Sigrún Davíðsdóttir's Icelog

The Magma mega mess

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There is the Eton mess, a delicious summer dessert of whipped cream, icecream, strawberries and meringue. The Magma mega mess is less delicious but it’s also a summer thing and is now all-consuming news in Iceland. There is suddenly a frantic political activity to stop the Magma deal but it’s not clear what will happen.

It was during summer last year that Magma Energy surfaced in Iceland as the potential buyer of one of the Icelandic energy companies, HS Orka, to begin with the share of OR, Reykjavik Energy, owned by the city of Reykjavik. This wasn’t the first move towards mixing private enterprise and public ownership. A year before the Icelandic banks imploded in October 2008 it emerged that some of the most risk-prone businessmen, notably Hannes Smarason of FL Group-fame, together with Bjarni Armannsson ex-CEO of Glitnir, a banker no less taken up by his own interest than the bank’s, had been planning a particularly cunning deal to buy OR. Part of the cunning was that the deal would immediately release zillions of Kronur for Armannsson, Smarason and their partners. Since the city of Reykjavik was incidentally aiding the instantaneous enrichment of the few chosen the news of this deal so enraged Icelanders that the deal collapsed.

Ever since, it’s been clear that Armannsson, together with other ex-Glitnir managers, has been looking for opportunities in the Icelandic energy sector. After all, energy and food was Glitnir’s speciality. Armannsson is now involved in one of the date centre projects in Iceland.

Favoured deals, like the OR deal, has been the chosen way of doing business in Iceland – a way that many Icelanders now hope will come to an end. After all, it’s clear that this was a major factor in the fall of the banks. Therefore, many in Iceland have a lingering feeling that ex-Glitnir bankers or other Icelanders are somewhere involved in the Magma affairs in Iceland.

There are some disturbing inconsistencies. Last year, Magma-CEO Ross Beaty, also Magma’s largest shareholder, sought to convince Icelanders that he wasn’t at all interested in buying the whole of HS Orka. Well, now nothing less will do.

Already last September I pointed out two major flaws in the Magma deal: firstly, when a public good is sold it has to be done in a transparent way – not the case here, there’s total opacity. Instead of a transparent deal where Magma pays outright and OR sells outright its coveted share in HS Orka the deal is convoluted with loans from the sellers. This is completely opposite to golden rules on privatisation laid out by the World Bank, OECD and others: if a public good is sold the sale should be transparent and bring plane cash to the coffers right away. All risk should be on the buyer, not the seller as is the case in the Magma deal.

Secondly, is so happens that Icelandic law prohibits non-EU/EEA companies to buy into the Icelandic energy sector. Magma found a way around this lay by setting up a subsidiary in Sweden as a holding company for its Icelandic assets. The Swedish company has, as far as is known, no purpose other than owning the Icelandic assets. It’s clear that if all it takes to own energy assets in Iceland is an off-the-shelf company in some EU/EEA country then the law is void and meaningless. – It’s difficult to belief that the Efta-court will let this pass since this would constitute an example in the other EEA countries.

It’s also interesting to note that Magma didn’t set up an Icelandic holding company. Most likely, a Swedish company brings some tax benefits. The ownership of Magma itself is an interesting case: a charitable foundation, Sitka Foundation, owned by Beaty, is the major shareholder. This has all the characteristics of a tax speculation and hidden ownership.

Consequently, Magma has been able to buy up ever-greater parts of HS Orka and now owns 43% and is buying Geysir Green Energy’s 55% in HS Orka. As if all this weren’t enough the truly scary part is that whereas it was at first trumpeted that Magma would bring much needed investment to Iceland it’s now liaised with a fund owned by the Icelandic Pension Funds that will invest in HS Orka. It also seems that Magma was allowed to buy offshore Kronur, no doubt at a favourable rate, instead of bringing foreign currency to Iceland. This weekend, it transpired that Magma’s CEO is himself lending money to Magma – a rather surreal course of events in a company that was supposed to be a strong investor bringing foreign investment to Iceland.

An ever-present element in discussion on foreign investment in Iceland is the atavistic Icelandic xenophobia, the fear of foreign barbarians at Icelandic shores. However, in the case of Magma there is a firm and solid ground to doubt the soundness of this investment. Foreign investment is of course painfully necessary in Iceland. It beggars belief why politicians are so prone to make elementary mistakes when it comes to foreign investment and the sale of public good. The fearful danger is that this proneness will create one mess after the other, certainly no Eton mess – and that this proneness will perpetuate itself by attracting the wrong kind of foreign investors to Iceland.

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Written by Sigrún Davídsdóttir

July 12th, 2010 at 6:24 pm

Posted in Iceland

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