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Wednesday, 4 February 2015

Research by the Dutch auditors and consultancy firm 'Deloitte' concludes that Dutch cities and municipalities have even more exposure to ground positions than anticipated earlier.

It is no secret that many Dutch cities and municipalities hold extensive ground positions, which had been collected in the "good ole' days" of the Dutch building frenzy, when the sky was still the limit for Dutch residential and commercial real estate. According to estimates, the total ground position of Dutch cities and municipalties is in the €10 billion range.  

It is also hardly a secret that these cities and municipalities suffered substantial losses (albeit yet mostly on paper) on their ground positions. These losses emerged, due to the dropping value and excess possession of building ground, as a consequence of the credit crisis and the considerable surplus of vacant (commercial) real estate, as this put an effective brake on building activities of cities and municipalities. 

An earlier report of Deloitte, published one year ago, spoke of paper losses of approximately €3.3 billion:

At the end of December 2013, the accountants organization Deloitte presented a research report to the Dutch government. The subject of this report: the depreciation of building ground, which is owned by the Dutch cities and municipalities.

The conclusion of this report: the depreciation on building ground for commercial and residential real estate (CRE/RRE), owned by the Dutch cities and communities, amounts to €3.3 billion in write-offs, until the year 2013.

In an Op-Ed concerning this Deloitte report, the retired professor Hugo Priemus of the Delft Institute of Technology (i.e. TU Delft) stated that this estimate of €3.3 was probably overly optimistic and that the losses could even be much larger:

For the situation until 2013, as described by Deloitte, the research study sketches a quite reliable picture, even though communities did not disclose everything. A substantial limitation of the study's value is the fact that private ground positions and “public/private partnership” relations have been left out of the equasion.

Practice learns that private parties in such a partnership are often able to transfer their financial risks to the municipalities, which (on their behalf) often didn’t reckon with the financial consequences of these risks.

In other words, according to professor Priemus, the amount of ground held in public/private partnerships could be a 'risk multiplier', for which the cities and municipalities carried the biggest amount of risk.

It seemed that Deloitte has taken this lesson from professor Priemus to heart. 
Today, about one year later, this auditors and consultancy firm published a new report with respect to such private / public partnerships, in which cities and municipalities are among the stakeholders. 

A special paragraph of this report was spent upon private/public partnerships for vacant building ground. Here I print the most important snippets of this report:

Corrected for double reporting, we can state that there have been 189 'spatial development projects with public/private cooperation' in 2013. In over 75% of the total 'public/private cooperation entities for spatial development', the executive format has been a corporation. About 20% was a common arrangement, general partnership or cooperation. In all these operational formats the risk for the municipality is higher than in case of a 'limited company'  (i.e. Ltd) or a ' public limited company' (i.e. plc), for which the liability is limited.

Based upon the available information, the average share of a city or municipality in such a 'public/private cooperation for spatial development' is approximately 50%. However, in many cases the current equity value of the projects at hand does not represent the deposited capital anymore. 

Besides that, the reported stake is not per definition equal to the percentage of the totally deposited capital. Next to their stake in shares, municipalities may have offered debt to the public/private organization in the form of loans and credit lines or they may have acted as warrants for a part of the acquired debt.

The average balance value per public/private cooperation for spatial development is €19 million. Based upon the aforementioned data, it is possible to estimate the total balance value of the active 'spatial development cooperations' to €3.6 billion (189 * €19 million), the total debt to €3.3 billion and the total equity to €285 million. This €3.6 billion comes on top of the current total exposure of €10.2 billion for municipal ground positions.

The risk, with respect to the balance value of these public/private cooperations for spatial development, will be shared between the shareholders. The average stake of the Dutch municipalities is approximately 50%. On top of that, there are the loans and guarantees that the municipalities supplied. Based upon these presumptions, it is conceivale that the direct exposure of municipalities to the 'spatial development cooperations'  ranges to €1.8 billion.

This additional risk does only exist at a limited number of municipalities: at 130 of the in total 408 municipalities. These (mostly larger) cities and municipalities host 44% of the total Dutch population and own 54% of the totally invested capital in self-managed ground positions (i.e. €5.4 billion).

One can conclude from these data, that the exposure to ground exploitation in such public/private cooperations is borne by municipalities, which also have a more substantial exposure to building ground, through self-managed ground positions. 

In other words: the risk of these participations lies with communities with an above average exposure to ground positions. The consequences could be that the public/private cooperations, partially owned by these municipalities, have to compete with the self-managed building grounds of the same municipalities, leading to serious conflicts of interests.

This example shows again what can happen, when cities and municipalities, with public tasks regarding housing and building activities, start to behave themselves as privately led corporations and start speculating with building ground for future commercial and residential real estate projects. Too often such partnerships lead to situations in which profits are privatized by the private partners, while losses are socialized by the public partners (i.e. borne by the municipalities themselves).

Another reason for concern could be, that this report is full of speculation and extrapolations, based upon the data that have been disclosed by the cities and municipalities themselves: the data that we know. 

Is it a strange idea that cities with much bigger stakes in such public/private cooperations - through loans and guarantees - and with a more risky exposure to (excess) ground positions are not very cooperative in disclosing such sensitive information? And could this not mean that the real situation could be even worse than already described in the report by Deloitte? 

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