Ráðstefna um sanngjarna skiptingu arðs af orkuauðlindum 16. nóvember 2012

 

Natural resources and division of returns

I.        

The topic addressed at this conference – fair division of returns on energy resources – is needed and timely. The demand for national ownership of natural resources has been prominent in discussions of the review of Iceland's Constitution, and it has been a fundamental element of the review of the fisheries management system. Most people agree that the nation owns its natural resources. But what national ownership entails, who will administer that ownership, and who can lay claim to returns on natural resources when they are utilised – these matters are less clear and are actually difficult to resolve.

It should not be taken as a given that natural resources are the source of economic well-being for a country or its people. Economic research has often shown that in countries where natural resources constitute a large share of the nation's wealth, output growth is limited. Furthermore, it should be pointed out that countries such as Denmark and Holland, which enjoy considerable economic well-being, are largely devoid of natural resources in the sense we are referring to here, and in various African and Asian countries that are rich in natural resources, the people live in poverty. Utilisation of natural resources often pushes other investment aside, and if the utilisation is carried out by foreigners primarily seeking resource rent, output growth is limited. Education and other social systems are neglected, and human resources are lacking. Controlling access to natural resources often involves corruption, which means that resource rent ends up in the hands of foreign parties and a small wealthy class rather than generating widespread economic well-being. Fortunately, however, the negative relationship between natural resources and economic strength is not universal. In Norway, for instance, natural resources and a number of other factors have created one of the wealthiest countries in the world.

The lesson to be learned from this is that natural resources themselves are not the determining factor. Other things – social systems and, more importantly, the political and governmental situation – are of critical importance. They determine whether the resources are utilised by the country or not, and whether the resource rent is used to benefit the nation or goes elsewhere.  

II.     

National ownership of natural resources involves at least three factors: the ethical duty to preserve them, a claim on resource rent, and the right to decide how the resources shall be used. It must be ensured that these three things go together and that responsibility for them lies with a party who is entrusted with them by the nation and has only the nation's interests at stake. That party is responsible for fulfilling the substantive objectives of collective ownership.

Full individual control of natural resources is contradictory to the idea of collective national ownership. This does not mean, however, that individuals and companies owned by them cannot be involved in utilisation, which could take place in a variety of ways, including temporary transfer of utilisation authorisations, leasing of utilisation rights, etc. The main point is that the interests of the nation as a whole must be protected by setting conditions, ensuring that resource rent reverts to the nation, and ensuring that rights are transferred for moderate periods of time.

The majority of Iceland's natural resources are formally owned by State or the municipalities. In terms of the objectives implied by national ownership, there is some difference between these two parties. A municipality is a community of people living in a defined land area, and the municipal authorities act as representatives of these residents and protect their interests. A municipality does not represent other parts of the country and is not responsible for their interests. This means that a municipality cannot exercise full control over nationally owned natural resources. A municipality's residents do not have exclusive right to resource rent, and they cannot exercise control over the disposal of collective resources – such as their utilisation for economic development, etc.  

Municipalities have a very different position from individuals and commercial profit-making enterprises. Their role is to provide their residents with services, including the operation of public utilities. In this respect, they are not unlike a farmer who utilises land resources for agricultural purposes. The municipalities should therefore have the right to utilise their natural resources in order to serve community residents. Any further utilisation for commercial or profit-making objectives should be subject to the rules that govern other utilisation of the nation's collective resources.  

Municipalities' utilisation of collective resources for the benefit of their residents gives rise to questions about the rights of the rest of the nation. Resource rent from Iceland's energy resources currently reverts almost solely to buyers, through the sale of energy to households and power plants at prices below equilibrium. In this way, homeowners acquire a share in the resource rent. Those without the option of making such purchases forfeit their share.

It can be said that this has issue been addressed to some degree. Public funds have been used to facilitate energy procurement in areas where it is not economical for residents, and this has given the vast majority of the population access to geothermal indoor heating. Furthermore, indoor heating costs in so-called “cold areas” have been subsidised. In view of the fact that geothermal energy is largely owned by the nation, these measures can be viewed as a means of ensuring that all residents of Iceland have a share in the returns on collective energy resources.

Considering the matter as a whole, there are a number of reasons why municipalities should not have full control of natural resources that should be the property of the entire nation. They are not authorised by the nation to control them, and the conflicts of interest are obvious. On the other hand, municipalities' obligation to serve their residents provides a strong argument in support of their right to utilise the natural resources in their area in order to provide residents with specified basic services. Where additional exploitation for profit is concerned, questions arise about the involvement of the municipalities, including questions concerning a fair division of the returns.

III.  

The current Government has defined a natural resources policy that includes all resources owned by the nation, including fishing resources, energy resources, and others. This policy is set forth, among other things, in a cooperation agreement among the political parties represented in the Government and, most recently, in recommendations for a natural resources policy prepared by a committee representing the Government and the political parties. The report prepared by the committee presents a clear policy that will presumably be covered more fully here at this conference. This policy exists not only on paper, as can be seen in the recent passage of legislation on fishing fees and will be seen in other areas in the future.

In recent decades, the utilisation of two resources – fish and energy – has generated considerable resource rent; that is, the value created by utilisation exceeds the cost of labour plus a normal return on the investment concerned. In neither instance has the resource rent reverted to the nation to the degree desired.

The allocation of fishing rights free of charge and without significant fees or taxes has meant that resource rent, whatever it may be, has reverted to the holders of the fishing rights. The assessed value of the fishing resource rent is not a fixed quantity, as it changes with fishing conditions, market prices, and so forth. Most of those who have studied the performance and position of the fishing industry have come to the conclusion that the resource rent from these activities has been around ISK 30 billion or more in the recent years for which accounts are available, and much higher in the very recent past. The passage of the Act on Fishing Fees at the last legislative session was a step in the direction of ensuring that the nation has a share in the returns from this collective resource.

Iceland's energy sector is characterised by the fact that the sale of the product – namely, the energy – has not taken place in the market; therefore, an assessment of returns and profits is not easily carried out. Delivery of energy has been subject to official decisions and long-term sales contracts concluded by the authorities. The resources have been provided at a discount to households, firms, and foreign industrial plants. The resource rent has thus been transferred to the purchasers of the energy.

Purchasers of geothermal power for indoor heating enjoy rent on energy resources in the amount of the difference between the price they pay and the price they would have to pay for comparable energy in a competitive market – for oil heating, perhaps. This advantage is probably the greatest share of the energy resource rent reverting to the nation. According to a report from the National Energy Authority, in 2009 the saving from using geothermal power instead of oil for indoor heating amounted to ISK 67 billion, which can be viewed as a rough estimate of the resource rent that Icelanders receive.

Purchasers of electricity in the domestic market also receive rent on the resource to the degree that the price they pay is below market price. This portion of resource rent is much smaller, however, than the portion represented by geothermal heating, and it can be said that it reverts to the entire nation and is divided in a reasonably fair manner.

Industrial companies are the buyers of 80% of all electricity in Iceland. According to information from Landsvirkjun, the largest seller, the price paid for the energy is so low that the company does not achieve an acceptable return on equity. This shows that the sale of energy to heavy industry has not generated adequate resource rent for Landsvirkjun or its owners. A portion of it has reverted to consumers, as I mentioned earlier, but the vast majority has reverted to other purchasers of energy – the industrial plants – and all indicators suggest that it is substantial. A comparison of energy prices charged to industrial companies in Europe indicates that, considering Iceland's geographical location, the resource rent could be estimated at ISK 25-40 billion per year, although this depends on the markets for energy and aluminium at any given time.

IV.  

I have mentioned some of the tasks awaiting the authorities as they implement policy for natural resources, energy in particular. I have also tried to give you an idea of the economic significance of natural resource utilisation for the benefit of the nation. The resource rent on fish and energy production can be estimated at well over ISK 100 billion per year. A goodly share of this reverts indirectly to some of the population through reduced indoor heating and electricity costs, but too large a portion does not benefit the nation.

The task ahead is to ensure that natural resources are a genuine collective asset by guaranteeing that the people have a claim on resource rent. In order to do this, we must resolve a number of issues. One is to bring a larger share of the returns to the community, and another is the focus of this conference: to ensure the fair division of the returns – in this case, on energy resources. This task must involve representatives of the people and the community most affected by it.