The Norwegian local government sector as an investment case

The sound financial position of the Norwegian local government sector and the strict financial framework within which it operates make the sector a creditworthy borrower. The local government sector accounts for a large proportion of public sector services production in Norway, and with the help of a government system of revenue transfers is able to offer a unified standard of services throughout the country.

The Norwegian local government sector is made up of borrowers that represent extremely low risk. This is a result of factors including the sector’s sound financial position and a robust framework that defines the duties and responsibilities of local government authorities and imposes strict limits for their financial conduct. This includes clearly defined restrictions on what activities municipalities and counties are permitted to finance by borrowing. Local government borrowers principally take up loans to finance investment in delivering welfare services such as schools, nurseries and sheltered housing for the elderly, as well as the provision of services for drinking water, sewage and waste collection. The local government sector receives a large proportion of its revenue from central government transfers. The objective of the system is to compensate for differences between municipalities in order to ensure a unified service delivery throughout the country. Municipalities and counties are responsible for areas including education, primary health care, public transport and infrastructure.

ORGANISATIONAL STRUCTURE OF THE PUBLIC SECTOR

The public sector in the Nordic region is made up of local government authorities and central government authorities. In Norway, Sweden and Denmark, the local government authorities comprise two levels: counties and municipalities. This means that there are three levels of public administration charged with providing for the needs of the population at the local, regional and national level.

In Norway, the principle of local democracy is considered to be very important, but in contrast to several other European countries, this principle is not enshrined in the Norwegian constitution. The legal framework for local government is laid down by the Norwegian Parliament through legislation and decisions, and Parliament decides on the division of duties between the levels of local government authorities. In addition, the government can impose new duties on municipalities and counties by legislation or Parliamentary decisions. This means that Norway has more comprehensive centralised control of local government authorities than is the case in many other European countries.
Municipalities and counties have an important position in Norwegian society, and account for a large proportion of public sector services production. 

RELATIONSHIP BETWEEN CENTRAL AND LOCAL GOVERNMENT

The accounting and budgeting processes of municipalities and counties are subject to extensive control by the central authorities. The state’s administration of the local government sector aims to balance national interests and the principle of local democracy. This involves giving municipalities and counties scope to prioritise and adapt services in response to local conditions and needs. The Ministry of Local Government and Modernisation is responsible for implementing policy in the local government sector. The Ministry is also the owner of KBN.

The legislative framework for the local government sector is stipulated in the Local Government Act. The purpose of this legislation is to facilitate functional municipality and county democracy, with efficient and effective management of municipality and county duties with a view to sustainable development. The Local Government Act stipulates that local government authorities are not permitted to declare themselves insolvent. In addition, the legislation gives central government the authority to make changes to a local government authority’s budget and financial plan in order to ensure that its activities are on a financially sound basis within a reasonable time. The Local Government Act stipulates that a municipality or county authority that is in ‘financial imbalance’ must be put onto a publicly available watch list. ‘Financial imbalance’ may mean that the authority is budgeting for a deficit in its annual budget or in a four-year financial plan. All municipalities and counties that are on the list, known as the ROBEK list, must seek approval from the Ministry of Local Government and Modernisation for all borrowings and for their financial plan.
It is extremely unlikely that a municipality or county could experience difficulties in meeting its liabilities, but in such a situation central government would intervene to appoint a supervisory board. KBN has not incurred a loss on its lending at any time in the 91 years that it has been in existence.