Saturday November 29, 2003 The Guardian

POWER DRIVEN

In Iceland , work has already begun on a colossal $ 1bn dam which, when it opens in 2007, will covera highland wilderness - and all to drive one smelter. Environmentalists are furious, but the government appears ditermined to push through the project whatever the cost. Susan DeMuth investicate

North of Vatnajokull, Europe's biggest glacier, lies Iceland's most
fascinating and varied volcanic landscape. Ice and boiling geothermal
infernos meet at the edges of the glacier, and then the largest remaining
pristine wilderness in western Europe begins - a vast panorama of wild
rivers, waterfalls, brooding mountains and mossy highlands thick with
flowers.

A large part of this is due to disappear under 150m of water by 2006, when
the Karahnjukar dam is completed. Work has already begun on the $1bn
mega-project designed to power just one aluminium smelter, to be built by
US multinational Alcoa. Environmentalists in Iceland and abroad have looked
on in disbelief as the project has proceeded, sidestepping one obstacle
after another, driven by a government seemingly determined to push it
through, whatever the cost to nature or the economy.

The 190m high, 730m wide main dam, two smaller saddle dams and 53km of
headrace tunnels will be paid for by Landsvirkjun (the national power
company, owned jointly by the Icelandic government, the city of Reykjavik
and the town of Akureyri). The main dam will create a huge reservoir, to be
called Halslon, which will inundate a 57sq km swathe of the highlands to
the south before running on to the glacier itself. The resulting
hydroelectricity is contracted for sale for 50 years to Alcoa, which is
closing two smelters in the US and relocating to Iceland as a cost-cutting
measure.

In August 2001, Iceland's National Planning Agency (NPA) rejected the
project on the grounds of "substantial, irreversible negative environmental
impact" - of 120 hydropower projects submitted for approval, Karahnjukar is
the only one it has opposed. Just four months later, that decision was
overturned by minister for the environment Siv Fridleifsdottir, in a move
that prompted a series of lawsuits and raised concern about the nature of
democracy in Iceland. Earlier this year, lawyer Atli Gislasson and a group
of 26 citizens brought separate cases before the Icelandic high court and
European Free Trade Association surveillance authority, challenging the
government's lack of transparency and Fridleifsdottir's decision; both
cases are expected to be heard next month.

I joined Gudmundur Pall Olafsson, Iceland's leading environmental activist,
at Karahnjukar to see for myself what will be lost. A charismatic man in
his early 50s, Olafsson was accompanied by 15 friends for the same
"valedictory pilgrimage" undertaken by several thousand Icelanders this
summer. We gathered on high ground overlooking the construction site.
Bulldozers crawled across the scarred sides of Karahnjukar mountain, their
distant rumble interspersed with birdsong. We could see the famous
Dimmugljufur canyon, Iceland's Grand Canyon, which will be partially
destroyed by the dam. The southern part has already been demolished and the
northern stretch, carved by the river through time, will become dry. The
dynamiting of the canyon began in March, some months before the final
finance was in place, and was broadcast on state television. "It was a
propaganda tactic," says Olafsson. "The general elections were on May 10
and the government did not want Karahnjukar to be an issue. The message
was, 'This is something you cannot stop'."

Heading south >from the site, the first part of our walk took us past
Saudarfoss, a breathtaking terraced waterfall, one of 60 that will be lost.
Last month, a farmer discovered remains nearby of a farm where much of the
action in Hrafnkel's Saga, one of the classics of Icelandic literature,
took place; archaeologists heralded this as a very significant find.
Crystal-clear waters tumbled into the grey silty torrent of Jokulsa a Dal,
the glacial river that will power the main dam, and from there one of the
largest continuously vegetated areas in the highlands begins.

It was difficult to walk on the deep, springy mattress of moss, grass and
flowers, and the spot is so inaccessible that few have been lucky enough to
do so. This is one of the main breeding grounds for the area's reindeer -
according to Skuli Sveinsson, a tracker, a cull of one third of the
population has already begun in anticipation of the drastic reduction in
feeding grounds. Thousands of pink-footed geese graze these uplands, a
protected nesting ground. It is also a favourite haunt of the snowy owl,
ptarmigan and the majestic gyrfalcon. Blood-red rocky gorges, vivid as raw
steak, give way to barren black sediment ledges. Moulded by glacial
movement and sensitive to atmospheric changes, the formations are a record
of 10,000 years of geological and climatic change. Unique in the world,
they are of immense interest to scientists studying, among other things,
global warming. Specialists fear there is not time to unlock even some of
their secrets. Passing rapids of unimaginable violence, we find the
imposing stone head, sculpted by nature, which has become a symbol of
resistance to the dam project; its image was this summer's top-selling
postcard.

The environmental impact of the project is by no means confined to the
future shores of Halslon, nor to unpopulated areas. In summer, when the
water is low, strong eastern winds will whip up dried silt at the edge of
the reservoir, blowing dust storms over the highlands towards farms further
east. The hydro-project will also divert Jokulsa a Dal at the main dam,
hurtling the river through tunnels into the slow-moving Jokulsa i
Fljotsdal, which feeds Iceland's longest lake, Lagarfljot. The calm, silver
surface of this tourist attraction will become muddy, turbulent and
unnavigable.

In the Herardsfloi delta, home to a significant seal population, heavy silt
deposits from Jokulsa a Dal currently prevent the sea from encroaching on
the land. Once the silt is trapped by the new dam, fields will be flooded
and two established farms - one an eco-tourism centre - almost certainly
destroyed.

The most alarming development for conservationists, however, is the
violation of an officially protected area. One third of Kringilsarrani at
the foot of the glacier will be submerged. In a radio interview in August,
Siv Fridleifsdottir said that, in her view, "protected" did not mean "for
ever protected". Fridrik Sophusson, Landsvirkjun's managing director,
supports her decision, and tells me the government "has the right to change
such a human decision".

But many people fear that these statements herald hydropower projects in
areas that would hitherto have been unassailable. An example is Dettifoss,
the most powerful waterfall in Europe, officially protected and one of
Iceland's great tourist attractions. Professor Gisli Mar Gislason, who was
part of a government thinktank consulted on proposed power projects, says,
"Landsvirkjun intends to divert Jokulsa a Fjollum, cutting off the water to
Dettifoss for most of the year but turning it on for the tourist season."

Gislason believes the government's determination to start the project was
strategic. "It was the most controversial hydropower plan on the table. The
reasoning was that, if they could force Karahnjukar through, they could get
away with anything. It's already happening: in September, the minister for
industry overruled an environmental impact assess ment and gave the
go-ahead for a project on the Thjorsa river that will inundate part of a
protected area - a project that had already been rejected by the local
authority."

Iceland is small - the population numbers around 290,000, and just 63 MPs
constitute its parliament. A handful of individuals and families,
colloquially known as "the octopus", exerts disproportionate power and
influence. Writer and social commentator Gudbergur Bergsson says, "Iceland
is unique in being 80% middle class... the easiest class to control,
because they have the most to lose."

There have been some grand gestures by individuals: this summer, poet and
activist Elisabet Jokulsdottir grabbed the microphone during a domestic
flight over Karahnjukar, giving passengers an impassioned lecture on the
dam project. But there is a lack of cohesion and strategy when it comes to
wider protest. A small grassroots movement has regular "speak-outs" and
demonstrations in Reykjavik, drawing up to 1,000 people, but Icelanders are
gentle and peace-loving (Iceland has no military). Its protesters would
struggle to orchestrate the kind of action and concentrated opposition that
halted construction of the Santa Isabel dam in Brazil.

While much of the developed world is busy dismantling dams, transplanting
its heavy industry base to the developing world, the people who govern
Iceland hold fast to their dreams of an industrialised nation. David
Oddsson, the prime minister and leader of the Independence party, has been
in power for 12 years and is revered, feared and hated in equal measure.
With Halldor Asgrimsson, leader of the Progressive party, he heads the
ruling rightwing coalition. The opposition comprises a centre-left
coalition with 20 seats, five Left-Greens and four Liberals.

Hydropower is officially the responsibility of the ministers for industry
and environment, appointed in 1999, but many Icelanders doubt their ability
to participate in informed debate on the relevant issues. Certainly their
CVs are not reassuring: in charge at the ministry of industry and commerce
is Valgerdur Sverrisdottir, whose only paper qualification seems to be an
English as a foreign language certificate awarded in 1972. Siv
Fridleifsdottir, minister for the environment, is a qualified
physiotherapist. Neither minister cites any parliamentary or other
experience relating to their portfolios. When I requested an interview with
Fridleifsdottir, I was redirected to Sigurdur Arnalds, described as "the
government's finest expert on the Karahnjukar project". Arnalds is
Landsvirkjun's head of PR. (This is like being redirected to Alastair
Campbell as the British government's expert on the war with Iraq.)

Fridrik Sophusson, a former minister of finance in Oddsson's cabinet and
now Landsvirkjun's managing director, clearly shares the ruling elite's
appetite for mega-projects. Now 60, he recalls the days when Iceland was
impoverished and patronisingly known throughout Scandinavia as "little
Iceland". Today, it is one of the most affluent nations in the world,
having exploited its natural resources, mainly fish, and Sophusson reasons
that hydropower is a logical step towards economic diversification. He
dismisses conservationists as "romantic".

Iceland's neighbours are not impressed: lamenting its "democracy deficit",
the Swedish Gothenburg Post recently described Iceland as "a pariah among
Nordic nations" for its disastrous environmental policy, which it called
"war against the land".

The government's utilitarian attitude would make more sense if the dam
project was in any sense viable. Its rationale is that the dam and smelter
will revitalise the local economy by creating jobs in the eastern fjords
and reversing the current depopulation trend. But the area has little
unemployment, and few Icelandic youngsters would be tempted by the harsh
conditions of the highland construction site or one of Alcoa's 400 or so
jobs. The two existing smelters in Iceland have been obliged to import
cheap foreign labour from eastern Europe. The environmental damage caused
by both smelter and dam looks set to prompt a further exodus.

Aluminium smelters emit enormous quantities of greenhouse gases. In 2001,
super-clean Iceland was able to negotiate a 10% increase in permitted
emissions under the Kyoto protocol - the biggest increase in the world. In
effect, Alcoa is buying Iceland's licence to pollute, as well as cheap
electricity. The ministry of environment also gave Alcoa a licence to emit
12kg of sulphur dioxide (SO2) per tonne of aluminium produced - 12 times
the level the World Bank expects from modern smelters. SO2; and fluoride,
the most dangerous pollutants in terms of public health and land damage,
will be pumped directly into the air via giant chimneys.

Local opposition is limited. Gudmundur Beck, 53, is the lone voice of
resistance in Reydarfjordur, the eastern fjord where the Alcoa smelter is
to be built. He has lived in the fjord all his life, but his farm will be
decommissioned once the smelter opens in 2007. He believes that local
people have been won over by a concentrated spin campaign: "Landsvirkjun
has spent millions of krona on PR in this area, particu larly on the
radio." Thuridur Haraldsdottir, a local sailor's wife, is so enthusiastic
that she has had her car number plate re-registered to read Alcoa.

Even Landsvirkjun concedes that the Karahnjukar project will not be
sustainable, and that the heavy silt content of Jokulsa a Dal will
eventually fill the reservoir. Expert opinion is divided only on how long
the dam will remain operational. Estimates range from 50-400 years. But
Landsvirkjun does not generally welcome adverse scientific findings. Many
geologists fear catastrophic flooding may result from regular glacial
surges and eruptions in Karahnjukar's catchment area. They also question
the consequences of building a colossal dam on a substructure weakened by
geothermal fissures. These concerns were brought before parliament by
scientists earlier this year, but the Left-Green MP, Kolbrun
Halldorsdottir, reports, "The minister for industry advised the house that
these scientists were politically motivated and not to be listened to."

Thorsteinn Siglaugsson, a risk specialist, prepared a recent independent
economic report on Karahnjukar for the Icelandic Nature Conservation
Agency. "Landsvirkjun's figures do not comprise adequate cost and risk
analysis," he says, "nor realistic contingencies for overruns." Had the
state not guaranteed the loans for the project, Siglaugsson adds, it would
never have attracted private finance. "Karahnjukar will never make a
profit, and the Icelandic taxpayer may well end up subsidising Alcoa."

In July, Barclays arranged the final $400m loan required by Landsvirkjun,
apparently in breach of the "Equator Principles" it had signed up to only
one month earlier, demanding "sound environmental management practices as a
financing prerequisite". Barclays has denied it is in breach of this
voluntary code of practice, pointing to a "second opinion" it commissioned
>from Texan environmental consultancy Stone and Webster. (Stone and
Webster's report, which was leaked, concluded, "Objection will continue
from some NGOs with the potential for some short-term negative publicity
but this is likely to diminish as the project moves forward, and can be
controlled by ongoing public relations activities.")

In 2001, the EU anti-corruption group Greco found that "the close links
between the government and the business community [in Iceland] could
generate opportunities for corruption", and it is the closeness of these
links that the government has had to watch. This summer the police launched
an investigation into alleged price-fixing by a cartel of three oil
companies, which is proving particularly embarrassing - the director
general of Shell Iceland, one of the companies under investigation, is
married to the government's current Speaker (and a former minister for
justice). The Independence party has necessarily close links with the
domestic construction industry, which has benefited from most of the
Karahnjukar subcontracts. But the biggest slice of the cake - $500m - has
gone to Italian conglomerate Impregilo, which was awarded the construction
contract in March and is itself facing allegations of corruption in Africa.

Impregilo is currently embroiled in trials in Lesotho, where South African
consultant Jacobus du Plooy has pleaded guilty to paying bribes of £225,000
to the Lesotho Highlands Water Project. A decision as to whether to
prosecute Impregilo alone, or together with the two British firms also
accused of corruption, has yet to be taken; all three deny that they
knowingly paid bribes. Impregilo was one of the three principal firms
contracted to the notorious Yacyreta dam project in Argentina, which
overran its projected costs by billions and was subject to financial
scandals throughout its construction. It was also part of the consortium
planning to build the Ilusu dam in Turkey which, had it gone ahead, would
have made 30,000 Kurds homeless and drowned the world historic site of
Hasankeyf.

When I asked Sophusson if he was aware of the corruption charges faced by
Impregilo, he referred to an established culture of corruption in Africa
and Asia as a "cost". While he is not in a position to comment on
Impregilo's business practice, he was candid about Iceland's past
experiences. "Twenty years ago we had to bribe officials [in order to
export] fish to Nigeria," he said. "It was even stated on bank statements.
It's a cost we have to pay, and it's much better to be without paying." He
was, however, quick to emphasise that "we are not taking money from
Impregilo" - a question I had not asked.

Impregilo was the only company to bid below the consultant's estimate for
the job, and substantially below its competitors in the final round. Asked
about the procedures involved, Sophusson volunteered the information that,
in the end, Impregilo's was "the only serious bid remaining... and we were
a little nervous about that". He may have good reason to be nervous, too:
Impregilo employs some of the best lawyers in Europe and has negotiated
1,100 exemptions in its contract - all of which are believed to leave
Landsvirkjun liable.

In Megaprojects And Risk, published earlier this year, the Danish economist
Bent Flyvbjerg examined hundreds of multibillion-dollar mega-projects
across five continents. Promoters of mega-projects, Flyvberg and his
co-authors write, characteristically "misinform parliaments, the public and
the media in order to get projects approved and built", with "the formula
for approval an unhealthy cocktail of underestimated costs, overestimated
revenues, undervalued environmental impacts and overvalued economic
development effects".

It is too early to say whether Karahnjukar qualifies as such a project but,
according to Flyvbjerg, the financial ramifications of such projects can
"hinder the economic viability of the country as a whole". This is
something that deeply concerns Thorsteinn Siglaugsson. "State-sponsored,
unprofitable industries harm the economy in general," he says. "That is why
the USSR went bankrupt." Siglaugsson fears that a boom during the
construction period, with attendant high interest rates, will be followed
by a recession. He knows of several Icelandic manufacturers who are already
planning to relocate abroad.

Polls show the nation to be more or less divided on the subject of
Karahnjukar. But how well-informed are Icelanders? Many journalists speak
of a media that is controlled both directly and indirectly by the state. In
August, the BBC World Service lost its slot on Icelandic airwaves just as
minke whale-hunting was resumed after a 14-year ban. Veteran broadcast
journalist Omar Ragnarsson told me how he ran into trouble when he reported
"both sides" of the Karahnjukar debate on national television - "There were
calls for me to be fired." In order to make a "rational" film about
Karahnjukar, he has sold his flat and jeep to finance it independently.

Dr Ragnhildur Sigurdarsdottir, a highly regarded environmental consultant,
apparently fell foul of Landsvirkjun last autumn over a report she had been
commissioned to write on the Thjorsa hydropower project (the report was
commissioned by VSO, a consultancy contracted by Landsvirkjun). "I was
asked to falsify my report to justify the larger-scale power plans
Landsvirkjun wanted," she maintains. "When I refused, it was altered
anyway." She went to the press with her story, and almost immediately, she
says, found herself out of work. "All the jobs I had in the pipeline were
cancelled overnight." Landsvirkjun dismisses Sigurdarsdottir's allegations
as "unsubstantiated". "She was unwilling to name the individuals she was
accusing," saysSophusson, adding that every employee who had contact with
Sigurdarsdottir has "signed and published a declaration that these grave
allegations were totally unfounded".

The "blue hand" is a slang term for the shadow of influence the Icelandic
ruling elite ("the octopus") casts over the individual. Myth or reality, it
is an effective force, ensuring self-censorship and caution. Professor
Gislason maintains that Sophusson has telephoned him on several occasions,
asking him to reconsider his well-publicised opposition to various
hydropower projects.

The Icelandic Nature Conservation Agency, in association with the
International Rivers Network, recently produced a highly informative
brochure about Karahnjukar for which it commissioned several independent
studies. The result was a coalition of 120 international NGOs - including
WWF and Friends Of The Earth - actively campaigning against the project in
June 2003. But the government seems to care little for world opinion, as
its resumption of whaling demonstrates. Sophusson represents the view of
many nationalistic, conservative Icelanders when he mimes squashing a bug
under his shoe and says, "Nobody does this to Iceland." Tourism is the
fastest growing sector in the economy, the fishing industry the largest.
Both stand to be significantly affected if Iceland and its products are
boycotted as a means of global protest, as they were during the resumption
of whaling in the 1980s. Already, the tourist board speaks of "hundreds, if
not thousands" of potential cancellations as a direct result of the whaling
controversy: 80% of tourists go to Iceland to experience what the
government markets as "unspoilt nature". In a sense, that nature is part of
the world's heritage and little has been known about the wholesale
destruction about to take place in Karahnjukar and other parts of the
country.

What could stop what poet Jokulsdottir describes as "a handful of men
imposing their destructive dream on a nation which seems half-asleep"?

For writer Gudbergur Bergsson, the key lies in the national psyche.
Icelanders, he says, are political fashion victims, heavily under the spell
of the US and oblivious to criticism from activists at home. "What they
perceive as 'in' right now is globalisation, so they want to be part of
that," says Bergsson, adding that Icelanders hate to look ridiculous. "If
the international community can show them how truly ridiculous it is to
destroy nature, the very thing they love most, for one aluminium smelter,
they may start to think for themselves. They might finally have the guts to
speak up and tell their dictatorial government how absolutely they have got
this wrong. You have to shame us into change."

                                                   Susan De Muth