Sigurður Jóhannesson, one of leading economist of Iceland, member of the Economy Institution of the University, asks if the heavy industry has prevented miscellaneous and profitable economy in Iceland
Nothing happened in the project financing plan for power plants. The explanation could be seen in the morning paper, Morgunbladid 6. august 2001. There the chief financial officer of Landsvirkjun says for example: “… if Landsvirkjun was going to build their projects on [project financing] it would mean that the energy prices would be so high that we would not be competitive for heavy industry … [But] we should use sources of energy to sell electricity to heavy industry, we can not see, at the moment, according to present situation, what else is going to secure a decent economic growth for the years to come.” Some still spoke of new procedures. Friðrik Már Baldursson, later a prof. of energy, said in a lecture held at the Faculty of Economics at the University of Iceland 2001, e.g.: “It has been said that project financing is inoperable because of higher interest. With same reasoning you could say that the state should also lower the interest costs of heavy industry [with collaterals] … The main thing is that a risk includes a cost, that one can evaluate in prices, and a efficient result is only possible if this price, this cost, is taken into account.” Friðrik also recommended that damage made to the environment should be evaluated with a conditional values. Due to disputes over the profitability of the power plant at Kárahnjúkar, a committee of specialists reviewed the profitability and gave a report in early 2003. The report of the so-called owners committee was very explicit, as we can see: “[T]he odds are very remote that the project is not going to give a rate of return that is greater than the interest rates on the loans … The methodology of Landsvirkjun when evaluating the profitability, is the same or similar to the one that is taught in financialology … the probability of positive profitability of the power plant at Kárahnjúkar, is predominant.” Although one notice is made: “It is obvious that without a collateral of the owners the capital cost would be much higher and the net present value of the project all the lower. However, it is normal that Landsvirkjun evaluates the estimated projects, based on the conditions that the owners give the company …” This is the perspective of Landsvirkjun, not its owners. It is a little bit strange because the committee was supposed to look after the owner’s interest. Nor was there anything to find, in the opinion of the owners-committee, about the value of the land. The opinion of the committee was generally interpreted as a cachet for the power plant at Kárahnjúkar. We should notice that the chairman of the owners-committee had strongly opposed public collaterals for power plants, just few years before. He said: “Repealing government guarantee on loans for [power plants] and its risk hedge included in the exclusive right [of Landsvirkjun] to sell on public market, means simply that the investment as it is, depends on the judgement of the funding party. They estimate if presumed rate of return of the project is sufficient to justify the funding, regarding the risk … I think this is a step in the right direction: if the project withstands this on the market, there is no need to worry about the profitability.” Had the chairman of the owners-committee changed his mind? No, the reservation of the owners security shows that he has not. But the reservation was phrased in such way that it brought little notice. Was the reservation thought of to be some kind of fingers crossed? When this is done, the authors can later say that they have stated the truth – even though the truth is wrapped up in a way so only few can see it. Unfortunately this is not a unique incident when specialists give an opinion. It is important that the best consultants of the nation speak their minds clearly. There is little hope for better counsel unless mistakes are pointed out – but in a small society, this is seldom done.
From the mid-nineties electricity sales for heavy industry has multiplied. The major power plants were constructed, using the “old scheme”, with full public collaterals. No political party, nor the interest group who made the opinion of the Committee of Energy Policy 1996 objected. Their stand seem to have been that a new method of doing things were preferable, but only in the sense that we continue “exploiting the hydro power”. It is still a general view that this has to be done. Those who work on building up heavy industry and power plants generate a pressure group and Landsvirkjun spends great amounts of money on propagandas: it actuates export, saves currency, creates jobs, maintains economic growth and purchasing power, puts boost in regions and reduces world polution. Senior officials in energy affairs say that it is the moral duty of Icelanders to harness hydro power for heavy industry. In Iceland people are used to believe what they are told. In such environment it can be useful to look at what foreign institudes of finances have to say about this. They have the advantage over Icelandic institutes of being independent of the Icelandic government. The Organisation for Economic Co-operation and Development (OECD) has, in recent years, had some concerns in their reports on Iceland, that the support of heavy industry in the form of official collaterals for power plants and tax rebate, prevent the development of knowledge industry in the country. At that time, OECD said it would have been better to let a private company build the power plant at Kárahnjúkar. That way the taxpayers had been rid of the risk of that project “and we could have tested the profitability of the power plant on the free market”. In the report from 2005, the OECD recommends that the government should put the harnessing licence on the free market, putting up first the minimum price. Primarily, this minimum price should be based on resource-rent (due to other possible utility of the energy) and secondly, it should be based on the environmental damage of the power plant. These recommendations remind us of the ideas of the financing project that was supposed to take place here in Iceland, more than a decade ago. The main difference is, that OECD not only wants an investment in a power plant to stands on its own feet, but also that environmental damage should be evaluated in prices. Tax reliefs, like heavy industry has benefitted from, is not mentioned, but according to these recommendations, they should be disallowed. If these ideas become real, it should be guaranteed that the same demands of profitability are set for heavy industry and other industries in Iceland. The changes could also result in that this harnessing of hydro power would stop for awhile. Icelanders will then have to accept other business activity, one that is more profitable and creates better standard of living.
Extract made by Jóhannesson from his article published this autumn in the book A Turnup of an ideological system.
Translation by Ófeigur Sigurðsson.
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