Reykjavík Grapevine - 15.07.2011, Blaðsíða 25

Reykjavík Grapevine - 15.07.2011, Blaðsíða 25
25 The Reykjavík Grapevine Issue 10 — 2011 This is such an unbelievable story. There are too many unbelievable stories going around these days. Wish our overlords would stick to doing semi-believable stuff. media both to make it known that when he was Chairman—between 2008 and 2010—the company had always been able to secure loans, and to accuse the new Board of fumbling a loan that was essentially a sure grab. “In January 2010 the CFO of Reyk- javík and the CFO of Reykjavík Energy met with the Nordic Investment Bank (NIB). They [NIB] expressed great de- sire to lend Reykjavík Energy 12–14 bil- lion,” he wrote. “…In June 2010 when I left as Chairman, there were no doubts that NIB would loan the company the previously mentioned amount given that the company met stipulations [to raise prices].” He concluded his letter with the implicating questions: “What changed after June 2010? Could it be that com- ments made by the directors and owner about the financial state of Reykjavík Energy have negatively inf luenced its ability to get financing?” Sigur!ur Jóhannesson, a Senior Re- searcher at the University of Iceland In- stitute of Economic Studies, put it this way on a University of Iceland radio show: “I probably wouldn’t say that my company were bankrupt if I was trying to get loans, but I think that investors must look first and foremost at things like cash f low and annual financial statements. One can also read reports by rating agencies, and there is very lit- tle there mentioned about Jón Gnarr.” If anybody knows best what the banks were thinking in 2010, however, it is probably Anna Skúladóttir who was Reykjavík Energy’s CFO from May 2006 until 2011. As Gu!laugur Sver- risson wrote, Anna met NIB in January 2010 and she confirms in conversation that “the bank expressed interest,” but told me that it was by no means a done deal. “In 2010, foreign loans weren’t just closed to Reykjavík Energy. Iceland as a whole was still on ice.” Ultimately, the far bigger questions remain: What happened to Reykjavík Energy before Jón Gnarr and the Best Party enter the story in June 2010? And, could it be that something hap- pened before 2010, which would ex- plain the company’s financial state? WHEN MONEY GREW ON TREES Reykjavík Energy was founded through the merger of the institutions Reykja- vík Electricity (Rafmagnsveita Reykja- víkur) and Reykjavík District Heating (Hitaveita Reykjavíkur) in 1999, and Reykjavík Water Works (Vatnsveita Reykjavíkur) in 2000. The company thus began on solid ground, with a long history of well-managed services to captive subscribers, respectively dating back to 1921, 1930 and 1909. Historian (and active Left Green member) Stefán Pálsson, who worked as a curator of the Reykjavík Energy Museum for ten years before he was let go in the mass layoff last October, explained that the institutions were so lucrative that they had to find ways of spending money so that they wouldn’t show too much profit. “They would, for example, hire hun- dreds of school children every summer to plant trees, make roads, and work on environmental projects,” Stefán said. “They would rationalise that we are harnessing geothermal energy from this area so we owe it to society to plant loads and loads of trees. And we give school children jobs, which makes their parents happy, which is good for soci- ety, and things like that.” In fact, the institutions that pre- ceded Reykjavík Energy were so lucra- tive that politicians could milk them to fund pet projects and other vanities. For instance, it was under Daví! Odds- son’s legacy as Mayor of Reykjavík that District Heating financed the construc- tion of The Pearl, a well-known monu- ment in Reykjavík, which opened to the public in 1991. “It was never supposed to turn a profit,” Stefán said. “The big tanks carry hot water, but then there is the building on top, the restaurant, and the sightseeing deck. And actually it was supposed to be even more extrava- gant with palm trees and tropical birds and plants.” Nonetheless, the institutions were loaded with money and owed very little when these endeavours were carried out. It was not until after the institu- tions were turned into a private part- nership company (sf.) in 2001 that the debt begins to amass. A SLEEPING GIANT STIRS If there is one person who has been most closely associated with Reykjavík Energy over the years, it is Progressive Party politician Alfre! "orsteinsson. Alfre!’s involvement began in 1994 when he was appointed Chairman of a municipal body charged with oversee- ing the three institutions. It was under his leadership that the institutions were merged into Reykjavík Energy in 1999, and from then until 2006 he served as Chairman of the Board of the new com- pany. Alfre!, along with Gu!mundur "óroddsson, the former head of Water Works who was hired as CEO, were keen on stressing that Reykjavík Energy was now a company, Stefán explained. “We the staff were told that we were not to refer to it as an institution.” This shift in mentality was also mir- rored by a shift in the legal framework governing the company. A specific law, no. 2001/139, which was passed in 2001, gave Reykjavík Energy the right to take small loans and make payments for the purposes of running the com- pany without the consent of its owners (the municipalities, Reykjavík, Akranes and Borgarbygg!). It also gave the com- pany the right to operate subsidiaries and to invest in other companies. In essence, it enabled Reykjavík Energy to be run like a private company, while re- taining a political management. “The idea was that this new com- pany was a sleeping giant that had been ineffective in the past. It had almost endless credit because it owed next to nothing, and around early 2000 that was not really something to brag about in Icelandic society; it was seen as an unused opportunity. You had this po- tential of taking loans to grow,” Stefán told me. “The same argument was made to regular people who had paid off their mortgage; they were told that this made no sense, that it was downright silly. So people refinanced their homes, took a new loan to be paid over twenty years time instead of five, and this freed cash to play in the stock market, or to buy a summer house or a new jeep. I would say that Reykjavik Energy's troubles stem from a large-scale version of the same thing.” In the case of Reykjavík Energy, unleashing the power of capital meant buying tens of small district heating companies in the south and west of Iceland, expanding their service from five to over twenty municipalities. “You got the impression that somewhere in Reykjavík Energy there was someone with a map, putting down f lags, you know with a Napoleonic dream of tak- ing over,” Stefán jokingly remarked. Additionally, Reykjavík Energy be- gan investing in other companies, and by 2003, it had shares in over twenty companies, including Feyging ehf, a f lax seed operation of which it was the largest shareholder. That project was abandoned in 2007 with a loss of 340 million ISK. An attempt to farm tiger prawns was also declared a failure in 2007, after seven years of work and 114 million ISK down the drain. Alfre!, the former Chairman of the Board, is adamant that the investments were not too many or made too quickly. “When I left in 2006,” he told me, “the company’s debt was less than 70 billion ISK. The state of the company was very strong. The loans taken were all long term, to be paid off in 20–30 years.” In any case, that debt is still nearly seven times the debt that Reykjavík Energy inherited through the merger of the in- stitutions in 1999. BIG INDUSTRY FULL STEAM AHEAD That being said, the bulk of Reykjavík Energy’s debt can be attributed to the construction of the Hellishei!i plant, which former Reykjavík Energy CFO Anna Skúladóttir said is “the largest investment in the company’s history.” The decision to build the plant, she said, was made in the beginning of the 21st century when it became evident that the Reykjavík area would need more hot water as the Nesjavellir plant was expected to become fully utilised. At the same time, the decision was made to harness 300 megawatts of elec- tricity to be sold to heavy industry, as it was considered more efficient to build and run a plant that produces both hot water and electricity. In 2006, the company reached an agreement to sell electricity to alumini- um smelting company Century Alumi- num Nor!urál, but when the crash hit in 2008, Reykjavík Energy had yet to secure financing for phase five of the plant build-up, including the 90 MW that were supposed to go to Nor!urál in 2010. By that time, however, it had already purchased five turbines at about 5 bil- lion ISK a pop. “Turbines must be or- dered at least three years in advance,” Anna explained. “It’s like ordering an airplane.” Two of the five will come online this year, but an agreement was reached to postpone delivery of three of the tur- bines until a decision has been made to continue further plant production. Of the three outstanding turbines, Reykjavík Energy didn’t have a definite energy source lined up for the third one. What’s more, there were originally seven, not five, turbines ordered, but Independence Party politician Kjartan Magnússon said he was able to back out of two of them when he took over as Chairman of the Board in 2008. When Moody’s reviewed the com- pany for a possible downgrade in July 2008, it noted: “The company's finan- cial profile has continued to weaken during the course of the year, mainly due to the company's exposure to un- hedged foreign currency debt, the company's primary source of funding. Conversely, 80% of its revenues today are in Icelandic krona derived from its operations as Reykjavik's primary multi-utility.” Despite the risks involved, however, it has essentially been government poli- cy to attract heavy industry to the coun- try. In the span of a decade, Iceland’s aluminium production went from 4% of the country’s GDP in 2000 to 14% in 2010—surpassing the country’s fish exports and making Iceland the largest aluminium producer in the world. “The ‘heavy industry agenda’ was a big part “In many ways, the REI story is a prototype of the financial crisis. Politicians decided to allow private individuals into public entities and let them behave as if they owned what belonged to the public.” Continues over DARTH VADER’S HEADQUARTERS Price tag: 4.271,7 BILLION ISK As the company struggles to stay af loat, its headquarters, which were built in 2002 under the chairman- ship of Alfre! "orsteinsson, stand as a symbol of what many believe to have been the excessive and ill- founded investments of the munici- pally owned company. “A service company for the peo- ple of Reykjavík has no business building a house like that,” Inde- pendence Party representative Kjar- tan Magnússon disapprovingly told me. “The people of Reykjavík felt it was part of a power game. When you come into this house, it’s a sign of power.” Similarly, former employee and historian Stefán Pálsson called it a monstrosity. “You would expect it to be Darth Vader’s Headquarters. It is my advice to politicians connected with Reykjavík Energy never to al- low themselves to be interviewed outside the building.” On a visit to the infamous headquarters, Chief Press Officer Eiríkur Hjálmarsson, a company veteran since 2006 and the lone survivor in the PR department after the October layoffs, showed a pho- tographer around the building. He took us to top f loor to see the view over Mount Hengill, where the com- pany operates the two power plants at Nesjavellir and Hellishei!i. Since our visit, that f loor has been put on the rental market. The advertisement is telling: “Fantas- tic 745m# office space on the sixth and top f loor in Reykjavík Energy is available for rent immediately. The building is fully equipped with the best of the best and has access to a big rooftop balcony with a vast un- hindered view over the city…” It continues: “In the house is a staffed reception, World Class (luxurious fitness centre), with optional access to lecture rooms, a library, computer room, and more […]Special housing for those with demands. Blue prints and more in- formation can be solicited from our sales men, trod.is.” The ad doesn’t mention it, but the building also houses impres- sive art, including a 35 metre tall granite fountain by artist Svava Björnsdóttir, which travels through all five f loors of the building, and a Foucault Pendulum, which takes 26 hours to knock down all the pins before they pop up again. However, former Chairman of the Board Alfre! "orsteinsson doesn’t think it’s overly extravagant. “The main fault of the house is that it is considered beautiful and chic,” he said. “If it had been built as a one or two story house nobody would have said anything. Should we have built an ugly house?” Furthermore, he said the top-class kitchen, which has been heavily criticised is “not unlike other kitchens in Reykjavík.”
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