Jul 18 2003

Violation of the Equator Principles by the $400 Million Loan to Landsvirkjun

International Rivers Network

The $400 million loan for Iceland’s National Power Company

On July 9, 2003, a $400 million revolving credit was signed by Iceland’s National Power Company (Landsvirkjun) and a consortium of 19 banks. The mandated arrangers of the loan are Barclays Bank (UK), Sumitomo Mitsui Banking Corporation (Japan), SEB (Sweden), and Societe Generale (France), with shares of $31 million each. The other members of the consortium are CDC IXIS (France), Danske Bank (Danmark), DePfa Group (Germany/Ireland), Dexia Group (France/Belgium), Fortis Bank (Netherlands), Islandsbanki (Iceland) and Landesbank Baden–Wuertemberg (Germany), with $25 million each; Deutsche Postbank (Germany), KBC Bank (Belgium) and Norddeutsche Landesbank Girozentrale (Germany), with $17 million each; and BNP Paribas (France), Deutsche Bank (Germany), JP Morgan (USA), Kaupthing Bunadarbanki (Iceland) and Landsbanki Islands (Iceland) with $10 million each.

The $400 million revolving credit is for general corporate purposes of Landsvirkjun, including for the Company’s capital expenditure requirements. Landsvirkjun’s capital expenditure program primarily consists of the Karahnjukar Hydropower Project (KHP) on Iceland’s Central Highlands. If built, KHP will consist of nine dams, three reservoirs, seven channels and 16 tunnels. The $1.1 billion project will generate electricity for an aluminum smelter in East Iceland that is presently being developed by Alcoa Inc.

The Equator Principles

On June 4, 2003, ten leading banks from seven countries announced the adoption of the so–called Equator Principles (EPs), a set of environmental and social guidelines.[1] The signatories include Barclays Bank as the only member of the bank consortium that just agreed to finance Landsvirkjun_s investment program, and thus the Karahnjukar project. Barclays Bank was one of the four initiators of the EPs, and is one of the two bookrunners of the Landsvirkjun loan.

By signing the Equator Principles, the signatories committed to complying with the applicable Safeguard Policies of the International Finance Corporation and the World Bank/IFC Pollution Prevention and Abatement Guidelines. In a strict sense, the Equator Principles only apply to direct Project Financing of an amount of $50 million and more.[2] Yet in the EPs’ Preamble, the signatory banks committed “to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices”. The banks’ commitment is thus not strictly limited to Project Finance. Indeed it would not make sense for banks to apply different standards for projects financed through Project Finance and through other instruments.

“Although, strictly speaking the credit facility is not project finance”, Barclays Bank agrees on this issue, “we appreciate that the Karahnjukar project development is closely linked to Landsvirkjun’s fund raising. Consequently we benchmarked the hydro electric project against both our own environmental impact assessment (EIA) policy and against the Equator Principles.”[3]

Violations of the Equator Principles

According to the EPs’ Statement of Principles, the signatory banks expect environmental assessment (EA) reports to address 17 “key environmental and social issues to our satisfaction”. The Landsvirkjun loan violates the following four of these key issues:
• “Protection of human health, cultural properties, and biodiversity, including endangered species and sensitive ecosystems”: As part of IFC_s Safeguard Policies, this issue is elaborated in Operational Policy 4.04, Natural Habitats, of November 1998. According to this Policy, “IFC does not support projects that, in IFC_s opinion, involve the significant conversion or degradation of critical natural habitats”. The Policy defines critical natural habitats, among other factors, as “sites that are critical for rare, vulnerable, migratory, or endangered species”.[4]

KHP’s reservoir and river diversions will impact an area of approximately 2,900 square kilometers, or three percent of Iceland’s land area. Through submergence, serious soil erosion, and changes in the hydrological regime, it will damage the habitats of the pink–footed goose, reindeer, harbour seals, and various fish species. The impacted area includes the Utherad and the Eyjabakkar Important Bird Areas. The reservoir will impact 35 rare moss and lichen species, including two globally threatened species.[5] On August 1, 2001, the Icelandic Planning Agency considered “that the value of the natural features in the impact area of the project is high, and that the impact of the project would in many cases be substantial and irreversible”.[6]

• “Cumulative impacts of existing projects, the proposed project, and anticipated future projects”: Hydropower plants are already powering two aluminum smelters in Iceland. Landsvirkjun has plans to develop additional dams that would allow the country’s smelting capacity to increase more than fivefold.[7] The Karahnjukar EA report did not address the cumulative impacts of the planned and proposed large dams in Iceland’s Central Highlands in any way.

• “Consideration of feasible environmentally and socially preferable alternatives”: The Karahnjukar EA report deals with alternative sources of electricity very cursorily.[8] In 1999, Iceland’s government initiated a process for the preparation of a Master Plan for Hydro and Geothermal Energy Resources in Iceland. An interim report on this Master Plan was basically ready by early February 2002, but was not released until after Iceland’s parliament passed legislation on KHP in April 2002. According to this official report, the natural value of the area affected by KHP is the highest among the 15 project sites considered. When the loss of natural value and the environmental impacts are jointly considered, only two sites are less acceptable than KHP.[9]

On August 16, 2000, Iceland’s Planning Agency argued as follows: “It would be conducive to easier assessment of the environmental impact of the Karahnjukar Power Plant and to more systematic discussion if results from the overall plan existed; nevertheless, the agency is of the opinion that the reasons for deferring environmental impact assessment for the plant until the master plan is ready are insufficient.”[10] This reasoning, and the interim findings of the Master Plan, confirm that alternatives to KHP were not adequately considered in the Karahnjukar EA report.

• “Pollution prevention and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management”: According to IFC’s Operation Policy 4.01, Environmental Assessment, the project area of influence is defined as “the area likely to be affected by the project, including all its ancillary aspects”.[11] The sole purpose of KHP is to supply electricity for Alcoa Inc._s Fjardaal aluminum smelter in East Iceland. The emissions of the Fjardaal smelter must thus also be considered in the context of the Equator Principles.

According to the World Bank’s Pollution Prevention and Abatement Handbook, “modern smelters using good industrial practices are able to achieve” sulfur dioxide emissions of 1 kg per ton of aluminum produced on an annualized basis.[12] Reaching such emission levels requires the use of a so–called wet scrubber system. Alcoa Inc. does not intend, and has not been obliged, to use wet scrubbers at the Fjardaal smelter. As a consequence, the SO2 emissions of the smelter, as allowed by the official environmental license, will amount to 12 kg per ton.


The $400 million loan for Landsvirkjun is not consistent with the Equator Principles. It is positive that nine of the EPs’ ten signatory banks have refrained from participating in the loan, even if several of them had financed Landsvirkjun in the past. The members of the new loan consortium include several environmental laggards such as Sumitomo Mitsui Banking Corporation, BNP Paribas and JP Morgan that have so far not even signed the UNEP Financial Institutions Statement on the Environment & Sustainable Development, and some medium–sized banks.[13]

Barclays Bank is the only bank that has played leading roles both in initiating the Equator Principles, and in arranging the Landsvirkjun loan. Barclays Bank has commented as follows on its leading role in this loan: “We called for a second set of EIA work to be undertaken through recognized consultants and we are as happy as we can be, based upon the info provided, that the environmental aspects are being managed properly at this point.”[14] Barclays Bank has shared a copy of the second opinion that it commissioned on the environmental assessment with International Rivers Network. The opinion is a quick desk review, and is not based on any site visits or consultations.

Through its active role in financing Landsvirkjun, and the Karahnjukar project, Barclays Bank has failed the first test to demonstrate that it is serious about its commitments under the Equator Principles. Unlike the other signatory banks, Barclays has created an impression that it treats the Equator Principles are a mere formality and greenwash.

As NGOs have pointed out in their collective analysis of the Principles, the EPs lack external verification and public disclosure mechanisms. Unlike the UNEP Financial Institutions Initiative, the EPs do not foresee any mechanism to report on their implementation. The signatories of the Equator Principles should create such mechanisms of compliance and accountability without delay. Only effective compliance and accountability mechanisms will prevent that the credibility of the Principles is further undermined by institutions such as Barclays Bank.

[1] See http://equatorprinciples.ifc.org/ifcext/equatorprinciples.nsf/Content/corepoints for a list of the signatories. See http://equatorprinciples.ifc.org/ifcext/equatorprinciples.nsf/AttachmentsByTitle/EPFinal/$FILE/EPFinal.pdf for the text of the Equator Principles, and http://www.financeadvocacy.org/mod.php?mod=userpage&menu=3&page_id=10 for a detailed NGO critique of the Principles.

[2] Project Finance refers to the financing of projects where the repayment of the loan is dependent upon the revenues that a project is expected to generate.

[3] Philippa Birtwell, Head of Public Issues, Barclays Bank, in a letter to International Rivers Network, July 15, 2003.

[4] IFC, OP 4.04, Paragraph 3 and Annex A – Definitions.

[5] See BirdLife International, Icelandic Nature Conservation Association, Wildfowl & Wetlands Trust, World Wide Fund for Nature, Hydropower Development in Iceland: Damage to habitats and species of European importance, 17 March 2003.

[6] See Planning Agency, Ruling, August 1, 2001.

[7] See Thorsteinn Hilmarsson, Energy and aluminum in Iceland, Platts Aluminum Symposium, Phoenix/Arizona, January 12–14, 2003.

[8] See Landsvirkjun, Karahnjukar Hydroelectric Project, Environmental Impact Assessment, pp. 86ff.

[9] Tilraunamat á 15 virkjunarkostum í vatnsafli. Verkefnisstjórn um gerð rammaáætlunar um nýtingu vatnsafls og jarðvarma. Apríl 2002.

[10] Quoted in Landsvirkjun, Karahnjukar Hydroelectric Project, Environmental Impact Assessment, p. 87.

[11] IFC, OP 4.01, Environmental Assessment, Annex A – Definitions, Paragraph 5.

[12] World Bank Group, Pollution Prevention and Abatement Handbook, April 1999, p. 264.

[13] See http://unepfi.net/fii/ for the UNEP Financial Institutions Statement and the list of the 192 signatories.

[14] George Hulbert, Barclays Bank, July 4, 2003.

Additional Information

• Visit IRN’s Home Page

Visit IRN’s International Finance Campaign

For further information, please contact:

Peter Bosshard
International Rivers Network
E–mail: pbosshard@irn.org
Phone: +1 510–848–1155


2 Responses to “Violation of the Equator Principles by the $400 Million Loan to Landsvirkjun”

  1. […] the project could have been partly responsible for the Icelandic financial crisis in 2007-2008. A consortium of banks, including the UK’s Barclays, lent $400 million to Landsvirkjun to finance Kárahnjúkar […]

  2. […] the project could have been partly responsible for the Icelandic financial crisis in 2007-2008. A consortium of banks, including the UK’s Barclays, lent $400 million to Landsvirkjun to finance Kárahnjúkar […]