Ms. Alison Ress
Sumitomo Mitsui Banking Corporation - Europe
February 27, 2003
SMBC support for Karahnjukar Hydropower Project in Iceland
Dear Ms. Ress,
International Rivers Network is concerned about the role of Sumitomo Mitsui Banking Corporation in supporting Icelandís National Power Company (Landsvirkjun) and indirectly, the Karahnjukar Hydropower Project. Please find below some preliminary information about the project and SMBC's involvement in it, and a request for further contact details.
The Karahnjukar Hydropower Project:
The Karahnjukar project will be developed and operated by Landsvirkjun, and will power a future aluminum smelter operated by Alcoa. If built, the project will consist of nine dams, three reservoirs, a series of tunnels and river diversions, and a 630 MW power plant.
The Karahnjukar project would have massive environmental impacts on Icelandís fragile Eastern Highlands wilderness area. It would irreparably damage a rare oasis of highland vegetation, and would destroy or severely impact sensitive habitats for reindeer, the pinkfooted goose and seals. The projectís Environmental Impact Assessment was rejected by Icelandís National Planning Agency, a decision that was later overruled by the Minister for Environment.
The economic benefits of the Karahnjukar project are questionable. The project will indirectly be subsidized by the state. SMBC has prepared a report on the project's economics on the basis that the technical, economic and legal assumptions provided are valid. Yet Landsvirkjunís assumptions regarding cost and time overruns and aluminum price trends are highly optimistic. A thorough economic evaluation commissioned by the Iceland Nature Conservation Association INCA estimates that (under slightly different parameters) Karahnjukar will entail annual losses for Landsvirkjun of $36 million.
Karahnjukar is a highly divisive issue within Iceland. Opponents have carried out large demonstrations, have picketed the national parliament every day since August 2002, have gone on hunger strike, and have raised national and international media attention (including stories in the New York Times and other papers).
Observers in Iceland agree that Karahnjukar is a highly politicized project. Highest officials in Government and Landsvirkjun have personally disparaged project opponents for supposedly ďsabotagingĒ the national interest. Many people are afraid of expressing their opinion on Karahnjukar in public.
INCA and three Icelandic citizens sued the Minister for Environment for overturning the negative decision on the projectís Environmental Impact Assessment. Icelandís High Court is presently considering this case. In addition, an Icelandic citizen filed a complaint with the EFTA Surveillance Authority regarding an infringement of the European Economic Area Agreement, asserting that the Icelandic Government unduly subsidizes Landsvirkjun and aluminum production through a variety of measures.
Landsvirkjun intends to raise funds for the Karahnjukar project primarily on the capital market. In 1998, Merrill Lynch arranged a $1 billion Euro Medium Term Note Programme for Landsvirkjun. SMBC's joint-venture company Daiwa Securities SMBC is one of the dealers of this programme. According to the Offering Circular of May 31, 2002, Landsvirkjun may from time to time issue notes under the programme, the proceeds of which will be used for ďgeneral corporate purposesĒ. The $1.1 billion Karahnjukar project is by far the largest investment project of the power utility, and will increase the utilityís power generating capacity by more than 50%. Landsvirkjun has no use for the bulk of the EMTN programme if not for investment in the Karahnjukar project.
Like INCA, World Wildlife Fund and other non-governmental organizations, International Rivers Network believes that the Karahnjukar project should not go ahead, at least until a full and open public debate of the project and other development options in Iceland is conducted. We believe that in line with their commitment to sustainable development, banks such as SMBC and other financial institutions should not fund the Karahnjukar project, either directly or through intermediaries such as Landsvirkjun. We believe that as long as the project is not reconsidered, no further tranches of the 1998 EMTN programme should be issued.
We will send you, and other banks involved in the EMTN programme (Merrill Lynch, ABN AMRO, JPMorgan, UBS), more detailed information and recommendations regarding the project soon. More information is also available at INCAís website, www.inca.is .
International Rivers Network
1847 Berkeley Way
Berkeley, CA 94703, USA