Sigrún Davíðsdóttir's Icelog

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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The ‘Environmental Performance Index‘ is an index that rates the environmental performance of 163 countries across several policy categories such as climate change, agriculture, fisheries, forestry, biodiversity and habitat, water and environmental burden of disease. When all is counted and added up, Iceland is the top performing country on the index that Yale and Columbia Universities published in January during the World Economic Forum at Davos in January.

As always, it depends on what is being measured. Iceland has long been a top performer on the Transparency International index over corruption though many Icelanders will claim that the Report of the Investigative Commission shows clear signs of corruption. It’s just not the kind of corruption that the TI measures. Corruption in Iceland doesn’t consist in taking a brown envelop to a judge to get a favourable ruling.

Though Iceland scores high on the EPI it doesn’t mean that there is a great sense of urgency among the Icelandic ruling class when it comes to environmental issues. There are many reasons for this, one being that nature is close to Icelanders, it’s there to be used, not just to be looked at as in so many other European country. Icelanders are still trying to conquer nature, overcome it – and often feel quite helpless as when a volcano suddenly starts to erupt (though this time it made a big part of the world feel equally helpless).

Iceland is also trying to harness nature and often the harnessing seems to be more important than protecting it. Recently, a Canadian energy company, Magma Energy, has divided opinions in Iceland by buying into the energy sector. Since only companies form the EU/EEA can own companies in the energy sector in Iceland it would seem to exclude Magma from ownership. But the holding company for Magma’s interests in Iceland is a Swedish Magma that has no other purpose but to own shares in Icelandic energy companies, set up solely as a holding company. – A clever way of avoiding rules or regulations or a sensible solution to attracting foreign investment to Iceland? Depends whom you ask.

The value of Magma’s investment isn’t clear. At first it was thought it would bring much needed currency to Iceland. Then it turned out, according to Icelandic media, that Magma bought Icelandic kronur at knockdown prices abroad on a market created by currency restrictions in Iceland, to pay part of the price and then borrowing the lion share of the price in Iceland.

Topping the EPI is sweet but deals and investments in environmentally friendly sectors like the sale to Magma Energy raises serious questions. The bank crash in October 2008 was a reality check of the Icelandic way of doing business and a bitter lesson. It will turn even more bitter if it turns out that nothing was learnt from it.

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In a document, seen by Icelog, sent to the Icelandic Government to underpin his project of investing up to $200m to build a highland resort at Grimsstadir in Iceland, the Chinese entrepreneur Huang Nubo mentions his first ties to Iceland: as a student he became friends with an Icelander and so warm was the friendship that the mother of his Icelandic friend knitted a lopapeysa (a typical Icelandic sweater, made from Icelandic wool in natural colours). This friend, Hjorleifur Sveinbjornsson, later married Ingibjorg Solrun Gisladottir, the leader of the social democrats 2005-2009 and minister of foreign affairs 2007-2009 – and Sveinbjornsson has been one of Huang’s ardent advocates in Iceland.

Huang Nubo is now mightily upset with the Icelandic government for not embracing his plans. According to the FT (subscription only), Huang sees this as a racial discrimination. “I think this is racial discrimination because I am Chinese,” he told the FT. “Many people have invested in Iceland in the past but no one has been treated like I have.”

This isn’t entirely true. There are serious restrictions to foreign investment in Iceland, especially when it comes to investment from outside the EU/EEA. Icelanders tend to be suspicious towards foreign investment. Ia a Canadian company, investing in energy in Iceland, at the time called Magma, now called something else, ran into similar problems, as explained earlier on Icelog. Magma found a way around this by setting up a company in Sweden. This caused hefty debate in Iceland, the investment was accepted – incidentally, this investor seems to have lost interest in Iceland, as sometimes happens.

The serious problem with Huang as an international investor is that he has nothing to show outside of China. The properties and companies he owns in the US are nothing to speak of, in terms of operations and having done something substantial. When he seemed to be losing the bid to invest in Iceland he turned his attention to Denmark, was interviewed there but again, just words and nothing seems to be moving there.

Another problem is the inconsistency in his intentions, which he has aired. He said he would fund it all himself, out of his own pocket and that wouldn’t be a problem. One day, he announced he would fund the Grimstadir operations by selling 100 Grimsstadir luxury dwellings to rich Chinese. It seemed to have escaped his attention that due to restrictions on nonEU/EEA owning property in Iceland this plan would make things very complicated. When I inquired about this with his Huang’s spokesman in Iceland this seemed just one idea out of many.

And this seems to have been a problem all along. There were many ideas and not concrete plans. So far, no independent due diligence has been done by Icelandic public sector entities, negotiating with Huang. All the information worked on comes from Huang himself. In that sense, these entities have not done a convincing job in securing public interest at stake here.

Huang Nubo makes much of the fact that he is a poet. Unfortunately, when it comes to business poetic visions aren’t substantial enough to bank on.

*A link to earlier Icelogs on Huang.

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