Hot Issues

March 2013 - Edition 18

Welcome This is the latest edition of “Hot Issues” from Burson-Marsteller’s Global Public Affairs Practice. Every month, “Hot Issues” focuses on new forthcoming legislative or policy issues that will impact business from around our global network of 158 offices in Latin America, Asia-Pacific, Europe, Middle East, Africa and North America.

The public policy dynamics in each country, let alone a particular region can be very different, demonstrated by the different experts we utilise in the countries where we operate. Conversely, there are similarities and you can see this in some of the issues we have picked out.

Hot Issues are designed to give you a flavour of our global perspective and should any of the items raise particular interest with you, please contact the designated person listed with that issue.

Australia: Doping in National Sports On 7 February 2013, the Australian Crime Commission (ACC) released the Organised Crime and Drugs in Sport Report, which detailed findings from a 12-month investigation surrounding the widespread use of new generation Performance and Image Enhancing Drugs (PIEDs) by Australian athletes. This included substances currently prohibited by the World Anti-Doping Agency, the involvement of organised crime in the distribution of new generation PIEDs, and other threats to the integrity of professional sport in Australia.

The report identified or alleged the use of drugs across a number of professional sporting codes as well as links to organised crime. It also noted that illicit drug use leaves athletes vulnerable to exploitation for other criminal purposes, including match fixing and fraud.

The ACC suggested that substances supplied by organised crime figures infiltrated every level of Australian sport.

Corporate organisations linked to sporting clubs via sponsorships or other partnerships are most vulnerable

to the negative media attention now associated with Australian sport. As a result, many sporting clubs have placed sponsorship announcements on hold until they can assure corporate partners that they are not implicated in the scandal. Companies in Australia should review local sponsorship agreements and prepare issues and crisis management plans if they are associated with any teams that may be implicated.

This issue is most relevant to companies who have sponsorship or partnership deals with affected sporting codes. As discussions and debates around organised crime and drugs in Australian sport continue, Burson-Marsteller can support affected companies by working with them to evaluate their level of exposure, review any sponsorship arrangements for reputation risk, and develop and implement a robust crisis and issues management plan.

Contact Melody Wong - melody.wong@bm.com

India: Foreign Companies Face Heat over Transfer Pricing The Indian government is aggressively pursuing tax claims linked to allegations of transfer pricing against some multinational firms operating in the country. Transfer pricing is the value at which companies trade products, services or assets between units across borders.

A number of global companies are currently involved in transfer pricing disputes with the Indian government. These companies have challenged the tax department's orders that could potentially

cost them millions of dollars in tax assessment payments.

Arguably, the government’s aggressive tax authorities could undermine foreign investment in India. For this reason, the government is likely to announce some steps to deal with the complex issue concerning indirect transfer of Indian assets through overseas deals in the Budget for 2013-14.

The government is working towards a solution based on recommendations of the Parthasarathi Shome

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panel, which suggested that either the government withdraw the retrospective tax amendment or waive interest and penalties in cases it has to recover the taxes.

Genesis Burson-Marsteller is poised to assist multinational corporations in India to navigate reputation issues linked to the changing tax

landscape and actively communicate their position to stakeholders in the government, customers and media.

Contact Melody Wong - melody.wong@bm.com

Singapore: Public Debate over the Government’s Population White Paper The Singapore Government released a Population White Paper on 29 January 2013. According to the White Paper, Singapore’s population is projected to reach 6.9 million in 2030, a 30 percent increase from the current 5.3 million. The White Paper is the first comprehensive report to outline the country’s strategy to ensure a sustainable population. The country currently has one of the world’s lowest total fertility rates at 1.3, and faces a rapidly ageing population and workforce. To stop the population from shrinking, the White Paper proposed that the country take in 30,000 new Permanent Residents and 15,000 to 25,000 new citizens each year.

Various Ministries have pledged to upgrade Singapore’s infrastructure to prepare for that population growth. The Ministry of National Development released the Land Use Planning 2013 report shortly after the Population White Paper, revealing how 76,700 ha of land will be required to support a population of 6.9 million, an increase from the current supply of 71,000 ha, and up to 700,000 new homes will be built by 2030. The Transport Ministry is also planning to double the existing rail network by 2030.

The White Paper was highly debated in Parliament, and has not been well received by some Singaporeans.

Although the Government clarified that the projected 6.9 million population figure in 2030 was a “worst-case scenario” and not a target, there is still concern in some quarters.

In the case of the Population White Paper, some observers have said the government’s communications on this issue should have been geared towards the improvement and expansion of public infrastructure to fix current overcrowding problems before plans were announced to grow Singapore’s population. Adequate infrastructure is at the crux of many of the criticism of the plan.

Burson-Marsteller Singapore stands ready to help corporate clients develop government relations programmes that are supportive of the government’s long-term development planning while also meeting their own corporate and business development priorities.

Contact Melody Wong - melody.wong@bm.com

Brussels: Big changes to Data Protection The European Parliament is currently working on the proposal from the European Commission aimed at reforming EU legislation on data protection, which dates back to 1995. The overall objective is to strengthen consumer rights and provide companies with greater legal certainty by harmonising privacy rules across all EU member states and adapting them to the latest technological developments.

The key and most controversial changes include: the concept of “explicit consent” for data to be legally processed, the right to be forgotten (right to have

personal data deleted if there is no legitimate ground for retaining it), data portability (right to transfer data from one platform to another) as well as requirements for companies to appoint a data protection officer and to notify the national supervisory authority of serious data breaches as soon as possible.

The changes will have far reaching implications on companies, both within and outside the EU, as the proposed rules would apply to all companies that are active in the EU marketplace and offer their

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services to EU citizens, even if personal data would be handled abroad. Indeed, the dossier has been subject to intense lobbying, in particular by US enterprises.

The European Parliament’s report on General Data Protection Regulation will be voted in the Committee on Civil Liberties in late April or May. A number of Council’s working group meetings are planned up to

June, while trilogue discussions between the Parliament, the Council and the Commission aimed at finding the agreement on package amendments are expected to begin in summer 2013.

Contact Anna Tobur - anna.tobur@bm.com

The Netherlands: The Growing Influence of Public Opinion on Energy Supply Earthquakes in the Netherlands? Not common, and never severe, but for the past month a number of small earthquakes in the north of the country have dominated the national news. The north is home to one of the largest natural gas reservoirs in the world. Since the first drilling in 1959, there has been a steady flow of natural gas to Dutch and other European households and businesses, combined with a steady flow of money to the nation’s treasury. The recent earthquakes, a direct result of the gas extraction, are posing a threat to future drilling possibilities. Protests from local residents are growing and getting louder, and have reached the national parliament. The company responsible for the drilling, a joint venture between the state, Royal Dutch Shell and ExxonMobil, might have to scale down extraction for the first time in history.

Western countries are increasingly looking at domestic energy resources to become less dependent on foreign energy. Over the past few years shale (natural) gas has taken centre stage in this domestic quest for energy. While European

countries are reluctant to provide drilling licenses due to environmental concerns and concerns from local residents, the United States has embraced the new energy source. Indeed, the economic success of shale gas in the US will have significant geo-political impact with the opportunity for the US to become a net exporter of energy.

Both with natural gas in the Netherlands and shale gas throughout Europe, public opinion rather than science seems to carry most influence with legislators.

To help energy companies secure and protect their licenses to operate, Burson-Marsteller has the expertise to communicate the scientific reality to political and consumer audiences.

N.B.: B-M Netherlands is currently supporting Royal Dutch Shell on this issue.

Contact Matthijs van Meerveld - matthijs.van.meerveld@bm.com

Venezuela: Tougher Controls on Imports A history of tight economic dependence on oil exports is, for some analysts, the cause of high consumption tendencies in Venezuela. Since 1928, state interventionism has been a strong factor and therefore a rich State has been able to sustain prices of basic products through measures like subsidies.

The entrance of Venezuela into MERCOSUR (Southern Common Market) was a governmental strategy to import low cost products from Brazil and Argentina, in order to solve the shortage of basic goods. Since these measures have not been

as effective as the government planned, the fiscal deficit of the past two years and the “mortgage” oil policy have deepened, triggering a new exchange rate adjustment and other restrictions.

Devaluation: The Venezuelan exchange rate was readjusted from 4.30 to 6.30 Bolivars per USD, representing a direct appreciation of the increase in prices of imported goods and products of 46.5%. Achieving the intended result to repair inconsistencies between State incomes and expenses relies on the increase of

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Bolivars flows. Some kind of relaxation is expected from the government, specifically in relation to the USD, in order to avoid more strain on the industrial sector.

Shortage: The lack of some products is not an unknown phenomenon in any economy; however, in Venezuela there is a shortage in practically all basic consumption products. A disproportionate rise in consumption, speculation and hoarding are the causes the government suggests to the media, while opposition leaders, blame the government for bad foreign exchange policies. This situation, along with inadequate incentives for private investments, has diminished Venezuela’s productivity levels.

Vehicles regulation: This possible new law is an example of the new governmental trend. The regulation of vehicles prices is an attempt to punish automobile marketers for unjustified pricing. Even though the government and the opposition agree on the need to solve this issue, the method is still being discussed. Public officials have declared that limits on vehicles imports are needed to protect the national industry, which in a lot of cases serves as a shield from Chinese and Iranian investments.

Contact JosĂŠ Luis Peralta - joseluis.peralta@bm.com

Chile: Pending Improvements of the Chilean Pension System Created in 1980, the Chilean pension system (AFP), replaced the old distribution system with an individual capitalisation model. This model has been exported to other countries, where it works with great success.

The system encourages mandatory coverage for dependent workers, by law, forcing them to contribute 10% of their monthly wages and taxable income.

Workers are individual account holders, whose deposits are capitalised according to the profitability of the funds managed by the AFP. Although it was a visionary model, many of the parameters on which the system was based have changed in the last 30 years, prompting criticism.

There is an intention to reform, nationalise, or even return to the old distribution system. The lower number of contributors, reduced future return of funds, increased life expectancy, GDP growth, late entry into the labour market, in addition to the increased cost of healthcare, has made the mandatory savings deficient in many cases.

Therefore, the challenge for the Chilean model is to advance in supplementary systems to meet the savings needs of the population.

Different mechanisms to raise savings have been established in order to support pensions. Of the 3.8 million dependent workers, 55% have rents lower than CLP$ 318,000, and are therefore covered by the solidarity pillar. They receive a state contribution to complement their savings, which increases their rate of replacement. 4 percent of employees have high incomes (over 2 million CLP), so they can complement their savings through a single APV. There are 1.5

million workers who need additional incentives to increase their pension savings and achieve good replacement rates.

Therefore, the middle class is the main target group to promote savings for retirement through the Collective Voluntary Social Security Saving (APVC).

This is a savings mechanism whereby voluntary savings by employees in a company are complemented by their employer. The savings plan must be established under an agreement or contract between the employer and an institution licensed to manage voluntary pension funds collectively. This agreement is signed by the employer on behalf of their dependent workers to adhere to the respective plan.

The Collective APV in the current regulation has not achieved the desired results, mainly due to the lack of incentives for companies to promote pension plans among their workers, or to make contributions to these plans. Changes to provide incentives to companies should be promoted to create awareness of the need to increase retirement savings, and to help uptake by their employees. "Tri-partite" participation, involving the workers (who have to make the choice to save), the State (through tax benefits) and the company (through contributions to the accounts of employees), is a solution that maximises chances to definitively resolve the question of pensions.

Contact SebastiĂĄn Iglesias Sichel - sebastian.iglesias@bm.com

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Brazil: Investment on Infrastructure The presidential message on 4 February, delivered by the Government to the National Congress, set out some of the government’s expectations for 2013 regarding the infrastructure sector: 1. To extend Brazil’s railroad system by 10,000 km, with Government investment of R$ 91 billion 2. To extend and duplicate 7,500 km of highway, investing R$ 42 billion, and 3. To expand and improve the efficiency of the services provided in ports In the first two cases, investors will concentrate investments in the first five years of the scheme, to quickly improve the quality of the network and stimulate rapidly the production that will result from these investments.

Studies on changes in the concessions of railways are being conducted by the National Bank for Economic and Social Development (BNDES). To attract investors, the government has adopted mechanisms such as eliminating the risk of dealer demand, since the state-owned company Valec should buy the total carrying capacity that will be offered by the railroads contractors, guaranteeing payment of the investor.

President Dilma has also initiated a structural change to the Brazilian port system, to expand and improve the efficiency of the services provided in ports. In the Provisional Measure 595, of 6 December 2012, the government proposed a new regulatory framework for the sector, to speed up awarding contracts and leasing allowing the handling of cargo by third parties in privately used terminals. This new

regulation, which expands the private sector’s involvement in Brazilian ports, is expected to bring investment of around R$ 54 billion in leasing and privately used terminals. All these contracts and partnerships with private business have been carefully drawn up, to increase the efficiency of services and to guarantee low tariffs without removing strategic control from the State or selling off public assets.

One example of a port terminal to get investments is the Port of Vila do Conde, located 120 km from Belém, Pará (Northern region). The Port should become the main export corridor not only for iron and steel products but also grains such as soybeans and corn. Over the next three years, the port will receive outlays of R$ 1.5 billion through the Growth Acceleration Programme and private resources for improvements and expansion of existing infrastructure.

The first stretch of railroad that will pass into the hands of the private sector connects the port of Vila do Conde (Pará) to Açailândia (Maranhão). For the government, this is a strategic point for distributing Brazilian production, especially agriculture and mining. The announcement of the line, which is relatively short, will also serve as a test for the model of railway expansion proposed by the Government.

Contact Paula Bakaj - paula.bakaj@bm.com

US: A Critical Need for Public Education on the Affordable Care Act’s Health Insurance Exchanges “If you build it, they will come.” Whether you’re a sports fan, movie buff or member of the Kevin Costner fan club, you’ve heard this famous quote before. The concept behind this quote has been tested time and time again, from product launches to government initiatives. Unlike in the movie Field of Dreams where all Kevin Costner’s character has to do is build the baseball field, however, most real-life scenarios require much more effort. Take for example the ongoing development of the Affordable Care Act’s (ACA) health insurance exchanges (Exchange).

Under the ACA, each state has been tasked with developing and implementing its own Exchange – an online, government-run portal, from which individual Americans and small businesses can access and purchase health insurance that is eligible for federal subsidies. Beginning on 1 October 2013, millions of currently uninsured Americans are expected to start enrolling in the Exchanges, with coverage starting on 1 January 2014. Regardless of how well the building process goes, each state will soon face, if they aren’t already, the daunting task of getting people to

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the online portal. The problem, however, is that many Americans don’t know what an Exchange is, let alone how it works and what it means for them.

Building the Exchanges will not guarantee that people will be lined up to enroll once everything goes live. Aggressive public education campaigns are needed both at the state and national level to ensure that people who need the benefits the Exchanges offer understand how the Exchange operates, what services will be covered, and how to redeem federal tax incentives designed to make health insurance more affordable. To do this effectively, states will need to get creative in how they message and reach out to their target audiences. Many individuals may not have access to the internet or a computer; English may often not be the native language or spoken at all, while others may just be hesitant to enroll online because of privacy concerns. All of these issues and more will need to be considered by both states and, as of mid-February, the federal government, since 25 states have opted for a federally run Exchange.

Washington, D.C., one of the 19 state-level Exchanges to be approved by the U.S. Department of Health and Human Services (HHS), has already started taking the necessary steps to engage its consumers on the community level. According to

Governing, D.C. plans to set up official service centers in public places (e.g. libraries) throughout D.C., complete with kiosks where consumers can access and enroll in the Exchange. But, even D.C. officials know that it can’t stop there. More must be done to ensure consumers actually make the trip to those official service centers in the first place.

An article from The Hill states that one of the main goals of the ACA’s Exchanges is to “make the process of purchasing health insurance dramatically easier and more transparent.” That same logic should be applied to how the Exchanges themselves are messaged to consumers. Micro-targeted grassroots campaigns – reaching consumers on the community level through local events, peer educators and localised advertising, to name a few – will be essential in helping consumers find the Exchanges and understand it once they get there.

It will be important for states and the federal government to invest adequate resources into not only just building the functionalities, but also in educating consumers well in advance if they hope to achieve the promise of Exchanges.

Contact Kelly Cross – kelly.cross@bm.com

US: The Defense Industry’s Battle for Budget The U.S. Defense Industry provides critical support to the U.S. military so it can support and defend the Constitution of the United States of America against all enemies, foreign and domestic, at home or abroad. As the country winds down from the wars in Iraq and Afghanistan, military war fighting missions will be replaced by exercises, training and joint operations. These activities are essential to ensure that the military is trained, equipped and prepared to fight and win future wars, but keeping a ready force takes funding and consistent support from a vibrant defense industry.

The U.S. Department of Defense (and by association many defense contractors) is a key federal agency that is being impacted by sequestration, the law that that went into effect on 1 March 2013 requiring automatic, across the board cuts for all U.S. federal agencies. This means that $1.2 trillion in automatic spending cuts are now in effect and will continue over the next 10 years – and approximately $85 billion of the total will be slashed in the remaining

six months of this fiscal year (the U.S. government operates on a fiscal year basis from October 1 to September 30).

A component of the Budget Control Act of 2011, Democrats and Republicans had agreed to about one trillion dollars in cuts, but could not agree on much beyond that. The original idea was to use sequestration as an automatic cutting mechanism to force Congress to find better cost cutting measures before it went into effect.

Sequestration’s impact on the Department of Defense and defense contractors is exacerbated by the fact that the agency is already operating under a continuing resolution (CR) that went into effect on 1 October 2012, when a fiscal year 2013 budget was not passed. The CR limits federal spending to an amount equal to the previous year's budget.

On 2 January, the President signed the fiscal year 2013 National Defense Authorization Act (NDAA), the budget for the Department of Defense, but Congress has so far not passed the appropriation

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bill to fund it, leaving the U.S. military to continue to operate under the CR expiring on 27 March 2013.

Neither the CR nor sequestration will affect active duty military pay, retirement, medical benefits, tuition assistance and family programmes; however, numerous Department of Defense civilians are facing furloughs, and many programmes that are supported by defense contractors are in jeopardy of being scaled back or cancelled. Defense contractors that have been publicly transparent with their stakeholders about an uncertain future are in line with the communication approach of Department of Defense officials.

In the face of these fiscal challenges, U.S. military leaders have been expressing their concerns, but remain committed to defending the country. In fact, the Chief of Naval Operations stated that even in this environment, the Navy must be ready to fight and win today, build the future force to fight and win tomorrow, and take care of its people while creating a motivated, relevant and diverse force.

He provided further guidance to Navy service members that to pursue these priorities in a constrained fiscal environment, the Navy must be effective and efficient, maintain its war fighting advantage against new threats using new technologies and operating concepts, use innovative ways to affordably operate forward, and be judicious with its resources (people, money and time).

Under any circumstance, the U.S. military and the U.S. defense industry are powerful forces to be reckoned with. Over the years, troops have faced enemies in numerous situations regardless of whether or not they had all the training and equipment they needed. The U.S. will continue to be a dominant global defense force, but in light of new budget reduction realities, it will very likely encounter situations where it will have to do more with less.

Contact Vic Beck – vic.beck@bm.com

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