Viewing cable 09REYKJAVIK191, INVESTING IN ICELAND: OPPORTUNITIES AND OBSTACLES

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FM AMEMBASSY REYKJAVIK
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RUEATRS/DEPT OF TREASURY WASHINGTON DC
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UNCLAS REYKJAVIK 000191 
 
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TREASURY FOR MYERS AND NORTON 
NSC FOR HOVENIER 
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E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN IC
SUBJECT: INVESTING IN ICELAND: OPPORTUNITIES AND OBSTACLES 
 
REF: Reykjavik 176 
 
Do not post on internet. Contains business information. 
 
¶1. (SBU) Summary: As Iceland struggles to rebound from last year's 
financial meltdown, the government is reevaluating the future 
direction of the country, including the role of foreign direct 
investment (FDI). There is potential for investment in a variety of 
sectors, particularly those that utilize green energy. The 
government has stated its desire to bring in FDI to create jobs and 
rebuild the economy, yet recent actions have begun to discourage 
foreign investors from entering the market or expanding operations. 
Creating and adhering to business-friendly tax policies will 
encourage more FDI. End summary. 
 
Opportunities 
------------- 
 
¶2. (U) Katrin Juliusdottir, Iceland's Minister of Industry (SDA), 
recently opened a conference on FDI with her thoughts on why 
investors are attracted to Iceland. Investors, she said, come to 
the country to take advantage of Iceland's abundance of clean 
energy, educated population, and geographic location. She added, 
however, that Iceland must diversify its economy if it intends to 
create a sustainable and competitive financial system. The country 
has identified several fields on which it is concentrating efforts, 
but is open to any idea that would utilize the country's resources 
in a profitable, environmentally responsible manner. 
 
¶3. (SBU) Several government leaders, including three Ministers, have 
told us that they view data centers as a key to the development 
future of Iceland. Data centers are an ideal industry for Iceland 
due to the country's naturally cool climate and low utility costs. 
According to the director of the government-sponsored Invest in 
Iceland Agency, data centers that invest in Iceland can negotiate 
power supply prices for 20 years. This could lead to savings of up 
to 40 percent per year on energy costs compared to data centers in 
London. As a result of these advantages, several data center firms 
are looking at Iceland, including an American company that is 
rumored to have lined up IBM as a client. 
 
¶4. (U) The government of Iceland is also actively trying to attract 
FDI in the field of health tourism. An American-financed company is 
planning to open a private hospital outside of Reykjavik that will 
specialize in hip and knee surgeries for foreigners. Invest in 
Iceland is also seeking investors for carbon fiber production, 
utilizing the energy stream from geothermal plants to power 
greenhouses, cultivation of aquatic biomass, and polysilicon 
production. Similarly, the property manager of the old NATO base in 
Keflavik is actively seeking businesses to set up operations. It is 
focusing on areas such as data centers, a renewable energy research 
center, health tourism and a flight school, but is flexible and open 
to other industries. The area is close to the international airport 
and a harbor and has access to renewable energy. 
 
Obstacles 
--------- 
 
¶5. (SBU) A major obstacle to investing in Iceland is the uncertainty 
created in the fallout of last year's financial crisis. The 
representative of one of the first companies trying to open a data 
center in Iceland noted at the recent FDI conference that the 
country is perceived as a risky place to do business as a result of 
last year's financial meltdown, the Icesave issue, and the ongoing 
currency restrictions. Capital controls remain in effect, though it 
is anticipated that the Central Bank will begin gradually lifting 
the restrictions upon receipt of the next tranche from the IMF. The 
managing director of the McDonald's franchise in Iceland announced 
the closure of all three restaurants effective November 1, citing 
the rising cost of importing ingredients and the lack of any signs 
of an economic recovery. 
 
¶6. (U) A second obstacle is Iceland's evolving tax structure. Fred 
Vossen, a partner with PriceWaterhouseCoopers in Belgium, stated at 
the FDI conference that the lack of certainty regarding the tax 
environment impedes investment. The government currently views 
increasing tax revenue as one of its few options in the struggle to 
reduce the record deficit that is projected to exceed 10% of GDP in 
¶2010. Vossen argued that a proposed uniform energy tax (reftel) 
would kill Iceland's national competitive advantage in energy 
intensive industries. Media reports indicate that foreign companies 
have already halted at least seven different projects after learning 
about the proposed energy tax and are looking to establish 
operations in other countries. 
¶7. (SBU) The data center representative agreed with Voss, noting 
that the uncertainty surrounding tax issues is the number one 
problem today. Despite Iceland's stated desire to attract data 
centers, for example, its prospective tax policy could produce the 
exact opposite effect. (Note: In addition to taxing the data center 
itself, the Ministry of Finance is considering classifying each 
server as a physical presence in Iceland, which would subject each 
data center client to additional taxation. End note.) 
 
¶8. (U) Another potential obstacle to foreign investment is a rising 
nationalistic movement in Iceland. A growing number of Icelanders 
are increasingly wary of foreign investors and deeply protective of 
maintaining ownership of Iceland's natural resources. The 
government has stated that it would also like to diversify the 
economy beyond the aluminum and fishing industries. As a result, 
aluminum projects planned years ago have been delayed or canceled. 
For example, the Minister of Environment did not renew a letter of 
intent for the construction of an American smelter in the north to 
allow the government to investigate more environmentally friendly 
options that could create more jobs or income. (Note: It is 
perceived that the long-term contracts negotiated by the aluminum 
industry contain unfavorable terms for the government, particularly 
regarding the cost of energy usage. End note.) The Minister of 
Environment also called for a review of an environmental impact 
assessment for another American aluminum smelter near Keflavik 
already under construction. Her decision could delay the project 
anywhere from two months to two years and raises the question of 
whether Iceland will honor previous commitments to foreign firms. 
 
Comment 
------- 
 
¶9. (SBU) The Minister of Industry recognizes that FDI is a key 
element in creating jobs and rebuilding Iceland's economy; however, 
she faces some strong opposition in creating such a reality, 
especially from the minority members of the ruling coalition. The 
potential exists for FDI in Iceland, ranging from small business to 
large scale investment. Yet the debate regarding the appropriate 
types and level of FDI in Iceland must be resolved in short order 
for Iceland to restore its credibility in the international business 
community. Implementing a business-friendly tax policy is the first 
step, which the government must do in consultation with key industry 
players. Iceland should also create an incentive package for inward 
investment that is in line with EU regulations, to include tax 
incentives, training grants, and cash grants for fixed asset 
investments. However, since the government has yet to fully grasp 
the importance of implementing such measures, a comprehensive 
investment strategy including such incentives is unlikely to 
materialize any time soon. End comment.