Iceland review - 2016, Page 61

ICELAND REVIEW 59
OPINION
to create jobs. As a country gets richer it
puts a higher value on its resources, both
for use and for preservation. We have
been firmly in the former camp, and are
only gradually moving into the latter.
Growing up in Iceland in the seventies,
vaguely aware of the news broadcasting
on the radio, two news items dominated.
One was persistently high levels of infla-
tion. The other was the endless financial
difficulties of the fishing industry. We
were scrambling to keep the fleet and
the freezing plants from going under.
Inflation caused costs to rise, leaving
exporters unable to compete in the out-
side world, and we dealt with the prob-
lem by devaluing the króna. Fishing was
important enough to us that we would
never have dreamed about asking for
payment for the use of the resource; all
our efforts went into preserving jobs. In
1984, a highly contentious quota
system changed all that
and allocated a
f i s h i n g
quota
to companies
based on their share in
the total catch of the three previ-
ous years. Whether you agreed with the
system or how the quota was allocated,
the system, along with other external
factors including the taming of inflation,
made the industry more efficient and
protected the stock of fish in the sea.
Fishing companies became profitable.
As the profits increased, demands for the
companies to pay for the right to use the
resource became louder. Despite resist-
ance from the industry, fishing com-
panies started paying a tariff in 2004.
Although the level of the charge was
reduced by the current government, even
the fishing industry now accepts that
paying for access is inevitable—the only
debate is about the level at which it is
applied.
NOT JUST ABOUT FISH
But there is no reason why fishing should
be the only industry that pays for access
to a public resource. Long after we
started diversifying our economy into
aluminum smelting, the harnessing of
glacial rivers to produce energy was still
seen as a way to create jobs. The low
price of electricity paid by the smelt-
ers in Reyðarfjörður, East Iceland, and
Hvalfjörður and Straumsvík, in West and
Southwest Iceland, respectively, reflect
this fact. The National Power Company,
Landsvirkjun, reported a 0.6 percent
return on equity in the years between
2008 and 2014. Even though the fig-
ure increased to 4.7 percent in 2015,
the abysmal return reflects the fact that
electricity has been sold too cheaply
for a long time. In addition, the largest
smelter, Fjarðaál in Reyðarfjörður, which
is said by its owner, US company Alcoa,
in its annual report to be its most profita-
ble, does not even pay corporate tax. The
reason for this is that the investment in
Iceland was funded with loans rather
than equity, which means that
the Icelandic opera-
tion’s profits
d i s -
appear to
Luxembourg in the
form of interest payments.
Making sure the smelters pay a market
rate for electricity is complicated by
the fact that in the case of Alcoa, we are
locked into a 40-year contract. But the
attitude of Landsvirkjun, and our politi-
cians, has changed. Electricity to large-
scale industrial users will now be sold at
market price. There has even been talk
of setting up a mini sovereign-wealth
fund along Norwegian lines, funded by
Landsvirkjun’s profits. But we have a
long way to go. Reykjavík Energy, a pub-
licly-owned utility, derives 41 percent
of its revenue from selling 77 per-
cent of its electricity to the Norðurál
smelter in Hvalfjörður. That means
that homeowners in the Reykjavík area
who buy 23 percent of the energy pro-
vide the utility with 59 percent of its
income. Electricity prices for homes
have increased by 55 percent since
2010 while prices to Norðurál have
remained unchanged because the com-
pany has locked in prices until 2035.
Tourism is another industry which
should be paying a resource fee. It
makes a profit by selling access to
Icelandic nature, without paying any-
thing for the privilege. While parlia-
ment has failed to agree to charge for
access to nature, that is precisely what
every bus company and tour operator
is doing. Although tourism is classified
as a service industry, in this country it
is closer to being a resource industry.
The latest example of an industry
which is being given use of a natural
resource for free is salmon farming.
Iceland decided that salmon farming
would only be allowed in two areas
in the country, in the East and West
Fjords, thereby creating a limited
resource. The license to farm salmon is
handed out in return for a one-off fee
of ISK 300,000 (roughly USD
2,200). The amount
charged is the
s a m e
whether you
want to farm 200 tons or
10,000 tons. In Norway a cou-
ple of years ago, you had to pay ISK
200 million for farming 940 tons in
Troms and Finnmark. Not surprising-
ly, Norwegian investors have bought
majority stakes in many of the new
Icelandic licensees, and production is
set to increase very rapidly over the
next few years.