Financial independence

Article 11 describes the procedures that Landsvirkjun has to follow in fixing electricity rates: After consulting with the Central Economic Institute, the Company’s Board is free to set prices, so that a “normal return on fixed capital in operations will be assured”. The new company’s revenue should also ensure an unspecified level of self-financing capabilities, allowing Landsvirkjun to expand power load capacity and “meet demand” independently of government policy.

Article 12 establishes that Landsvirkjun is allowed to raise local and foreign loans for its own needs. It is not required to consult its owners before negotiating new loans with foreign banks, as is the normal practice of other public enterprises in Iceland. In accordance with this article, Landsvirkjun has repeatedly issued bonds for sale in the European and American money markets.

Fiscal privileges

Article 13 exempts Landsvirkjun from paying import duties, estimated at 20-30 per cent of the cost of power plants and related equipment.  Article 16 exempts Landsvirkjun from paying income tax, community tax and other taxes.

Government guarantee

Article 15 permits the Government to guarantee loans that Landsvirkjun may raise, up to the amount of $28m or the equivalent in other currencies. This article has been amended a few times since, to keep up with the financing targets of Landsvirkjun.

Búrfell power plant

Pursuant to article 6, Landsvirkjun was allowed to construct a hydro-electric power plant of a total capacity of 210 MW (megawatt) at Búrfell on the Thjór­sá River. Landsvirkjun is also allowed to set up thermal power stations – for backup purposes – when and where it sees fit.

The proposed Law was opposed on two levels: On a more general level it related to foreign investment policy; on a more specific level, the unique privileges granted to the company were considered unjustified.

Although discussions with Alusuisse were then reaching their final stages, no formal decision was taken concerning the smelter at the time of the Bill’s enactment.

Some legislators considered it inap­propriate to grant a permission for a 210 MW power plant, that could more than feed a 60 kt/year aluminum smelter, while negotiations with Alusuisse were still pending. By enacting this permission, it was argued, the negotiating leverage of Iceland vis-a-vis Alusuisse would be reduced. It was furthermore claimed, that it would strengthen the negotiating posture, if Iceland could credibly demonstrate its ability and readiness to expand power generation capacity (for local use) without recourse to a foreign bulk customer. Thus, a per­mission for a 70 MW power plant would have sufficed at the time.

Some also considered inappropriate to hand the ultimate control of the elec­tricity sector to a Board on which the Ci­ty of Reykjavik would have veto power. This was apprehended because the development strategy for the electrical power sector was closely related to the policy on foreign investment. The ques­tion whether Iceland (at the time 240 000 inhabi­tants!) should allow foreign investment has been a hot political issue in the country for over 50 years.

In the next two sections, we will analyse the role of the World Bank in establishing, monitoring and steering Landsvirkjun.

The World Bank’s role in creating appropriate conditions for foreign investment in Iceland

The role of the World Bank in pro­moting a development scheme favorable to transnational companies has been analyzed by several writers (1-3). This being the case, no attempt will be made here to add evidence that is widely known. Instead we provide unpublished in­formation about means used by the World Bank group to pursue its goals specifically in the electric power sector.

In this section we will analyze the World Bank’s role in establishing in­stitutional bases apt to carry out the Bank’s ultimate aims “from within” a country, a method that has sometimes been called the “Troyan horse” method. The establishment of the National Pow­er Company in Iceland (Landsvirkjun) may be considered a typical case.

Did the World Bank formulate the Landsvirkjun Act of parliament?

No firm evidence exists that allows to answer this question with an unquali­fied yes. Having said so, there are never­theless a series of indications that strongly support the claim that the Bank was actively involved in formula­ting the law, or at least its most signifi­cant provisions. These indications will be reviewed here one by one:

1. A report of the Industrial Develop­ment Committee to the Icelandic Gov­ernment (1964-11-14), describes the World Bank’s attitude to the integrated power-station/aluminium-smelter pro­ject. Regarding the power company yet to be established, the Bank is quoted to have said “that it would like in a future discussion to study in detail the organi­zation and financial structure of the Company”.

2. According to the World Bank’s report “Operations Evaluation Report: Elec­tric Power” (hereafter called the WB Report, (4)) the Bank has regularly used its “leverage” to impose upon borrowers conditions (“covenants”) of an institu­tional character.

In the conclusions of this report the authors state:

“Effective project execution is im­portant and it is not irrelevant to the role of the Bank insofar as most of the companies studied were either created or consider­ ably reorganized within the period, with the Bank con­tributing to a greater or lesser ex­tent to the formulation of their basic constitutions.” (bold by ED) (p 66)

The report describes several methods the Bank uses to impose specific policies on borrowers in this sector. Some of these methods will be described later.

3. The Act of Landsvirkjun includes provi­sions that “insulate” the Power Com­pany from what the Bank calls “politi­cal interference”, a label that carries itself political connotations! This “insulation” was achieved by the provisions of articles 1, 8, 11 and 12 of the Act, described in the last chapter.

These provisions reflect faithfully the Bank’s philosophy (WB report p. 6, p 10. See also example later in this article).

4. The World Bank has acknowledged the Lansvirkjun Act by covenants in all Loan Agreements made between itself and Landsvirkjun. In these agreements, special covenants restrict the legislative power of the Icelandic Parliament.(5) Should Iceland’s parliament neverthe­less decide to exert its rights of legisla­tion and amend the Law of Landsvirk­jun so as to make Landsvirkjun for in­stance more accountable to the legisla­ture and to the general public, the World Bank would be entitled – at its own discretion – to define such amendments as a default on the Loan Agree­ment. If this should occur, the Bank,

Whether such infringement upon the sovereignty of a country’s legislature is consistent with current trends in inter­national law, is open to question. It is, however, noteworthy that this legal question was never brought to the attention of the Althing. Whether the World Bank ever referred to these clauses in its dealings with Iceland to assert its will, is not known and may never become known.

The World Bank’s invisible hand and Landsvirkjun

What quality has the relationship be­tween the World Bank and Landsvirk­jun taken? To what extent is Landsvirk­jun’s autonomy real? How does the World Bank exercice control over Landsvirkjun?

We will proceed by looking again at the Búrfell Loan Agreement  – a publicly available document (7) – made between Landsvirkjun and the Bank in 1966, and offer comments on those provisions that demonstrate the Bank’s influence on, or control of Landsvirkjun’s organization, constitution and operating pro­cedures (as distinct from the Bank’s in­fluence on or control of the execution of the Búrfell Power Project, for which the Bank has loaned funds).

Article 5.01

Landsvirkjun’s consultants and contractors must be “acceptable to, and to an extent and upon terms and conditions satisfactory to, the Bank”.

Implications
This covenant (condition) can be inter­preted in several ways. The Bank would maintain that such a covenant does ensure the qualifications and financial strength of consultants and contractors. In addition to this legitimate concern of the Bank it is plausible to ascribe to the Bank the aim of ensuring the selection of firms and individuals which share the Bank’s economic philosophy (support of MNCs etc).

The above assumption is quite legi­timate, if one considers the general ideological framework under which World Bank personnel operate, plus the fact that the Bank has often made loans conditional on hiring specific in­dividuals (WB Report, Table 4, 5).

Article 5.02 (c)
Landsvirkjun “shall enable the Bank’s representatives to in­spect”, not only the project for which loans are disbursed, but also “the goods, and all other plants, works, properties and equipment (of Landsvirkjun), and to examine any relevant records and documents.”

Article 5.02 (d)
Landsvirkjun “shall furnish to the Bank all such information as the Bank shall reasonably request concerning” not only “the expen­ditures of the proceeds of the Loan, the Búrfell Project” and related matters, but also “the ad­ministration, operations and fi­nancial condition (of Landsvirk­jun), its relations with ISAL (the subsidiary of Alusuisse in Ice­land) and the exercice of Land­svirkjun’s and ISAL’s respective rights, and the carrying out of their respective obligations, under the Power Contract and any other agreement related thereto.”

Implications
This covenant permits the World Bank to monitor and control the entire infor­mation base of Landsvirkjun, financial, legal, administrative and operational.

These scrutiny rights are incidentally denied to the members of the Althing and to Iceland’s tax­ payers.

Article 5.03 (b)
Landsvirkjun “shall inform the Bank of any condition which in­terferes with, or threatens to interfere with, the accomplishment of the purposes of the Loan, the maintenance of the service thereof, or the performance by Landsvirkjun of its obligations under this Loan Agreement, the Power Contract, the Purchase Agreements and the External Bonds”.

Article 5.09 (b)
“The Bank and Landsvirkun shall exchange views as to any ar­bitral or judicial proceeding con­templated or undertaken pur­suant to the Power Contract … Landsvirkjun shall promptly ad­vise the Bank of any such pro­ceeding contemplated or under­ taken and shall give the Bank such information as the Bank shall reasonably request … ”

Implications
While covenants 5.02 (c) and (d) call for a passive relationship towards the Bank, covenants 5.03 (b) and 5.09 (b) require Landsvirkjun to actively supply the Bank with legal and economic intelli­gence pertaining to domestic matters (such as government policies, plans and strategies to increase Iceland’s revenues from electricity sales to Alusuisse sub­sidiary, etc … ).

Article 5.08
Landsvirkjun “shall at all times take all steps necessary to main­tain its existence and right to carry on operations:” It shall “except as the Bank shall otherwise agree, take all steps necessary to acquire, maintain and renew all rights, powers, privileges and franchises which are necessary or useful for ( … ) the conduct of its business.”

Implications
It seems obvious that the World Bank wanted hereby to ensure the cooperation of Landsvirkjun in warding off any laws or regulations that might affect the company’s constitution, prerogatives and “particular relationships.” There is evidence (WB Report p 10), that the Bank is ready to assume the defense of its borrowers in eventual con­flicts with their legitimate owners.

Articles 6.01 and 6.02
If “any provision of the Land­svirkjun Act or the Regulations (pertaining to Landsvirkjun -ED) shall have been amended, suspended, abrogated or repealed so as to affect adversely the finan­cial condition or operations of Landsvirkjun or the performance by Landsvirkjun of its obligations under the Loan Agreement, ( … ) the Bank, at its option, may declare the principal of the Loan and of all the Bonds then out­ standing to be due and payable immediately” (see also note 8).

Implications
This covenant, mentioned previously, restricts effectively the exercice of democratic control by the Icelandic nation over the main producer of electric energy in the country. It must be borne in mind that the terms “affect adverse­ly” used in this covenant, may have a wide range of applications: It may not only infer a deterioration of finances but refer to any decision that would af­fect the administrative obligations of Landsvirkjun towards the World Bank, such as those dealing with the role of Landsvirkjun as intelligence officer in behalf of the Bank.

“Considerable cost overruns oc­cured in many of the projects reviewed in Colombia and Mexico (projects funded by the Bank), and in particular by experience of Calima for which the cost overrun was so great that, in combination with other factors of lesser impor­tance, it raises some doubt now as to whether the project was the most economical means of meet­ing system load growth.”

The above analysis focused on adminis­trative, institutional and constitutional covenants, that ensure the Bank’s con­trol of Landsvirkjun. Financial cove­nants will be reviewed later, in relation to the central aims of the Bank, as an agen­cy for steering a particular form of (state) capitalist accumulation.

Means and ends according to the World Bank’s own words (from the “WB report”)

The main aims of the Bank in attaching conditions (covenants ) to loan agreements are summarized by Bank’s officials in the following terms:

“Many of the Bank’s financial and institutional objectives in connection with its loans have been expressed in the form of covenants in the Loan Agreements or supplementary letters attached to the Loan Agreements. The conditions set were generally designed to assure sound financial management and development and sound organiza­tion and operations in the company and/or the country’s power sector as a whole.” (p 41).

There are basically three classes of covenants: Financial, managerial and institutional:

• Financial covenants attempt to insure a minimal self-financing ratio and limit the incurrence of long-term debt.
• Managerial covenants include obliga­tions of the borrowing company to con­sult with the Bank on issues such as con­tracting, consulting, accounting, bid­ding, hiring of executives and the like.
• Institutional covenants attempt to en­sure or increase the autonomy of the borrowing company toward its owners (Government, City) or induce a specific sectoral development in a whole region or country.

Let us quote a few extracts from the Bank’s report, that describe in more detail the means and the ends of the Bank’s involvement in its member coun­tries’ electric power sector:

To be able to obtain World Bank finan­cing, borrowers had to bow to the Bank”s conditions or be turned down:

“A loan for a second stage at Jurong (Singapore -PUB) was seriously considered in 1970 but finally turned down because of PUB’s failure to take action on the appointment of a General Mana­ger.” (p 18)

It should not be assumed that this type of condition (covenant) is unique to this case:

“Covenants regarding Bank ap­proval of appointments to senior positions in (public) utilities, have been quite frequent features of Bank loans:” (p 6)

Another important type of institutional covenant is one dealing with a utility’s autonomy (meaning insulation from public policy):

“EEEB is an autonomous entity responsible for all phases of public electricity supply in the city of Bogota, the capital of Colom­bia, ( … ) The autonomy of the entity and its independence from other city services were assured by decrees issued in 1959 as a precondition for Bank lending. Al­though owned by the municipali­ty of Bogota, appointments to the Board are made in such a way as to prevent the city council from obtaining a majority of the seats; this arrangement, agreed with the Bank, has been designed to in­sulate the entity from intrusion of politics.” (bold by ED) (p 23)

Once a public utility is established in accordance with World Bank’s directives, the relationship with that utility,

” … has often been maintained by further loans in support of fur­ther expansion. There are a num­ber of companies with which the Bank has been associated more or less continuously since the early 1950s or even earlier, such as CFE in Mexico, KESC in Pakistan, Chidral in Colombia, ENDESA in Chile and CEMIG in Brazil ( … ) Interruptions in the Bank’s series of loans to such companies, where they have occurred, have generally resulted from delays by the company, or more often, the Government authorities, in tak­ing certain steps upon which the Bank insisted.” (p 4)

When the Bank”s client-utilities have difficulties with their legitimate owners, the Bank typically stands on the side of their clients:

“The Bank has been a strong pro­ponent of the company’s interests in negotiations with the Govern­ment (of Argentina), for instance, securing lower taxes on equip­ment purchased by SEGBA, spec­ial Government contributions in 1966 to its working capital, Gov­ernment support for renegotia­tion of the labor contract in 1968.” (p 10)

An operational aim of the World Bank in the electric power sector is to initiate and sustain a rapid expansion of elec­trical generation capacity, so that “all demand in the existing service area” would be met (p 4). Since demand must be met at all times, then public utilities will have to dispose of excess capacity, a situation sought after by the power­ intensive industry (smelters and process industries).

The Bank admits readily that its methods lead to a rapid expansion of its clients’ generation capacity:

“Through studies, advice, loan conditions and lending itself, it has sought to bring about changes in the sector’s institutional struc­ture or in Government policies toward the industry, which would enable the power sector to expand more quickly and at a lower unit cost than would otherwise be the case.” (bold by ED) (p 7)

The results have demonstrated that the Bank’s expansionary aims were fulfil­led:

“Sales by borrowing companies have grown faster than customers, indicating an average annual in­ crease of 4 per cent in kW/h con­sumption per customer.” (p 37)

Although many methods are used by the Bank to stimulate its “clients” expan­sion, one method is used more widely and more regularly than others:

“Tariff covenants have probably been in practice the most impor­tant: They have generally been phrased in such a way as to re­quire that the borrowing utility earn a surplus sufficient to fi­nance part of its own further in­vestment requirements ( … ) or to yield a certain rate of return on total net fixed assets in operation, sometimes revalued to allow for inflation.” (bold by ED) (p 6)

As most electricity sales to bulk users (power-intensive industry) are made under long-term agreements, the only way for a utility to reach the prescribed level of return “on total net fixed assets (revalued)” is to increase electricity tariffs to the general public.

As utilities earn a surplus, they invest in new facilities, thus increasing their capacity (fixed assets). As World Bank covenants require them to yield a rate of return based on the value of fixed assets, the borrowing utilities are forced to increase their earnings. This can best be done by pushing up electricity consumption and/or increasing the price to the cap­tive market, i.e. the general population.

Concluding remarks

We have now expanded on the means and ends of the World Bank in the electric power sector. These should be related to one of the Bank’s major purposes, namely:

“to promote private foreign in­vestment by means of guarantees or participation in loans and oth­er investment made by private in­vestors.”(9)

This primary purpose was reaffirmed in slightly different terms in another Bank publication from 1969:

“[A]s the records of the Bretton Woods deliberations indicate, the emphasis from the beginning was not so much on what the Bank could lend out of its paid-in capi­tal as on the concept of the Bank as a safe bridige over which private capital could move into the international field.” (10)

To provide “private capital” (in this context a euphemism for transnational corporations) a receptive investment and operating climate in the Bank’s less indutrialised member countries, the Bank carries out specific policies in each sector. The Bank’s operational strategy in the electric power sector may be broadly defin­ed as follows:

• Subvert effective public control over electrical power utilities.
• Build-up an oversupply of in­stalled generation capacity.
• Use captive markets (local populations) to subsidize interna­tional competition between power utilities, for the benefit of power-intensive industries operating internationally.

Notes
(1) Teresa Hayter, Aid as Imperialism, Pen­guin books, 1971
(2) Bruce Nilsson, “The World Bank -A Political Institution”, Pacific Research and World Empire Telegram, San Francisco, Sept-Oct 1971
(3) Amon J Nsekele: “The World Bank and the New International Economic Order”, Development Dialogue, Uppsala (Sweden), 1977:1
(4) International Bank for Reconstruction and Development (The World Bank): Ope­rations Evaluation Report, Electric Power, 1972-03-10, Report Z-17 (restricted). Although this report deals in a general way with the Bank’s strategies in the electric power sector, it analyzes in more detail the operations of and its relationship with ten electricity companies in Third World coun­tries, namely: CFE (Mexico), VRA (Ghana), SEGBA (Argentina), CELPA (Ethiopia), FURNAS (Brazil), NEB (Malaysia), PUB (Singapore), EEEB (Colombia), EPM (Co­lombia), CVC/CHIDRAL (Colombia).
(5) Loan Agreement (Búrfell Power Project) between International Bank for Reconstruc­tion and Development (the World Bank) and Landsvirkjun, Loan No 466-0 for $18m
(6) Ibid. Article 8.01
(7) Contrary to general belief that Loan Agreements between the World Bank and its borrowers all over the world are confidential, they are in fact freely available from the Bank’s stationary stores in Washington, D.C.
(8) Article IX.10 in the Suppliers Credit Agreement between Landsvirkjun (Bor­rower) and Manufacturers Hanover Trust Company and ExImBank (Lenders), dated 1974-04-05, reads:
“(If) the Borrower shall have default­ed under any other agreement involv­ing the advance of credit to the Bor­rower, if such default gives to the holder of the obligation the right to accelerate the indebtness . . . then either lender … may make immedi­ately due and payable … (a) the entire principal indebtness owing to it then outstanding … and (b) accrued in­terest to the date of payment.”
(9) International Bank for Reconstruction and Development (The World Bank), Ar­ticles of Agreement, Washington 1976,”Arti­cle 1
(10) The World Bank, IDA and IFC Policies and Operations, The World Bank (IBRD), Washington, DC, June 1969