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More deals ahead |
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Archives -
2006 Archive
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Written by B. Tyril
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Monday, 08 May 2006 |
Stimulated by large privatization schemes and lowered corporate taxes, obvious investment opportunities emerge in the Faroes—including assets available in the seafood industry, potential offshore oil and gas exploration farm-ins, and favorable conditions for merchant sea vessels under the FAS registry.
Some may wonder why international players in the transport-logistics sector are placing so large investments in such a small country as the Faroe Islands. Bearing in mind the infinitesimal population of the Faroes and the limited amounts of anything—in a worldwide context—that this country either exports or imports, what could be the incentive behind such economic decisions?
One may argue that, after all, the amounts of fish and related products exported by the Faroese aren’t really that small, considering the fact that the nation harvests more than half a million tons of fish per year, more than half of it in Faroe waters. That’s sufficient to fill quite a few containers and occupy many cubic meters of cold storage—but would it be worth hundreds of millions in investments?
According to figures from the Faroese Fisheries Inspection, foreign vessels catch close to 400,000 tons per year in Faroe waters, bringing the total annual catch in the Faroe exclusive economic zone up to approximately 675,000 metric tons. This raises the potential value of the Faroese transport-logistics market, but the question remains whether it would suffice for grabbing the attention of deep-pocket investors.
The answer could be found in geography. Picking a spot in the middle of the North Atlantic for a land base, the most central place will often be… the Faroes. Not merely the fish caught in the Faroe EEZ but rather the loads brought into the area en route to virtually anywhere could translate into a point of interest, underpinned by the constant traffic of international pelagic vessels, fishing in Faroe and adjacent waters, that land their catch for processing here. For vessels out for longer periods of time, the islands offer a popular in-between base for transshipments, for instance, which in turn increases the demand for various maritime services and goods including transport and logistics services. So with the total tonnage beefed up to make sense for economies of scale, substantial investment becomes a more viable option.
The Faroese business environment is getting increasingly attractive by several reasons. For one thing, corporate ownership is no longer regarded as a thing of permanence by an overwhelming majority of shareholders. Companies are being traded like never before, although as yet only one corporation, Atlantic Petroleum, has been floated on the VMF (Faroese Securities Market); others are in the pipeline, including several government owned corporations. The government years ago decided to privatize a number of commercial and semi-commercial companies, including Faroese Telecom, Atlantic Airways, and Föroya Banki. After a period of political stalemate the process eventually moved on, with tangible schemes first outlined by Prime Minister Jóannes Eidesgaard last year.
Apart from these profitable and apparently well-managed corporations, there are other assets that could well be worth pursuing, not least in the recovering aquaculture industry. Here, a highly respected and leading enterprise is still owned by one of the banks as a result of corporate restructuring years ago.
In 1999, the corporate tax rate was lowered from 27 to 20 percent; this year (2006) it was further lowered to 18 percent. That said, the oil industry tax rate however remains unaltered at 27 percent, something that doesn’t appear to scare away too many companies from exploring the Faroese Continental Shelf.
So the Faroese Earth and Energy Directorate (Jarðfeingi) is planning to hold a second Exploration Conference, hoping to draw a good crowd of experts and industry people to Tórshavn. The first such event, held in 2004, “was a big success with over 100 foreign professionals attending the conference from many different countries… This success prompted the decision to make it a biannual event.” So the second Faroe Islands Exploration Conference (FIEC06) will take place on 12-13 September. “This conference is a must for anyone who has an interest in hydrocarbon exploration on the Faroese Continental Shelf,” according to Jarðfeingi.
By September 2006, the Faroese Continental Shelf will be in the sixth year of exploration and as witnessed by the interest to obtain licenses, many investors are placing bets on a future in oil or gas production offshore Faroe. “There are presently some licenses with one oil company holding a 100-percent equity, which may be interested in divesting some of the risk,” Jarðfeingi stated. “In addition there will always be other licenses with available equity. This process will be facilitated by a prospect fair where oil companies wanting to divest are given an opportunity to market held licenses with a view to allowing new companies to enter the license.”
Looking to London: As inviting important people to visit the Faroes is not the only option for looking into business opportunities, the Faroese often go abroad. One trip to London to meet with investors, financial analysts and oil company executives, in 2005, left a Faroese delegation headed by Finance Minister Bárður Nielsen, upbeat on the prospects of attracting foreign investments for privatization plans and sustained offshore oil and gas exploration activities. The ‘Celebration of the Faroes’ event at the Representation of the Faroes in London and at the Royal Danish Embassy there was seen to add fresh momentum to the process of preparing the privatization of government-owned enterprises.
“I was very pleased with the event,” Mr Nielsen said. “We had the opportunity to present some information about the Faroes in proper settings and the number of representatives attending clearly indicated that the subject had caught the interest of oil industry executives, investors, financial analysts and others. Obviously, oil and gas exploration is drawing the most attention, but this meeting demonstrated that there are other areas of interest, too. As to the potential for satisfactory privatization deals, there’s no doubt we have a number of investors to choose from.”
Mr Nielsen added: “We have seen mergers and acquisitions with potentially huge socio-economic implications and they have had profound impact on the political outlook; deals that people thought were unimaginable have proved the very opposite. This atmosphere of change may have something to do with the overall dramatic increase in access to information, which is something that has given people a more natural feeling about the issue of globalization. But whatever the case, the influence that protectionism used to exercise on a political level and practically everywhere, seems to be waning. Instead, we are seeing the appearance of a more open business environment, and I hope we are going to have more Faroese companies tapping into the financial resources available in foreign capital markets.”
Ship registry revamp: In addition to visiting the London Stock Exchange along with the other members of the 20-person delegation, Mr Nielsen with two others went on a brief research trip to the Isle of Man, a place with certain similarities to the Faroes—small population, overall proximity to the sea, large maritime sector, self-governing territory under the sovereignty of a somewhat separate state power.
Mr Nielsen, who had visited the Isle of Man on an earlier occasion, expressed enthusiasm about the island. “I think we have a lot to learn from the Isle of Man,” he said. “They have faced some of the very same issues that we have faced in the Faroes and they have been very clever at solving those issues. In the 1960s they had a crisis with failing tourism and fisheries sectors, effectively forcing a large proportion of the population to leave the place. However, they contemplated the situation and came to the conclusion that their economy should change its main focus towards financial services, and so necessary changes were subsequently implemented with resolve at all levels. As anyone could see a few years later, the results were astounding.”
Avoiding direct references to specific examples of Isle of Man practices worthy of consideration for a Faroese agenda, Mr Nielsen nonetheless mentioned characteristics such as the island’s non-partisan political system and the ability to work unitedly to reach common goals.
“It’s about a more integrated approach to politics,” he said. “With the absence of political parties, the Isle of Man’s political processes are devoid of partisan bickering and there is very close cooperation between the political system and the industry. Somehow they have fostered a culture of openness and made it a priority to work effectively together for the common good; in this way, they have succeeded in creating a world-class business environment that attracts good investors. I understand they are currently planning to remove altogether the traditional tax on company profits, using other ways to generate income for the treasury. Well, I don’t think we can copy their systems as such but there are most definitely several aspects that we should take a closer look at.”
While the Manx ship registry has long been thriving in the international marketplace, the Faroese are underway to bolster the competitiveness of the FAS open registry, hoping to attract hundreds of international merchant vessels. In this context the Minister of Fisheries and Maritime Affairs, Björn Kalsö, has joined forces with the Ministry of Finance as well as the Ministry of Social Affairs in order to ready a new FAS bill during 2006.
Mr Nielsen noted: “In a business area such as international ship registration, it’s obvious that we can capitalize more on our firmly rooted traditions in the maritime industry. There is little doubt that with our knowledge of the ocean, ships and navigation, we possess a natural advantage in this field that can be used as a competitive tool.”
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