Iceland Review
The required return on investment of the hydroelectric power plant at Kárahnjúkar was too low said Ágúst Gudmundsson, chairman of Bakkavör on the current affairs program Kastljós (Spotlight) Tuesday, according to the Icelandic Broadcasting Service, RÚV. “I would have preferred that the money had been spent in a different way,” he said.
According to its website, Bakkavör Group is “an international food manufacturing company of Icelandic origin specializing in chilled convenience foods” with 42 factories in 5 countries, employing 13,000 people, and an annual turnover in excess of £1 billion. It is listed on the Icelandic stock exchange. In Q3, 2005, its return on shareholder equity was 28.3%
In its latest financial statements, the annual report for 2004, the Icelandic National Power Company, Landsvirkjun, does not state the return on equity for its shareholders. During 2004, a year when Landsvirkjun claims it earned “record profits”, Iceland Review calculates it to be 14.1%, only half of that of Bakkavör. In 2004, Landsvirkjun employed 287 people, and turnover amounted to slightly more than £100 million, ten times less than Bakkavör. Landsvirkjun is a cooperative which operates under a special charter from Althingi; it is owned by the Republic of Iceland (50%), the City of Reykjavík (44.5%) and the City of Akureyri (4.5%).
According to a model developed by the economist Thorsteinn Sigurlaugsson, the hydroelectric dam currently being constructed at Kárahnjúkar has close to 0% return on equity using many of the assumptions published by Landsvirkjun. If this is true, the owners of Landsvirkjun, the citizens of Iceland, are putting their capital at risk to build the dam at Kárahnjúkar without receiving any compensation. Others have also criticized the fact that Landsvirkjun is subsidized with tax credits and by the favorable interest rates which it receives as a state owned entity. Thorsteinn’s model does not include the environmental costs.
In an interview with the weekly business section of Fréttabladid on Wednesday, Gylfi Zoega, professor of economics at the University of Iceland and Birkenbeck College, UK, claimed that the heavy industry projects in northeastern Iceland (ie, the hydroelectric dam at Kárahnjúkar and the Alcoa aluminum smelter it supplies) were the cause of the substantial problems currently being suffered by Iceland’s export industries. “The root of the problem is the large-scale projects in the northeast of Iceland. At full employment, the decision to build an aluminum smelter does not create new jobs, it just adds another smelter [to the economy] and displaces other jobs,” he said. “Jobs are being moved from other parts of the country to the northeast,” said Gylfi. Gylfi said that if interest rates had not been raised in response to the expansion, inflation would have followed. Adopting the Euro would not solve these problems, said Gylfi, only make them manifest themselves in a different way.
Fréttabladid also reported Wednesday that foreign purchases of Icelandic securities had decreased in the last quarter of 2005, amounting to ISK 7.3 billion compared to ISK 43 billion the preceding year. Net purchases of shares dropped by 74%. The research department of KB-bank (Kaupthing) attributed the lower levels of foreign purchases to expectations of a weaker Icelandic króna and the substantial appreciation of Icelandic stocks last year. Expectations of a drop in the Icelandic króna had, nevertheless, been reduced recently in the wake of news of possible additional heavy industry projects, said Kaupthing.