A bad deal for Norway: a US investor’s view of the proposed ground rent tax

    WeAreAquaculture spoke to David Hodges, the US global investor determined to warn politicians and the public about the "hidden penalties" of Norway's proposed new tax.

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    “I wanted to speak out about this, but it’s not the most typical thing for me,” David Hodges admits, interviewed by WeAreAquaculture this month. Hodges, a Dallas-based global investor whose roots are in small-town Arkansas, is also not the most typical speaker at Norway’s parliament, the Storting.

    Nevertheless, he made the journey from Dallas to Oslo in February 2023 determined to warn Norwegian politicians, and the public, about the “hidden penalties” of Norway’s controversial tax proposal.

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    Hodges’ speech at Norway’s parliament followed an op-ed he penned for Norwegian newspaper Aftenposten in December 2022, where he writes, “The proposal for land rent tax is not only horribly uneconomic. It will also cost each Norwegian citizen much more than it will generate in income. It is a poorly designed policy that must be stopped at once”.

    “I’ve never done anything like that before,” Hodges says. “But I felt compelled to do so because I know that there are going to be ramifications. It seems very irrational to me, as someone who has had a connection with Norway for so many years.”

    “The ground rent tax will affect the entire Norwegian economy in a very negative way. I feel quite certain that the politicians who are going to vote on this legislation are unaware of these negative ramifications, and I also know with certainty that most of the Norwegian population are unaware of them.”

    “I thought it was important to say something, because many global investors will simply cross Norway off their list and then just move on. They won’t go to the trouble to write an op-ed, or to go to the Storting and try to speak with the politicians about this. They don’t have the time or bandwidth for that.”

    Uncertainty over the tax proposals continues

    “I’m hopeful that a final decision hasn’t already been taken by the governing coalition. When I travelled there a few weeks ago to speak at the Storting, it was my hope that that all the legislators would have open ears and take into consideration other perspectives.”

    However, Hodges says, no-one from the ruling parties came to hear what he had to say. He has also heard “rumours” that the legislation has already been drafted.

    Norwegian industry observers are also pessimistic. At last week’s North Atlantic Seafood Forum, salmon industry CEOs lined up to criticise the tax proposals. In December, WeAreAquaculture spoke to other professional investors, who expressed concerns that the tax will stifle growth and raise uncertainty.

    Meanwhile, Norwegian finance minister Trygve Slagsvold Vedum has continued to advocate a 40% tax rate. A decision is expected from the Storting within the next few weeks, and the clock is ticking.

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    David Hodges
    Global investor David Hodges says Norway’s ground rent tax proposal is “ill-conceived”. Photo: David Hodges

    “Norway resonates with me,” says Hodges

    Hodges is no stranger to Norway, or to the salmon farming industry, although he says not everyone in the global investment world is as tuned-in to Norway and to aquaculture as he is.

    “Norway resonates with me. I’m from Arkansas, which is predominantly an agriculture-based economy,” Hodges says, explaining that he is from a culture that values life in the outdoors and a community spirit. “When I met people from Norway, I really hit it off with them, in part because I felt a common sense of community and culture.”

    A successful global investor, who was previously fund manager at investment firm Barrow Hanley, Hodges founded his own investment business, Equanicca, in 2018. His connection with Norway dates back to his first role as a fund manager in 2007.

    “Virtually from the time the fund was launched, I began to invest in some of the public equities in Norway. In the first year or two, I had investments in Cermaq, back when it was a publicly traded equity, as well as Nutreco.”

    “Because of the fund requirements, I was not able to invest in smaller sized companies like Leroy or Austevoll or SalMar. But I was able to invest in those companies personally, and I continue to hold those shares to this day.”

    Salmon farm in Norway. Photo: Adobe Stock.
    Salmon farming is “very attractive not only from a profitability and growth perspective, but also from a sustainability perspective,” Hodges says. Photo: Salmon farm near Skibotn, Norway (Adobe Stock).

    Salmon farming is an attractive proposition – but not all investors understand the industry

    Although salmon farming is a key sector in Norway and other locations around the world, the industry as a whole “flies under the radar” when it comes to global investment, Hodges says.

    “Many professional investors don’t really understand salmon farming or the aquaculture industry,” Hodges explains.

    “There’s really only one company, Mowi, that’s large enough from a market capitalization perspective to qualify as a potential investment for many fund managers. So I think the industry itself flies under the radar. That means the valuations of some companies tend to be a little lower than they might otherwise be.”

    Hodges says salmon aquaculture makes an attractive proposition for investors, particularly from a long-term growth perspective. “There’s a bit of an arbitrage from a feed conversion perspective”, he says, noting that salmon outperforms chicken, pork and beef in the ratio of feed input to protein output. “If you do the math on that over time, it’s a really a quite a significant advantage.”

    “Salmon farming also uses fewer resources relative to the other protein producers. That makes it very attractive not only from a profitability and growth perspective, but also from a sustainability perspective,” Hodges adds.

    Global investment will substantially decline in Norway, while capital becomes more expensive.

    However, salmon farming’s attractions for global investors will be eclipsed if the tax proposals go ahead, Hodges warns – and he says the negative effects won’t be limited to aquaculture.

    He predicts two negative outcomes if the legislation is passed: firstly, many global investors will abandon Norway, and secondly, the price of capital will rise.

    “This is not just for the aquaculture sector, but across all Norwegian industries. If investors do make investments in Norway, they will do so at a lower valuation than they would have otherwise before this legislation passed.”

    “For example, instead of paying 15 times profits for a company in the utility industry, they may pay 12 times, or if they’re lending money in the form of a bank loan or buying bonds, they may charge 8% interest instead of 7%. So the cost of capital is going to go up across the Norwegian economy. That’s not something that may be evident to non-finance participants in the economy.”

    Many investors will “cross Norway off the list”

    One U.S.-based investor told Hodges he would still consider investing in Norway, but “it would need to be at a pretty hefty discount to entice me in”. Another contact in the financial community, who works for one of the top asset management firms, told Hodges that Norway’s risk rating had been raised to that of “frontier markets” like Romania.

    “That’s got to be very troubling if you’re involved in any industry in Norway that requires capital for future growth,” says Hodges.

    “Some investors will continue to invest, but they will charge more for capital in the future. But many global investors just simply will no longer invest in Norway.”

    “And I put myself sadly in that same category”, Hodges adds, noting that he recently turned down the opportunity to invest in a private equity related to tourism.

    “I just can’t invest in Norway anymore. I have a lot of different countries in which I can invest around the world. And if there’s a material chance the Norwegian government may decide without really a good reason to take half of the future cash flows of the business in which I’m invested, that’s just too much of a risk for me to take.”

    “It means I will cross Norway off the list and no longer consider Norway as a potential vehicle for investment, whether it’s in the public equity space or on the private equity side.”

    Aquaculture industry will “migrate away from Norway”, Hodges predicts

    “If the government’s intention is to raise revenue, that’s already been a clear failure,” Hodges says. “A quarter of the farming licenses that went up for auction a couple of months ago were not even bid upon. And the licenses that were bid upon received lower bids than were hoped for. So, it’s easy to calculate the shortfall on license auctions and compare that to the revenue raised by the tax.”

    “Tripling the tax rate like this will cause higher salmon prices. It’s just an economic certainty – it’s like the law of gravity.”

    “The natural outcome of this will be lowered investment along the coast of Norway and increased investment in other geographies like Iceland, Canada, and Scotland. There are many jobs that won’t be created on along the Norwegian coast because of this policy.”

    Andfjord Salmon released smolt into the company's first land-based pool in Kvalnes, Andøya. Photo: Andfjord Salmon.
    Salmon smolt in Andfjord Salmon’s land-based facility at Kvalnes, Andøya. Photo: Andfjord Salmon.

    Land-based farming will grow in the US

    “Higher salmon prices will also spur the development of land-based farming. And that’s a major risk to the Norwegian economy.”

    “The faster that land-based farming develops, the sooner that land-based facilities will be economically viable in places like the East Coast of the United States, where the transportation costs to the US market will be much lower.”

    “So someday it’s possible that Americans will consume salmon that’s raised in land-based facilities in the United States. The contribution to the Norwegian economy from salmon farming will go down quite dramatically once that happens.

    “Ironically, these politicians may be spurring along the development of land-based production techniques, which will cause the industry to migrate away from Norway.”

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