Mayor of Tórshavn Municipality Annika Olsen uses this leeway as well as healthy finances to plan long-term development of the metropolitan borough.

By Søren Ditlev Monrad

In a shiny circular building, on the top of a hill and with a view over Tórshavn, BankNordik’s headquarters sit prominentlyabove the Faroese capital. Behind the doors of the headquarters, the bank’s many employees cross paths, others sit and work at computers, and some help customers at the counters.

After sitting for a while, observing life in the bank at a slight distance from a hard sofa in the middle of the ground floor, I’m met by Hermundur Johannesen. He works in the bank’s commercial department and advises Faroese companies and municipalities on their financing options. He and his colleagues are in daily contact with the Faroese municipalities and, therefore, they have an excellent understanding of the options available to the municipalities.

We climb a spiral staircase and take a seat in the Faroe Islands’ biggest bank’s, biggest department’s, biggest meeting room. The room is called Streymoy – after the largest island in the Faroes. We have a view of Tórshavn’s many building projects through the massive window.

I’m interested in hearing about the Faroese municipalities’ options for borrowing money. In Greenland, municipalities cannot borrow as much as a penny – no matter how healthy their economy – without the consent and approval of Greenland’s Self-Government. This is not the case in the Faroes. A municipality can borrow up to an annual tax income without the interference of the Home Government.

“When we assess a municipality’s financing options for a specific purpose, we look at the project it wishes to finance first of all. And the municipality’s general management of its finances is also very important,” says Hermundur Johannesen.

He adds:

“In some cases, municipalities can actually ask today and get an answer tomorrow if they request financing for a municipal project. But it depends on the size of the loan. If the municipality can present accounts that prove their financial affairs are in good shape, we’ll usually be happy to grant a loan. If the municipality can prove that it doesn’t owe too much, we can give them a financing option for use when they need it.”

In the last financial year, Tórshavn Municipality had an income of DKK 868 million and recorded a profit of DKK 135 million. This enables the capital region to borrow up to DKK 868 million for its projects, without asking for the permission of the Home Government or anyone else.

Has this leeway helped to develop the Faroe Islands?

“Yes, I’d say so. The municipalities can decide for themselves up to the credit ceiling. This enables local politicians to realise more of the projects they consider to be in the best interests of the municipality.  They may wish to build new schools or port facilities to bring in more income,” says Hermundur Johannesen, and he points through the large window to a couple of ships carrying stone. The work to expand the port in Tórshavn has just begun.

The head quarter of BankNordik in Tórshavn.

Rules for borrowing would slow things down 

Tórshavn Municipality itself is responsible for the development of the capital’s port. Large freighters require deep water, so the harbour needs to be deeper. A new quay also needs to be built, and it is expected to be completed in two and a half years. Development of the port has its own separate economy in the municipality’s budget, and the project will cost DKK 450 million.

Annika Olsen (Fólkaflokkurin, or the People’s Party), Mayor of Tórshavn Municipality, sees development of the port as a necessary step due to the increase in shipping traffic between the Faroe Islands and the rest of the world. She tells me this when I reach her by telephone on my return to Nuuk.

“We’re developing the port now due to the increase in shipping and an increased demand for the freighters, which need more room in the harbour. It’s actually merely a question of meeting the demand from freighters sailing between the Faroe Islands and other destinations. Naturally, the Port of Tórshavn earns well every time a ship docks and again when it unloads goods.”

The port is only one of the many construction projects in Tórshavn Municipality. The municipality is currently building a public school for DKK 400 million and a music school for DKK 100 million. And they’re also improving the road network. Due to a new tunnel under the sea, another approach road to Tórshavn will soon be built.

“Of course, we need to be careful not to add too much fuel to the fire. The business sector is thriving at the moment, and there are full order books in the construction industry. As the metropolitan borough, we also need to steer according to economic trends to prevent an overheated economy. We need to be sensible and our planning for civil works is long-term,” Annika Olsen explains.

In Greenland, municipalities need the consent of the Self-Government every time they want to borrow money. How would it be if the same rule applied to Tórshavn Municipality?

“It would slow things down considerably, and it wouldn’t make sense. The 29 Faroese municipalities have a great degree of freedom. We can borrow up to a year’s tax income. I actually believe it’s a good thing that we have the freedom to act and plan. Municipalities always need to take social issues and finances into account,” says Mayor Annika Olsen, and she adds:

“We haven’t made use of the financing options available to us. Our income is good and our cash flow is currently very healthy. Obviously, the financing options provide the municipality with an excellent safety net if we should need them. There’s an upper limit to everything, and we need to be proactive in improving the business sector’s working conditions to get more people into work and build a stronger business sector. This will make it easier for us to make investments.”

Sins of the past

The story of the Faroese municipalities’ financial leeway is also a story about learning from the mistakes of the past. In 1992, the Faroe Islands went bankrupt, and some municipalities owed up to eight years of income. The government had to guarantee security for many of the country’s companies; companies in which – in numerous cases – the municipalities had a financial stake.

Today, the Ministry of Finance has control over the finances of the municipalities, and the credit ceiling of a year’s tax income is a direct consequence of the credit crunch of the 1990s, which wrecked the municipalities’ finances.

I have wandered into Tinganes, Tórshavn’s old town. The district takes its name from Lagtinget (the Faroese Parliament), which was established on the headland in the Viking era. Today, many of the Faroese government ministries are located in Tinganes’ historic red buildings, with grass on the roofs and separated by narrow, undulating cobbled paths.

The Ministry of Finance keeps track of the municipalities’ finances. Once a month, the 29 municipalities report their financial ratios to the ministry.

“The Ministry of Finance doesn’t interfere in municipal spending. We merely check that the debt doesn’t exceed an annual income. The figures are entered into a system each month and published, so that they’re publicly available. So anyone can compare the finances of the municipalities,” explains Bjarni Askham Bjarnason, Permanent Secretary at the Ministry of Finance. And Egon Joensen, adviser at the same ministry, backs him up.

“As long as we have a system with a credit ceiling up to one year’s tax income, we feel fairly safe. Even if a municipality should veer off its financial track, it will be remediable,” says Egon Joensen.

Tinganes, the oldest neighbourhood of Tórshavn. A lot of the Faroese ministries is situated in Tinganes.

Unfettered by state control

Not far from the centre of Tórshavn, I meet Eyðun Christiansen. He is the Director of Kommunufelagið, the Faroese association of municipalities. He tells me that financial leeway is not the only thing municipalities in the Faroe Islands have more of than municipalities in Greenland. This degree of freedom extends to other areas, too.

“In the Faroe Islands, the municipal sector is relatively free from state control, apart from the fact that they’re not permitted to borrow more than one year’s income. They receive the tax they levy, and they receive the entire income from tax on pension payments. In many other countries, national and local governments undergo difficult negotiations every year. Here, the municipalities have a fixed income, which is independent of any negotiations between state and municipality. In that sense, municipalities in the Faroes have total freedom and the freedom to develop their municipalities,” says Eyðun Christiansen, and he adds:

“In any event, there is a trend that the Faroese government will not interfere in the financial affairs of the municipalities. I believe this gives a weight to local democracy unseen in most places around the world.”

The Director of the association of municipalities explains that each municipality is responsible for its own finances, right down to the last penny.

“We don’t have a municipal compensation system, which is completely unique. In my opinion, compensation systems bring out the worst in people. It’s too easy to rely on others if you know the money is coming in anyway. Any initiative to create local jobs and to participate in necessary enterprise disappears. We become less innovative,” Eyðun Christiansen confirms. However, he does admit that some kind of compensation may be necessary in certain cases.

Like many others in the country, he points to the lesson learned at the beginning of the 90s when the municipalities discovered the hard way when to interfere and when not to:

“The municipalities’ debt was partially due to the fact that they’d invested in the fishing industry and filleting factories in almost every town, and all were losing concerns. Today, the municipalities are aware that they should avoid getting involved in the business sector but should create a framework for the sector – for example, by creating port facilities and industrial areas – and keep away from other things. They learned a lot from this.”

This is in line with the Mayor of Tórshavn Municipality Annika Olsen’s view of the role of the municipalities in driving development in the Faroese capital a quarter of a century after the country went bankrupt in 1992.

“We’ve learned from history. We think more along the lines of planning and ensuring that the municipality is financially secure, so that we don’t jeopardise anything.  Our greatest challenge is to meet the demand for housing, for everyone who wants to live in Tórshavn. The municipality needs to create the framework and parcel out land for housing and industry. We’re responsible for setting things in motion and for promoting good dialogue with those who’ll be doing the building. We’re taking action on all fronts, but it’s not necessarily the job of the municipality to handle the building work itself.”