Published October 29, 2009
One by one men in suits of varying shades of grey approached the podium in the pit of the Reykjavík City Hall. One by one they pleaded their cases while Reykjavík’s esteemed mayor—the fourth in two years—Ms. Hanna Birna Kristjánsdóttir looked on appearing disinterested in what appeared to be solely a formality. As the council members continued selling the idea of selling Iceland’s resources, a crowd of 100-strong grew more agitated and increasingly vocal from their perch in the viewing gallery of the hall, separated from having a say in their own natural resources by an aesthetically pleasing glass barrier.
“People were screaming, saying that the politicians were traitors,” explained Jón Bjarki Magnússon, a student who arrived at City Hall just in time for the vote. “It was a weird feeling to see it happen, to see these people down on the floor raise their hands and the decision is made and to see all these angry people above them not able to do anything.”
The September 15th city council meeting stretched on for over three hours, during which time onlookers shouted and boo-ed as city council progressed toward approving the 32.32% sale of Iceland’s HS Orka to the Canadian-cum-Swedish firm Magma Energy Corp.
Reykjavík Energy had agreed to purchase shares in HS Orka from Hafnarfjörður but the Competition Authority prohibits the energy firm from owning shares in competitors, explained the Progressive Party’s Óskar Bergsson. “It is my opinion that the sale was necessary to comply with the law, solve a dispute with a neighbouring municipality and strengthen the financial status of [Reykjavík Energy].”
They had no choice, they said. It was a done deal, they said. It is a wise move for the Icelandic economy, they said. And so the sale was approved; three protestors, including Jón Bjarki, were arrested; and the mayor, along with her councilmen and women celebrated the sale with a champagne toast behind closed doors.
A brief but complicated history of Hitaveita Suðurnesja
“Before this all started, in 2007, the state owned 50.9% of [Hitaveita Suðurnesja], the municipalities owned the rest,” recounts Júlíus Jónsson, CEO of HS Orka. “Then the state [run by the Independence Party] decided to sell their shares to Geysir Green Energy [owned by the FL Group, an Independence Party supporter].”
By July 2007, Geysir and Independence Party stronghold Reykjanesbær each owned roughly a third of the company, Reykjavík Energy and Hafnarfjörður each claimed a sixth and four other municipalities owned just over 1% between them.
In June 2008, Alþingi passed new energy laws that mandated the separation of private energy production from competitive operations thus Hitaveita Suðurnesja was divided into HS Veitur, managing distribution of electricity, water and heat, and HS Orka, taking care of energy productions and sales.
Júlíus continued: “Then in July, 2009 Reykjanesbær sold all their shares in HS Orka to Geysir Green Energy and bought all Geysir Green Energy’s shares in HS Veitur. At that time Geysir Green Energy sold 10.78% to Magma Energy.”
According to press releases heralding this initial transaction between Magma and Geysir, throughout the sale “Magma was advised by Glacier Partners… and its affiliate Capacent Glacier… and Mannvit Engineering provided a third-party evaluation of HS Orka’s operations.”
Interestingly, Geysir’s Director of Business Development, Davíð Stefánsson, is also a Partner at Capacent Consulting, focusing on corporate strategy in the energy sector, and Mannvit Engineering is a shareholder in Geysir Green Energy. It’s curious, therefore, how Capacent and Mannvit were deemed suitably objective to advise Magma Energy through their purchase of shares from Geysir Green Energy.
“Then Reykjavík Energy made their contract with Magma and, along with Hafnarfjörður, sold them 32.32%,” Júlíus further explained. So today Geysir Green Energy and Magma are proud owners of 55.2% and 43%, respectively, and four municipalities hold on to just under 2% of HS Orka.
Was it inevitable?
This sale to Magma Energy has been in the works for sometime it would seem, with the wheels set in motion with the Independence Party selling the state’s share in Hitaveita Suðurnesja to their cronies—infamous banksters Hannes Smárason, Bjarni Ármansson and Jón Ásgeir Jóhannesson—at Geysir Green Energy to ensure transfer of what is now HS Orka to private hands.
“In the beginning of 2007, the government of the Progressive and Independence parties decided to put the state’s share in Hitaveita Suðurnesja up for sale and barred public entities from bidding,” said Þorleifur Gunnlaugsson, a Left-Green city councilman and Reykjavík Energy board member. “Representatives of those same parties have now sealed the deal in the municipal government.
While it’s true that Reykjavík Energy’s partial ownership of HS Orka contradicted Icelandic competition laws, critics have been questioning the speed at which the deal was passed, the lack of options presented to keep HS Orka in the hands of the public and the overall timing of the deal. Municipalities are, indeed, strapped for cash in these trying economic times, but the value of green energy is such that it would seem to be most sensible to hold on to it for dear life. Or at least to consider doing so.
The guaranteed revenue of owning a stake in a geothermal plant could very well have proved to be a life vest for drowning municipalities—times when the nation is in such a weakened financial state are also those in which interested parties are going to suss out the most lucrative deal for themselves, possibly paying far less than the resources are worth.
Júlíus noted that there were, at one time, as many as thirteen parties interested in purchasing the shares in HS Orka, but only two offers were made and there was allegedly no comparison. No information on the second bidder in this case has been made public, but their offer must have been laughable if not strong enough to rival the appallingly low deal wrangled by Magma, explained below.
Dagur B. Eggertsson, former Mayor of Reykjavík and Vice Chair of the Social Democrats, asserts that “now is probably the worst time in history to sell shares,” and criticizes the majority in the municipal government for failing to investigate alternate solutions.
“It was not inevitable,” Dagur insisted. “During this period we have seen examples of big energy-related deals that have been turned over by the city government but the thing is that the two political parties in power in city hall now are the same parties that gave away Icelandic banks to their friends, so they have a reckless record with privatisation. Not all privatisation is bad but you can privatise in such a manner that everybody is losing, and that is the sad case of a lot of privatisation in Iceland.”
Who is Magma Energy?
According to their website, Canadian Magma Energy Corp. is a “geothermal pure play focused on becoming THE pre-eminent geothermal energy company in the world.” With its hands in geothermal operations along the west coast of the United States, throughout South America and, most recently, in Iceland since its inception in early 2008, it would appear that Magma is indeed dedicated to achieving their lofty corporate goal of industry domination.
“I’m an entrepreneur so I’ve started many, many companies, that’s what I do. This time around I wanted to build something green, so I looked at geothermal and it was just perfect, it just fit,” explained Ross Beaty, CEO of Magma Energy, of his foray into green energy following more than thirty years heading up precious metal mining companies.
“I went to Iceland earlier this year and looked at opportunities and it seemed that HS Orka could benefit from capital infusion, reorganisation of its shareholding to stronger positions and it looked like there was an opportunity to do something that would help us and help HS Orka and, in the big picture, help the country of Iceland.”
Strike while the nation is poor
However, since Magma’s appearance on Iceland’s radar, their intentions have come under fire, with the general public seeming to doubt the Canadian firm’s interest in helping Iceland, rather than simply helping itself at Iceland’s expense. Earlier this year John Perkins, author of Confessions of an Economic Hit Man, paid a visit to Iceland expressly to warn the nation of what was to come. “You may be the first developed country to really be hit by the hit men,” he said. “Like the people in Latin America [Iceland has] incredible resources, the old fish industry and cheap energy. Energy and water are scarce resources on the planet today. Iceland must protect its resources.”
When confronted with claims that Magma Energy is an economic opportunist, praying on a country that is already on its knees following the economic collapse, Mr. Beaty responded “that is ignorance and complete nonsense. It’s just because Icelanders don’t know what we’re all about and they don’t understand the world that we live in. We’re in Iceland because it has opportunities for the long-term benefit where we can deploy capital and we can improve the condition of an Icelandic company for the long term.”
“We’re here because Iceland is a core geothermal country that has great resources, many of them untapped, and it’s simply a core business for us to get involved with countries like that, be it Iceland, Indonesia, the Philippines or, for that matter, North America,” said Mr. Beaty. “I particularly enjoy the hypocrisy of some people who don’t want foreign companies to be in Iceland but have no problem with Icelandic companies going to other parts of the world to do geothermal development, but that’s a whole different subject. There’s a lot of hypocrisy and a lot of finger pointing in situations like this, but that’s the way of the world I suppose.”
Out with the old and… back in with the old
The general concern that seems to be brewing around Magma Energy’s involvement in Iceland is not unfounded, however, as the deal struck with Reykjavík Energy reeks of the economic wheelings and dealings that led to the collapse precisely one year ago.
The Share Sale and Purchase Agreement entered into by Reykjavík Energy and Magma Energy Sweden AB reads: “Payment of the Purchase Price shall be by: (i) wire transfer of ISK 3,616,988,813… and (ii) delivery to Arctica… of a bond issued by the Buyer in favour of the Seller… evidencing an aggregate indebtedness of an amount in USD equivalent to ISK 8,439,640,562 calculated using the mid rate for the USD/ISK exchange rate as posted on the Central Bank of Iceland’s website at 11:00 2 (two) business days prior to the Closing Date.”
To put it in terms that have become alarmingly familiar: Magma Energy will pay ISK 3.6 billion to Reykjavík Energy upfront, with a remaining ISK 8.4 billion provided to Magma as a bullet loan from Reykjavík Energy, with the sole collateral being a bond in HS Orka reissued to Reykjavík Energy by Magma. Also, according to Magma’s financial statements “the bond is repayable in a single instalment in seven years and bears interest at an effective rate of 1.52% per annum.” Magma will repay Reykjavík Energy in US dollars using the Central Bank’s exchange rate according to the strength of the króna at the time of the deal being signed now, in 2009.
Magma’s financial statements further state the “purchase of the Company’s interest in HS Orka will be financed by cash on hand and the credit facility available to it, or from other sources of capital available to the Company” and that, as of June 30, 2009, cash and equivalents totalled $4.5 million, working capital was $2.7 million and Magma’s undrawn credit was $20 million. This would imply that Magma Energy is some $5 million short of paying even their initial down payment to Reykjavík Energy, contradicting the purchase agreement guaranteeing sufficient liquid assets to complete the transaction and, one would assume, making Magma a poor candidate for a loan for the remaining ISK 8.4 billion.
“I’m very sceptical. It reminds me of what has been going on in Iceland before and to see this happen and stuff like them buying a company with a bullet loan and just using shares in HS Orka as collateral,” worries Jón Bjarki. “How the fuck do they do that? It stinks. The whole thing stinks. I just don’t trust these people anymore. I don’t think anything has changed here. John Perkins came to Iceland and he said that what is going to happen is that we are going to start to sell our natural resources away, you won’t realise what’s happening but that’s what happens after crises like this in Iceland. This may be a small step but it’s a very scary step.”
Wave the red flags
More possible cause for contention, the term of usage rights Magma Energy is purchasing allows for an initial 65 years with the option of renewal for another 65 years. “This poor deal becomes even clearer when we compare it to other contracts that Magma Energy has made,” explains Social Democratic MP Ólína Þorvarðardóttir, referring to Magma’s 10-year term in Nevada with the possibility of extending for another ten.
From a purely business perspective Mr. Beaty argues that such a long-term is proof positive that Magma is invested in building as strong and successful a company as possible. He says: “If you’re building a house and you want to have a really nice house and you have a leasehold agreement that gives you ownership rights for your house—if you have a short leasehold agreement you’re going to build a really crummy house because you know that, after a while, you’re not going to own anything. If you have a decent term you’re going to build a nice house and it’s going to run well and be nice to live in.”
However some critics of the agreement have their doubts about Magma Energy’s dedication to HS Orka and Iceland. “To my knowledge Magma has plans for maybe five to seven years in Iceland and then they want to exit with good profits,” projected Dagur B. Eggertsson. “So they will probably just sell their 130 year contract for their own profit but not for the profit of the people.”
Who is Magma Energy Sweden AB?
Magma Energy Corp. and Magma Energy Sweden AB are, essentially, one and the same. The “Sweden AB” suffix was added when it came to light that Magma Energy Corp. was not permitted to purchase shares in Icelandic natural resources because corporations outside the EEA would not guarantee EEA regulation of resources. Thus a Swedish shelf company was established to skirt Icelandic laws. The listed president of said Gothenburg-based shelf company is Lyle E. Braaten, a long-practicing Vancouver based lawyer and secretary and general counsel of Magma Energy Corp.
Said Mr. Beaty of this: “It’s legal nonsense that comes out of particular Icelandic laws that say the only companies that can be involved in the Icelandic energy business are European community companies. So Canadians, or anywhere else in the world for that matter, can only get involved by incorporating a subsidiary in the EU.”
Due to an agreement between the Canadian and Swedish governments regarding taxation, Sweden was ideal for Magma’s EU P.O. box for the Canadian firm to avoid double taxation.
As for Magma Energy’s operation in Iceland being regulated in accordance with the EEA and Icelandic law, Mr. Beaty doesn’t “know that it really matters. Magma is going to be following the best practices that I’ve followed all my career. All kinds of things that are demonstrably at world standards. We’re not interested in raping and pillaging, we’re interested in doing long-term sustainable development and if you can do that in any industry you can do it in geothermal.”
This raises concern about the ease with which foreign firms can incorporate themselves within the EEA and the purpose of laws prohibiting non-EEA ownership if they are so easily manoeuvred around.
Throngs of unanswered questions and intense circulation of rumours surround the Magma Energy deal. Halldór J. Kristjánsson and Finnur Ingólfsson (there’s a name that should ring a bell for those familiar with Icelandic corruption and shady deals) are thought to be involved, and some even suspect Ross Beaty of just being the face of a company being run by Icelandic banksters-cum-green energy enthusiasts, all of which feed the fears of the general public that could be calmed through widespread corporate transparency.
Daði Rafnsson, author of the popular Economic Disaster Area blog, while adamant that transparency is the means by which Iceland can rebuild itself as a nation and avoid suspicion, said, “I think it’s going to be really hard. For business here we’re always going to run into situations of knowing somebody on the other side of the table, but too often the same people are on both sides of the table, that seems to be a reoccurring theme. It’s hard to not be connected in some way but people should know about it. That will go a long way in educating people on who to vote for, who to not vote for, who to trust.”
Iceland’s privatised future
In her frighteningly poignant tome Shock Doctrine, Naomi Klein writes “When communities get hit by great shock large corporations and other power blocks use the opportunity to push a pointed policy where public property is given to private parties on a silver platter, for a disgraceful price.”
The partial sale of HS Orka to Magma Energy is, undoubtedly, a landmark in Iceland’s political economy, but that is not to say that it is destined to be a precedent. For the time being it appears to have opened a floodgate, as a Chinese aluminium company has shown great interest in the possible acquisition of 32% of the Þeistareykir geothermal plant in Húsavík—their representatives have already met with Húsavík officials to discuss the possible deal. The future of Iceland at this pivotal point in its history is largely dependent on ongoing critical thought by policy makers on the long-term well-being of Iceland’s resources.
As Noam Chomsky warns: “Privatisation does not mean you take a public institution and give it to some nice person. It means you take a public institution and give it to an unaccountable tyranny.”
For the time being it is likely best that Iceland stops to evaluate its current situation. Many argued that the Magma Energy deal was passed too swiftly, that not enough time was given to contemplate the possible consequences of the foreign privatisation, that the public didn’t know enough or just didn’t care. But contemplation is imperative, the public needs to know and the public must care. Now is not the time to grow complacent.
“It’s weird to see what they do and to feel like you can’t really do anything,” bemoans Jón Bjarki. “After the protests this winter, people who were there feel like ‘what can we do? Nothing seems to change no matter what.’ For a period of time people were doing stuff, trying to let their voices be heard, but nothing changes and it all seems pointless. The thing is, there are so many reasons to be against all this but people don’t even know it is happening.”
Cast of Characters
FL Group, now Stoðir, is an Icelandic investment company, placed under insolvency in September 2008 when its largest investment, Glitnir Bank, was partly nationalised. Other notable investments include the controversial Baugur Group and Geysir Green Energy. FL Group, along with former exec Hannes Smárason, has a complicated history of buying up worthless investments, like Sterling Airlines, and reselling them back and forth among friends to mysteriously turn a profit.
Geysir Green Energy is an investment company in the field of geothermal energy established by Icelandic investment company FL Group and Glitnir Bank. It bought the state’s share in Hitaveita Suðurnesja in 2007 when the Independence party put it up for sale. FL Group, Geysir’s owner, had made a hefty donation to the Independence party a few months earlier. Big names in the failed economy, Bjarni Ármansson, Jón Ásgeir Jóhannesson and Hannes Smárason, headed up the company at one time, and it is now run by Asgeir Margeirsson.
Magma Energy is a new Canadian geothermal company with a Swedish shelf company allowing it to operate in Iceland. It owns 43% of Hs Orka hf. Ross Beaty is the CEO of Magma Energy. He has a long history in the mining industry in Canada and abroad and currently serves as Chairman of Pan American Silver Corp., a leading silver producer. He has extensive experience as an entrepreneur, having started more than fifty companies over the course of his career.
Halldór J. Kristjánsson is the former co-CEO of Landsbanki, which was taken over by the state in October 2008 and has left the country to deal with their failed Icesave account. In all the speculation surrounding the Magma Energy deal, it is rumoured that Halldór is somehow secretly involved behind the scenes, as he is known to have moved with his family to Canada for a job with an energy company.
Arctica Finance hf is the financial advisory firm that negotiated the deal with Magma Energy on behalf of Reykjavík Energy. All Arctica staff “have in recent years been successful and proud contributors to many of the largest transactions that have taken place in Iceland”… they are also all former financial gurus of Landsbanki. For example, Stefán Þór Bjarnason, Arctica’s CEO, was Head of Corporate Finance at Landsbanki until October 2008.