Leasing trend grows among Finnish municipalities as liabilities near €24 billion

Municipalities in Finland are increasingly turning to leasing for construction projects, where an external financier builds facilities such as schools that municipalities then lease and ultimately purchase at a predefined residual value. The total liabilities from leases and loans among Finnish municipalities are nearly €24 billion, with lease liabilities making up about one-fifth of this amount.

While leasing can sometimes be more expensive for municipalities, the appeal lies in transferring certain risks to financiers and the potential for savings in emergency repairs or operational costs. A recent legal change now includes lease liabilities in the assessment process for financially distressed municipalities, which has moderated the use of leasing as a means of economic embellishment.

The trend towards leasing has gained momentum since the early 2010s, with large cities leading in its adoption, while about half of Finnish municipalities displayed minimal reliance on leasing funds in 2023. The highest lease liabilities per capita can be found in smaller or medium-sized municipalities, some of which use a lifecycle model that encompasses construction and operational costs, such as cleaning and heating.

Critics argue that leasing can sometimes obscure transparency, akin to high-interest loans, although experts do not fully endorse this comparison. It’s essential for municipalities to carefully review agreement terms and interest rates to avoid unfavorable contracts. Private financing companies often request confidentiality for leasing agreements, which can limit access to necessary information for decision-makers.

Prior to 2019, the ability to mask true financial situations using leasing was significant, but recent legislative changes have aligned lease liabilities with regular debt assessments. This means municipalities can no longer conceal their obligations as easily, making the long-term costs of leasing more apparent.