The “Magma-Deal” has caused fierce discussion, confusion and perplexion in the last months. Canadian-cum-Swedish company Magma Energy acquired shares in HS Orka, and thus attained exclusive rights to energy resources in the Reykjanes peninsula for the next 65 years (with a renewal clause of another 65). With regard to the fear of the Icelandic population that this deal could mark the beginning of a sell-out of its natural resources, we asked John Perkins, author of the book Confessions Of An Economic Hitman, what he thought.
“It is a legitimate fear,” says Perkins. “Energy is the driving force behind economic development. This means that economies are very dependent upon and vulnerable to energy companies. If an energy company defines its goals as being to maximize profits for private investors and individuals who live in another country, it is likely to exploit local populations and resources. The focus goes toward earning profits rather than encouraging economic growth in ways that will benefit the majority of the population.”
To be able to assess the impacts of a possible wave of privatisation in Iceland’s energy sector I tried to discern what, in fact, privatisation means and what it entails.
First the basics. “Privatisation” is a term for the transferral of a business or industry from public to private ownership. Thus, all privatised companies have undergone some sort of transition away from public to private ownership. So relieved from all political and economical ballast, “privatisation” could be construed as a neutral term.
Nevertheless, shareholders, energy analysts, companies, policy makers and the general public have observed privatisation thoroughly involved in an everlasting dispute about the rights and wrongs of nationalisation on the one hand and privatisation on the other. Reflecting on the difference of opinions, some states have undergone massive changes back and forth in their energy sector. In Venezuela, for example, the originally private oil sector was nationalised in 1976. In the following decades, it opened up for foreign investors. In 2001, Venezuela then nationalised all oil production and distribution activities.
From privatisation to nationalisation to privatisation to nationalisation…
At the beginning of the 20th century, nationalisation represented a post-war European ideal to create large vigorous state-owned businesses, providing jobs and allowing the governments to exercise influence over their economies. Russia was the first to nationalise its petroleum industry following the Bolshevik Revolution in 1918. In Western Europe, the nationalisation process lasted a few decades but essentially took place in the 1930s. In dictatorial Spain and Italy, large state-owned companies were formed through nationalisation.
Nationalisation also involved expropriation of foreign companies. In 1938, Mexico nationalised what was at the time an industry largely owned by U.S., UK, and Dutch companies. Later waves of nationalisations and expropriations followed in the post-war era in Latin America and the Middle East. In the 1970s, the atmosphere changed and a wave of privatisation followed. Between 1988 and 1993, roughly 2.700 state-owned enterprises in over 95 countries were transformed to private ones, raising over US $270 billion. Although privatisation efforts differ substantially from country to country, there seems to be a strong common economic rationale underlying the decisions to privatise. In general, nations have privatised state-owned energy industries to achieve several objectives, like raising revenue for the state, reducing the government’s role in the economy, increasing efficiency (mainly through the saving of investment costs) and introducing greater competition. For developing countries it is also a major method to raise capital and transfer of technology from industrial countries.
In the vast majority of the cases privatisation goes hand in hand with deregulation. When it comes to regulation, it is in the power of the national government to influence the effects of privatisation by determining the scope of the company’s autonomy in its business activities.
What are the effects of privatisation?
Numerous studies and reports have assessed impacts of privatisations on the market. Academic studies in the fields of business administration and economy have shown, for example, that efficiency of labour has increased about 25 percent post-privatisation. A study issued by the FEEM—an association within the field of sustainable development and global governance—showed that price and trade liberalisation, deregulation and privatisation are strongly linked to a rapid economic growth.
On the European level, the numerous privatisation processes have also led to a concentration of businesses with usually negative, yet very different effects on tariffs and prices for the end-consumer. These effects have been examined by the NGO WEED (The World Economy, Ecology & Development) and Attac in the analysis “Pressure of privatization on public services.” It showed, for example, that energy prices in the U.K. went down for about 25 percent on average, whereas in Germany the prices rose over the European average.
Before the privatisation measures a state monopoly existed in the U.K., whereas the German energy market had been in the hands of several public, private and mixed companies before. The analysts in this study came to the conclusion that the rather positive effects on the energy price in the U.K. might be connected to the fact that the privatisation actually led to a wider distribution of energy management than was the case before. In contrast, the number of companies on the German energy market has diminished significantly to a duopoly, a development which has lead to higher energy prices.
Another aspect, which shouldn’t be neglected, revolves around the effects of partial privatisation. A study conducted to analyse the costs and benefits of the partial privatisation of Norway’s oil company Statoil concluded that “benefits from partial privatisation can be substantial, particularly, if ownership change is supported by additional restructuring measures”. In 2001 the state of Norway partly privatised Statoil, the biggest oil company in Scandinavia, and managed to capture more than 60% of its total welfare gain ever since. The analysis emphasized the possible positive effects of a privatisation, when it is structured with state involvement at several levels, aiming to maximise the public share of benefits.
What does this mean for Iceland?
Privatisation has had positive and negative effects depending on the market situation in the countries and the degree of liberalisation accompanying the privatisation process, thus depending on the scope of the market opening.
Now, Iceland finds itself in the unfortunate position of desperately needing foreign capital, any capital at all really, to get itself out of the deep crisis it has slipped into. Letting foreign investors into the country is probably not the worst idea in order to obtain such capital.
But to what extent should Iceland allow the privatisation of its energy business involving one of its most precious resources? The sole participation of Magma in HS Orka does not carry detrimental effects for the whole energy sector imminently, but the question remains to what extent local and national governments are willing to open the sector up to more foreign investors, with the result of not only renting out its energy resources, but actually giving up control over them.
It also remains to be seen in how far the Icelandic government is willing to supervise the market activities of privatised companies.
Hand in hand
However, in the past, privatisation and liberalisation have gone hand in hand. Perkins elaborates: “Typically this happens because the company has control of the people running the government – often through “legal” bribes (such as guaranteed jobs with the company or as consultants after the term in government ends, stock options, scholarships for officials’ children, lucrative contracts for family members, etc).”
Moreover, he acknowledges that it is theoretically possible to connect privatisation to de-liberalisation measures, but notes that this has not happened in the past. An alternative seems to be Norway-style partial privatisation, where the state doesn’t give up all control over the company and supervises its activities on the market.
Bottom line: the Icelandic legislative still has the possibility to influence the impact of possible privatisation in the future, for example, by ensuring the government’s right to exercise a certain, control over the energy companies with regard to supply and pricing policies.
In fact, it is amazing how the local Reykjavík government proceeded with the Magma deal last year, ignoring the doubts and fears of the public with regard to this deal in particular and the extent of a possible privatisation processes in Iceland in general.
In a country with a small community like in Iceland, the possibility of taking prevalent public resistance into account is even more feasible than in other countries populated by millions. The politicians in charge of the deal should have addressed the public with concrete information and outlook for the future.
And so should the politicians that will almost inevitably follow in their footsteps.