discretion of the board of directors. The main reason behind the difference is the fact thatthe Øresund link is between two states and would always require the two states to agree on the tolls. To
avoid this, it is up to the board, whose members are appointed by Denmark and Sweden, to decide.
Toll setting will primarily be driven by the need to ensure an appropriate repayment of the company's
debt. In this context, consideration of price elasticity and possible competition from alternative routes,
with or without user payment, will be central. In any case, the company will of course comply with theEU’s and the Denmark’s competition rules.
Revenues from user payment are used primarily for operation, maintenance and reinvestment in the
fixed link. The company is responsible for organising a strategy for these tasks, which ensures the lowest
possible cost in the long term. This will have already begun during the construction phase, with thedesign of the actual facility attending to these issues in order to ensure the lowest possible cost over the
project’s life (life-cycle cost).
Revenues from user payment will additionally cover the interest costs of the debt, which will haveaccumulated during the construction phase. During the project's first year of operation, it will not be
unusual for it to be impossible to cover the entire interest cost. This means the debt increases over the
early years of operation. The SGM typically takes this into account by allowing a certain level of net
borrowing during the operational phase.
When cash flow from user payment exceeds the total of operating, maintenance and reinvestment costs,
as well as interest expenses, the debt is amortised. As previously mentioned, in practice the debt

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comprises many individual loans, so that there is some refinancing each year. This refinancing is adjusted
to the free cash flow, so the total debt decreases in line with this.

Self-financing
The project’s self-financing capacity is the key element in the SGM. Revenues from user payment repay
the debt, which occurs in connection with the construction phase of the project. In the Danish context,
this is expressed by the fact the company will not receive government subsidies in addition to the valuethat lies in the guarantee. This self-financing capacity is reflected in the repayment period and is
illustrated in Figure 5 below: it shows the breakdown of total revenue and expenses in the Øresund Fixed
Link project, from the day of opening to when the debt is repaid. The left column shows the revenue andthe right column shows the cost of the project. All amounts are calculated as the current value across the
project's repayment period, so by definition the columns are the same size.
Figure 5. Øresund Fixed Link net present value of cash flow in the repayment period

Repayment period
The repayment period is the key to evaluating the project's financial strength. With regard to theadoption of the project, the expected repayment period is calculated based on anticipated costs forconstruction (including design, etc.), operation, maintenance and interest, as well as on the expectedtraffic revenue and EU support. Since factors such as construction cost, traffic revenues and interest
costs are subject to uncertainty, there is also a certain level of uncertainty with respect to the repayment
period.
This is why at the outset of the political decision-making process meticulous forecasts and sensitivity
calculations are made to ensure new policy decisions will not be needed.
In order to use the SGM for a given project, it is essential the repayment period falls below the facility’s
useful economic life by a good margin. With Danish projects, the repayment period is typically
30-40 years, as opposed to facility lifetimes of over 100 years.

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If any of the parameters change, the repayment period falls or elongates accordingly. Variations during
the actual operation of the project are absorbed in the form of adjustments to the repayment period.
Thus, they do not require new policy decisions or risk ongoing capital injection by the owner.
Experience shows that if the repayment period exceeds approximately 50 years, the risk in the projectincreases significantly. In other words, a given change in conditions (e.g. interest rates, expenses, traffic
demand, etc.) will have an increasing impact on the repayment period as it increases. In order toevaluate the uncertainties in the project, a number of sensitivity analyses are conducted in which theeffect of changes in one or more of the above parameters is highlighted. This may be supplemented bymore advanced risk calculations.
The greatest single risk factor is typically traffic revenue, which is determined by the volume of traffic
and the toll per vehicle. These elements depend on a wide range of social factors, such as economic
growth, demographics, car ownership, fuel prices, competition from alternative routes and modes oftransport.
Fixed link across Storebælt

Traffic volumes on the Storebælt link proved to be significantly higher than the forecasts prior to theadoption of the construction act. When the Storebælt link opened in 1998 (rail opened in 1997), theexpected repayment period was 37 years. A decade later in 2008 the greater traffic level and lower
interest rates resulted in a reduction in the repayment period to 25 years. Due to the company’s strong
performance, the Danish parliament has decided to let the company finance other infrastructure
investments by way of dividend payments. The repayment period has expanded to 30 years because ofthis. Furthermore, as a result of the heavy traffic, the Danish parliament decided to make two toll
reductions, one in 2006 and another one in January 2018.
The Storebælt fixed link is a success both in terms of its benefits to society due to improved
infrastructure and more interaction between western and eastern Denmark and its strong financial
performance. In 2014, an external ex-post analysis concluded that the socioeconomic gain from theStorebælt link over a 50-year period is as high as EUR 51 billion, equivalent to an annual return of 14%.
The use of the SGM has meant the link could be built without tax revenues.
Fixed link across Øresund

After opening of the combined Øresund bridge and tunnel link between Copenhagen and Malmö, roadtraffic was initially below forecasts, but in the following years traffic rose strongly until 2008, when justover 7 million vehicles used the link. This level was maintained for several years, rising to 7.4 million
vehicles in 2016. The train service has been a great success: in 2016 11.5 million passengers used it. On
the Øresund tunnel and bridge, the estimated repayment period varied between 30 and 36 years after
commencing operation. This was primarily due to changes in traffic expectations. On current
assumptions, the debt of the consortium can be repaid by 2034, 34 years after the opening.
The Øresund fixed link has fulfilled its purpose, successfully bringing together the two large urban
centres in Denmark and Sweden on either side of the Baltic strait. This has led the EU Commission to hailthe project as a model for removing barriers between countries. This would not have been possible
without the use of the SGM, since it is unlikely the two governments would have been able to agree tofinance the link through tax revenues.

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Political interference and control
In an SGM, a stable political environment pays a crucial role for the SPV to operate efficiently on a
year-to-year basis. The legal framework is the most important building block for operating the company
effectively and without political interference.
As one of the major advantages of the model is the ability for the government to maintain control overthings such as setting toll charges, this can also be a disadvantage to the SPV, as it can interfere withrunning the company efficiently. In Denmark, the political system is quite stable, and all the major
infrastructure projects have been adopted by a large majority in parliament. Consequently, governmentschanging has not affected the daily operations of the company.
There is a genuine interest in the projects, and due to the financial success of the Storebælt link, theparliament has twice decided to cut tolls, not because of economics or guidance from the SPV but rather
because of socioeconomics. The first toll reduction (20%) in 2006 resulted in a 10% traffic increase, andeight years was added to the repayment period. The second reduction, which has just been decided, willfurther lower the tolls by 25% and is estimated to add three years to the repayment period.
Furthermore, in 2009 the Danish parliament decided to let the SPV finance other infrastructure
investments by way of annual dividend payments totalling EUR 1.2 billion in 2009 prices. This extends therepayment period a further five to six years, and in 2017 a little over EUR 300 million was added to thisto finance a specific highway project.
These examples show the state stays in control and has the ability to adjust conditions for asocioeconomic benefit. And even though these decisions can be a lengthy process and can cause somechallenges in the SPV, they are more of a change in the framework rather than interference in company
management itself. All decisions have been made in co-operation with the SPV and with the overall
financial stability of the project in mind. The Storebælt link is expected to be fully repaid by 2033, only
35 years after opening.

Other aspects of the state guarantee model
By having several SGM projects run by the same company or group of companies, knowledge andexperiences regarding construction and, in particular, the operation and maintenance of large
infrastructure assets can be transferred and used to improve efficiency.
The SGM is also a financing vehicle and therefore faces the same arguments as the PPP model. However,as a result of the lower financing cost of SGMs, more projects will be financially viable when compared to
PPPs with demand risk. This increases the chance of a project with a positive return in terms of social
costs and benefits. In practice, this can make a project that would otherwise not be carried through or
would be delayed by several years viable. For example, the highly profitable Storebælt project inDenmark would not have been realised in the time it took without the SGM.
When it comes to public accounting, the SGM is subject to the same ruling as PPPs with demand risk.
These rules (ESA 10) treat public investments with a high social benefit in the same way as public
consumption when measuring public deficit and debt. Using the SGM or a PPP can be seen as an
unjustified accounting exercise, but it can also be a rational way for political decision makers to promote
good projects under existing accounting rules. Since these projects are funded by tolls, they are a not areal burden on taxpayers but instead are paid for by those who also enjoy the benefits, i.e. the users.

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The SGM is primarily used in a domestic context, but due to the size and complexity of these projects
foreign contractors and technical advisers are used to a large extent. This has undoubtedly had a positiveeffect on the local Danish economy. For example, Denmark has several engineering companies doing
business in international infrastructure projects that far exceed those in its domestic market. Thisdevelopment has clearly been facilitated by the realisation of the large SGM projects.
The SGM can be seen as an attractive alternative to the PPP model, especially in highly developed
countries that have a stable governance structure and a high credit rating.

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References
ESA (2010), European System of Accounts – ESA 2010,https://ec.europa.eu/eurostat/documents/3859598/5925693/KS-02-13-269-EN.PDF/44cd9d01-bc6440e5-bd40-d17df0c69334.

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Appendix 1. Research questions and outputs
Introduction: Getting the basics right
What are the economic characteristics of infrastructure?
What is infrastructure and what are operations? What are
the models of private participation in infrastructure andthrough which significant private investment actually takes
place?

Makovšek, D. (2018), “What is Private
Investment in Transport Infrastructureand Why is it Difficult?”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Can private investment improve productive efficiency?
Makovšek, D. (2018), “The Role of
Improve project selection? Close the infrastructure funding Private Investment in Transport
gap? Have other positive effects when it is private?
Infrastructure”, Working Group Paper,

International Transport Forum, Paris(forthcoming).
What have the private investment trends in transport Mistura, F. (2018), “Quantifying
infrastructure been over the last 20 years? How much Private and Foreign Investment inof that was foreign private investment?
Transport Infrastructure”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).
Defining the challenge: How uncertainty in contracts matters
How does uncertainty affect risk pricing? Beyond
investors, do suppliers in PPPs also have issues withrisk pricing? How does its transfer to the private
sector affect competition? What does uncertainty
mean for the public vs. private cost of financing?

Makovšek, D. and Moszoro, M. (2018),“Risk pricing inefficiency in public–
private partnerships”, Transport
Reviews, 38(3), 298-321.

Is uncertainty also an issue in long-term
services/operations contracts?

Beck et al. (2018), “Uncertainty inLong-term Service Contracts:
Franchising Rail Transport
Operations”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

What is the competition for large transport
infrastructure projects in the EU Market? Is there adifference between traditional procurement and
PPPs?

Roumboutsos, A. (2018),” Competition
for Infrastructure Projects: Traditional
Procurement and PPPs in Europe”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

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Addressing uncertainty for suppliers: the construction phase as example
Adversarial vs. collaborative procurement – iscollaborative contracting the future?

Eriksson et al. (2018), “Collaborative
Infrastructure Procurement in Sweden
and the Netherlands”, Working Group
Paper, International Transport Forum,
Paris (forthcoming).

What lessons in dealing with risk and uncertainty
were learnt in Danish mega projects from Storebaelt
to Femernbaelt?

Vincentsen, L. and Andersson, K. S.
(2018), “Risk Allocation in MegaProjects in Denmark”, Working Group
Paper, International Transport Forum,
Paris (forthcoming).

What can governments do in the short run to reduce
inefficient pricing of risk by construction contractors?

Kennedy et al. (2018), “Risk Pricing in
Infrastructure Delivery: Making
Procurement Less Costly”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Addressing uncertainty in long-term contracts in the absence of continuous pressure for
efficiency
What is the public sector organisational Holm, K.V. and Nielsen, T.H. (2018),
counterfactual on which private investment should “The Danish State Guarantee Modelseek to improve?
for Infrastructure Investment”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).
Partial fixes to the Private-Public Partnership approach
How would an organisational structure consisting of
PPPs come close to a network-wide management
approach? What benefits would it yield?

Vasallo, J. (2018), “Public-Private
Partnerships in Transport: Unbundling
Prices from User Charges”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

Should the public or the private side bear the cost of
long-term uncertainty? How could we design a PPP
contract to avoid hold-up due to incomplete
contracts?

Engel et al., (2018), “Dealing with the
Obsolescence of Transport
Infrastructure in Public-Private
Partnerships”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

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Long-term strategic approach
How do the PPP and regulated utility model (RAB)
compare in terms of efficiency incentives?

Makovšek, D. and D. Veryard (2016),“The Regulatory Asset Base andProject Finance Models”, International
Transport Forum Discussion Papers,
No. 2016/01, Paris.

What basic considerations underlie the choice
between a PPP and RAB approach?

Hasselgren, B. (2018), “Risk allocationin Public-Private Partnerships and theRegulatory Asset Base Model”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

Which are the preconditions a country would need to Alchin, S. (2018), “A Corporatised
take to establish a RAB model on a motorway
Delivery Model for the Australian Road
network? Is user-charging a must?
Network”, Working Group Paper,
International Transport Forum, Paris(forthcoming).
From the investors’ point of view, does a RAB need to
be fully reliant on user-charging?

Francis, R. and Elliot, D. (2018),“Infrastructure Funding: Does it
Matter Where the Money Comes
From?”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

Incentive regulation can also yield perverse
incentives. Can the capex bias be managed?

Smith et al. (2018), “Capex Bias andAdverse Incentives in Incentive
Regulation: Issues and Solutions”,
Working Group Paper, International
Transport Forum, Paris (forthcoming).

Does it make sense to pursue hybrid solutions
between PPP and RAB?

Zhivov, N. (2018), “The Thames
Tideway Tunnel: A Hybrid Approach to
Infrastructure Delivery”, Working
Group Paper, International Transport
Forum, Paris (forthcoming).

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Uncertainty and private investment mobilisation in transport infrastructure
What lessons can we draw from recent attempts tomobilise private investment in infrastructure in theaftermath of the global financial crisis?

Makovšek, D. (2018), “Mobilising
Private Investment in Infrastructure:
Investment De-Risking andUncertainty”, Working Group Paper,
International Transport Forum, Paris(forthcoming).

Synthesis

ITF (2018), Private Investment inTransport Infrastructure: Dealing with
Uncertainty in Contracts, Research
Report, International Transport Forum,
Paris

24

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CPB

CPB

CPB

Private Investment inTransport Infrastructure
Dealing with Uncertainty
in Contracts

The Role of Private
Investment in Transport
Infrastructure

Risk Pricing in
Infrastructure Delivery:
Making Procurement Less
CostlyCorporate Partnership
Board

The Danish State
Guarantee Model for
Infrastructure Investment

Corporate Partnership
Board

4

2

This paper describes the modelof infrastructure delivery andmanagement known as the Danish
State Guarantee model. The Danish
State Guarantee model provides
an interesting alternative for the
public sector to privately financed
infrastructure. The paper is part of aseries of 19 papers and a synthesis
report produced by the International
Transport Forum’s Working Groupon Private Investment in Transport
Infrastructure.

6

CPB

CPB

CPB

Dealing with the
Obsolescence of Transport
Infrastructure in PublicPrivate Partnerships

Risk Allocation in
Mega-Projects in Denmark

Risk allocation in PublicPrivate Partnerships andthe Regulatory Asset Base
Model

Corporate Partnership
Board

Corporate Partnership
Board

8

Corporate Partnership
Board

10

12

CPB

CPB

CPB

The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

The Danish State Guarantee
Model for Infrastructure
Investment

Infrastructure Funding:
Does it Matter Where theMoney Comes From?

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

16

14

18

CPB

CPB

CPB

Public-Private Partnerships
in Transport: Unbundling
Prices from User Charges

A Corporatised Delivery
Model for the AustralianRoad Network

Collaborative Infrastructure
Procurement in Sweden and
the Netherlands

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

22

20

24

CPB

CPB

CPB

Competition for
Infrastructure Projects:
Traditional Procurement
and PPPs in Europe

Capex Bias and Adverse
Incentives in Incentive
Regulation: Issues andSolutions

Uncertainty in Long-term
Service Contracts:
Franchising Rail Transport
Operations

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

28

26

30

CPB

CPB

CPB

Quantifying Private andForeign Investment inTransport Infrastructure

What is Private Investment
in Transport Infrastructureand Why is it Difficult?

Mobilising Private
Investment in Infrastructure:
Investment De-Risking
and Uncertainty

Corporate Partnership
Board

Corporate Partnership
Board

32

1

Corporate Partnership
Board

Corporate Partnership
Board

34

36