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17. febrúar 2003 Fjármála- og efnahagsráðuneytiðGeir H. Haarde, fjármálaráðherra 1998-2005

Ræða fjármálaráðherra á fundi Landsbankans í London 17. febrúar 2003. Ræðan er á ensku.

Minister of Finance
Geir H. Haarde

- Check against delivery -
Landsbanki Investor Relation Meeting
February 17, 2003
Gibson Hall, Bishopsgate, London

Ladies and Gentlemen,

It is a great pleasure for me to address this Investor relation meeting, especially in light of recent development in the ownership of Landsbanki Íslands. In brief, I am particularly pleased not to be representing the majority owner of Landsbanki Islands anymore.

I will first take a few minutes to discuss the current economic situation and the financial environment in Iceland and then move on to discuss the privatisation process with emphasis on the financial market.

The Icelandic economic situation
The Icelandic economy is in good form. This is in part the result of sound fiscal and monetary policies over the last several years, as well as the direct result of important structural changes and a shift in policy towards market liberalisation, deregulation and, indeed, privatisation.

All this has helped to strengthen Icelandic industries and the financial market. As a result, productivity has increased and economic growth has been higher in Iceland than in most neighbouring countries for the past several years. Real disposable income of households has increased by roughly one third since 1994.

Readjustment period
After five years of good economic growth, where real GDP rose at an annual average of 4S per cent, the Icelandic economy went through a period of readjustment this past year. There were signs of overheating in the course of 2000 and early 2001 resulting in a considerable current account deficit and rising inflation. These trends have now been reversed with the current account returning to approximate balance and inflation rapidly moving below the OECD average, currently running at 1S per cent. The Central Bank's inflation target is 2S per cent and the Bank now forecasts price stability to prevail for the next two years.

The soft landing of the economy was guided by prudent monetary and fiscal policy. The small Icelandic economy has showed great capacity for rapid adjustment in the past year, and a recession has been avoided with sensible measures, taking advantage of the greatly increased flexibility of the economy. The tight monetary and fiscal stance played a decisive role in readjusting the economy and succeeded in keeping unemployment to a minimum. This year, the economy is expected to resume its growth. Interest rates have come down and the 2003 growth rate is forecast at above 2 per cent on the basis of good export growth and resumption in domestic spending.

Tax cuts improve outlook
The future prospects for the Icelandic economy are bright with at least a 2S-3 per cent annual growth rate forecast even in the absence of new energy-intensive industry. The planned energy investments will raise the overall level of GDP by 1-2 per cent when they come on stream and by an even larger margin during the construction period.

In the face of increasing globalisation, sharper international competition and rapidly growing mobility of enterprises and labour, the Icelandic Government decided last year to aggressively slash the corporate income tax, from 30 percent to 18 percent. Furthermore, companies can now select the currency in which to do their accounts. The tax reduction will stimulate domestic industry, attract foreign investment and discourage Icelandic companies from moving abroad. It will also strengthen the balance of the economy, create better growth conditions and further raise the already high standard of living. The short-term fiscal revenue loss should be recovered in due course through increased economic activity and a broadening of the tax base.

Iceland, being an island far away from the European continent, is already at a geographical disadvantage. It must therefore compensate for its location by creating a healthy business environment for strong economic growth in the long term.

Privatisation policy in Iceland
Let me now turn to the privatisation process in Iceland and current developments in that area. As discussed earlier, the Icelandic economy has changed dramatically over the last decade both with respect to general conditions and the role of the government. A policy that was characterised by state involvement in industry, subsidies and state monopolies in various areas of business has been put aside and replaced with a policy that aims at freeing the economy of political intervention and nurturing private enterprises. Iceland's participation in the EEA agreement as of 1994 and increased globalisation have supported this development.

Objectives of privatisation
The Icelandic Government has defined several objectives in regard to privatisation. These are:

1. To increase economic efficiency by eliminating the distortions inherent in state-ownership. The state owned two of the three major commercial banks, various other financial institutions and funds as well as several manufacturing and service industries. The energy companies and the Post and Telecommunication companies are also public property.
2. To widen share ownership and continue to encourage development of the Icelandic stock market which came to life in the mid 1980's and has since developed rapidly. The turnover of the Icelandic stock market has over the period from 1994 to 2002, increased from less than 20 million dollars to more than 800 million dollars. Privatisation of publicly owned companies over this period has greatly influenced this development.
3. To raise capital in order to decrease Treasury debt. One of the main goals of the privatisation programme is to use income from privatisation to reduce the already relatively low Treasury debt. Earnings from privatisation will also be used to finance specific infrastructure projects and to support the development of information technology.

Executive Committee on Privatisation

I now turn to the specifics of the privatisation program. At the beginning of its new term in 1999, the Cabinet reappointed an Executive Committee on privatisation to make specific recommendations on policy and to oversee the execution of the privatisation process. The Committee works on the basis of special rules on procedures regarding the implementation of privatisation that were agreed by the Cabinet in 1996 in order to ensure professional preparation of the sale of state-owned enterprises. These rules are publicly available.

Proceeds from privatisation
The government has over a five year period received more than USD 600 million for its shares in the previously government owned banks, of which USD 250 million for Landsbanki and 170 million for Búnaðarbanki. Since 1991, twenty-eight companies have been privatised partly or wholly. The total proceeds from these sales are more than 700 million dollars. It is therefore clear that privatisation has had a very positive effect on the Treasury budget and has helped significantly to lower government debt as well as serving other important objectives.

Landsbanki and Búnaðarbanki
The most recent privatisation project was the sale of government shares in Landsbanki Íslands and Búnaðarbanki Íslands, the Agricultural Bank. This process was launched last June when the Executive Committee called on those interested to bid for a large stake in both Landsbanki and Búnaðarbanki. In the public advertisement it was announced that the government was seeking a strategic investor to purchase at least 25% of the total shares in each of the banks. In the end 45,8% in both banks were purchased by such investors.

In addition to the general objectives already mentioned two additional ones were defined: First, to seek an investor, foreign or domestic, that would contribute knowledge and know-how and that way strengthen the banks. Second, to enhance competition in the financial market in Iceland. The investors would be evaluated on the basis of financial standing, knowledge and experience of financial markets, the size of the holding sought by the party, proposed cash price, and plans regarding the future operation of the banks.

The government put heavy of emphasis on the transparency of the process by publishing the notice and all relevant information. Accordingly the names of interested parties were disclosed as well as the most important milestones in the process. This was done in order to maintain the required credibility and has throughout been an essential factor in making privatisation a success, both financially and politically.

Selection criteria
For this audience it might be interesting to review the criteria for the selection of a major investor in Landsbanki. There were five interested bidders.

The selection of a candidate for negotiation was based on responses from the bidders to a number of specific questions posed by the Executive Committee on all the key aspects. Each bidder also met with the committee and had the opportunity to meet the management of Landsbanki.

The criteria used for the selection of a bidder were of course in line with the objectives published by the government. The criteria relating to "financial standing", "plans regarding the future operation of the bank" and "knowledge and experience of financial markets" all relate to the objective of strengthening Landsbanki. The remaining criterion related directly to the other stated objective of strengthening competition in the Icelandic financial market. Therefore, "financial terms of offer" including the proposed size of the holding were important determinants in deciding which party should be given exclusivity. The importance of price is self evident, although it was made clear that relatively small differences in price might not be critical if other factors pointed differently.

Given that exclusivity was to be granted at an early stage, the financial standing of the bidder and his plans for the bank were the two most important evaluation criteria, closely followed by the financial terms of the offer and the bidder's knowledge and experience of financial markets. The Committee, in consultation with HSBC, our outside investment bankers, decided on the relative importance of the criteria in the overall outcome.

The importance of factors such as the financial standing of the bidders can be debated. The government, in this case, was of the opinion that it was necessary to provide a high level of comfort, not only that the bidder could fund the acquisition of the shareholding in Landsbanki, but also that the bidder would not be financially stretched in doing so in a way that might put the bank itself under pressure. Among the factors that were looked at in assessing the financial standing were funds available, level of external funding, and status of funding.

It is clear that the selected bidder, Samson Holding Ltd, scored high on these points. They demonstrated enough financial strength to give sufficient comfort regarding the financing of the acquisition. The importance of this criterion demonstrates that government objectives can vary depending on the project involved and whether the government is seeking a strategic investor instead of just selling assets with the objective of maximising the proceeds.

This particular privatisation was highly successful in my view, both for the government and hopefully also for the buyers. It is valuable for the Icelandic economy that this important financial institution, Landsbanki, has a committed strategic owner who has outlined his vision for the future operation of the bank. The same is true of the investors in Búnaðarbanki. Samson will without doubt greatly contribute to the bank as well as to the economy as a whole. In the contract, Samson have committed themselves to hold at least 33% of the total shares in the bank for two years which in itself is important and shows that the investor has a trustworthy long term plan.

Government role focused
The withdrawal of the state from commercial banking is extremely important, both for the financial market and the Government itself. It can now concentrate on its role as regulator and on policy making, instead of holding the conflicting role of being both owner and regulator. The financial sector in Iceland is fortunately rapidly developing and very competitive in most areas. There is no longer any need to tie up government resources in financial institutions. We intend to sell all the remaining shares in the two banks within the next few weeks.

The new investors who have taken over the ownership role in Landsbanki have shown that they are able business people and a lot will be expected of them in the future. I would personally like to congratulate them on their large purchase in Landsbanki and wish them every success.

Iceland's privatisation programme 1991-2003

Million Ikr.
Skipaútgerð ríkisins
(coastal shipping line)
Company disbanded. Assets sold to private lines. Services now in competitive market.
(alcohol and tobacco monopoly)
Production facilities, trademarks and patents sold.
Prentsmiðjan Gutenberg
(printing plant)
Compete privatisation
Jarðboranir hf.
(geothermal drillers)
Sale of entire 50% Treasury holding
Ferðaskrifstofa Íslands hf.
(travel agency)
Sale of entire 1/3 Treasury holding
(arts fund)
Publishing unit sold.
Þróunarfélag Íslands hf.
(venture capital)
Sale of entire 29% Treasury holding.
Íslensk endurtrygging
Sale of entire 1/3 Treasury holding.
Rýni hf.
(fisheries quality control)
Complete privatisation.
SR – mjöl hf.
(herring processing)
Complete privatisation.
Þormóður rammi
(trawlers and fish processing)
Sale of entire 1/6 Treasury holding.
Lyfjaverslun Íslands hf.
(pharmaceutical manufacturing and distribution)
Sale of 50% Treasury holding.
Lyfjaverslun Íslands hf.
Sale of remaining 50% Treasury holding.
Skýrr hf.
(data processing)
Sale of 28% Treasury holding.
Bifreiðaskoðun hf.
(automobile safety inspection)
Sale of 44% Treasury holding.
Íslenska járnblendifélagið hf.
(Ferro-silicon plant)
Sale of 26.5% Treasury holding.
Íslenskur markaður hf. (Retail store) Sale of 54,6 Treasury holding.
Fjárfestingarbanki atvinnulífsins hf.(Investment bank ) Sale of 49% Treasury holding.
Skýrr hf. (data processing) Sale of the remaining 22% Treasury holding.
Íslenskir aðalverktakar hf.
(Building contractors)
Sale of 12,1% Treasury holding.
Stofnfiskur hf. (Fish farmer company) Sale of 19% Treasury holding.
Áburðarverksmiðjan hf.
(Fertilizer plant)
Sale of entire 100% Treasury holding.
Hólalax hf. ( Fish farmer company) Sale of entire 40% Treasury holding.
Fjárfestingarbanki atvinnulífsins hf. (Investment bank) Sale of remaining 51% Treasury holding.
Búnaðarbanki Íslands hf.(Commercial Bank) Sale of 13% Treasury holding.
Landsbanki Íslands hf. (Commercial bank) Sale of 13% Treasury holding.
Intís hf. (Internet company) Sale of 22% Treasury holding
Kísiliðjan hf. (Diatomite plant) Sale of entire 51% of Treasury holding.
Stofnfiskur hf. (Fish farmer company) Sale of entire 33% Treasury holding.
Landssími Íslands hf.(Iceland Telecom) Sale of 2,68% of Treasury holding.
Steinullarverksmiðjan hf. (Rock wool company) Sale of entire 30.11 Treasury holding.
Landsbanki Íslands hf.(Commercial bank) Sale of 20% of Treasury holding.
Landsbanki Íslands hf.(Commercial bank) Sale of 45,8% of Treasury holding.
Búnaðarbanki Íslands hf.(Commercial bank) Sale of 45,8% of Treasury holding.

Issue of new stock
Landsbanki Íslands hf.(Commercial bank) Issue of new stock 15% 1725 ikr.
Búnaðarbanki Íslands hf.(commercial bank) Issue of new stock 15% 1067 ikr.


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