Business24 Newspaper - July 22, 2020 by Business24 Online

EDITION B24 | 76

THEBUSINESS24ONLINE.NET

WEDNESDAY JULY 22, 2020

Ofori-Atta to signal path to recovery Oil revenue drop set to affect Free SHS funding BY BENSON AFFUL

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BY NII ANNERQUAYE ABBEY

inance Minister Ken Ofori-Atta will tomorrow deliver the 2020 mid-year budget review, which will unveil the government’s most detailed economic response yet to the COVID-19 pandemic. Mr. Ofori-Atta has over the past three months delivered government’s response to the impact wrecked by the coronavirus in bits and pieces, as the scale of the damage became more obvious. But when he appears before Parliament tomorrow, he will have to detail his government’s measures to salvage the faltering domestic revenues, which has been exacerbated by the hurt to businesses caused by the virus. Government’s revenue performance in the first three months of this year fell short of its target by

more than GH¢3.6bn—a period which at best could be described as the dawn of the virus and its knock-on effects. If Mr. Ofori-Atta’s fears, as communicated to Parliament on March 30, are anything to go by, the virus’ impact may not be generous on government’s revenues, particularly in the second quarter, which saw nearly a month of restrictions on movement in Accra and Kumasi— the two most economically vibrant cities. While the restrictions have been partially lifted, bringing some temporary relief to businesses, the Finance Minister will be expected to provide innovative measures to drive up revenue amidst the lethargic environment businesses are operating within. Living with the virus Although Ghana continues to record new cases of the virus—there were more than 28,000 cases as of July 21—there is a general acceptance that

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ECONOMIC INDICATORS *EXCHANGE RATE (INT. RATE)

USD$1 =GHC 5.6734*

*POLICY RATE

14.5%*

GHANA REFERENCE RATE

15.12%

OVERALL FISCAL DEFICIT

6.6 % OF GDP

PROJECTED GDP GROWTH RATE PRIMARY BALANCE.

1.5% -1.1% OF GDP

AVERAGE PETROL & DIESEL PRICE:

GHc 5.13*

INTERNATIONAL MARKET BRENT CRUDE $/BARREL

44.32

NATURAL GAS $/MILLION BTUS

1.67

GOLD $/TROY OUNCE

1,842.40

CORN $/BUSHEL

329.50

COCOA $/METRIC TON

1,536.00

COFFEE $/POUND:

+5.70 ($108.30)

COPPER USD/T OZ.

220.15

SILVER $/TROY OUNCE:

editor@thebsuiness24online.net

17.07

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NEWS/EDITORIAL

WEDNESDAY JULY 22 , 2020

EDITORIAL

Stop illegal ‘saiko’ trade now! 1

Wash your hands 2

Cover your cough 3

Illegal fishing in Ghana is threatening the livelihoods of millions of coastal dwellers who rely on fishing. Canoe owners, fishermen, fish mongers, and cold store operators rely on a good catch to make enough money to fend for themselves and their families. However, the activities of fishing vessels which use prohibited nets, fishing in the exclusion zone reserved for small-scale canoe fishers, and the illegal ‘saiko’ trade is a threat to local fishers now more than ever due to the collapse of crucial fish populations in Ghana and threatening the livelihoods of about 2.7m Ghanaians. The situation is further compounded by the export of illegal catch into the EU market that may lead to a fish export ban on the country. In 2013, the European Commission issued Ghana with a “yellow card”—a

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LIMITED Copyright @ 2019 Business24 Limited. All Rights Reserved. Editorial Team Dominic Andoh: Editor Eugene Kwabena Davis (Head of Parliamentary Business & Commodities) Benson Afful (Head of Energy & Education) Patrick Paintsil (Head of Maritime & Banking) Nii Annerquaye Abbey (Online Editor) Marketing Alexander Lartey Agyemang (Business Development Manager) Ruth Fosua Tetteh (Dept. Business Development Manager) Gifty Mensah (Marketing Manager) Irene Mottey (Sales Manager) Edna Eyram Swatson (Special Projects Manager ) Events Evelyn Kanyoke (Snr. Events Consultant) Finance/Administration Joseph Ackon Bissue (Accountant)

Ghana’s waters. This is having devastating impacts on local fishing communities and the 2.7m people in Ghana that rely on marine fisheries for their livelihoods,” it said. The watchdog alleged that products are apparently routed via China and imported to the EU as products of Chinese rather than Ghanaian origin. Business24 backs call by the EJF for the EU to use all tools available under its regulation to combat illegal, unreported and unregulated fishing to help Ghana bring an end to “saiko” and improve transparency in its fisheries. Local authorities must also do more and punish offenders to serve as a deterrent to others.

Ofori-Atta to signal path to recovery (…CONTINUED FROM COVER )

Wear a mask

formal warning over illegal fishing that can lead to import bans to the EU. This was lifted in 2015 as a result of new legislation and a clear fisheries management plan. The Environmental Justice Foundation (EJF) has alleged that seafood caught by vessels fishing illegally in Ghana is entering the European Union (EU) market. “Using data from satellite monitoring and at-sea observations, as well as pooling data from other organisations, EJF has been able to show multiple cases in which trawl vessels authorised to export to the EU have been involved in illegal activities. As a market for seafood caught by Ghana’s trawl fleet, EU consumers are inadvertently supporting illegal practices and severe overfishing in

economic recovery must begin in earnest in order to mitigate the initial damage the virus has caused. The Finance Minister, having concluded a protracted US$918m Extended Credit Facility programme with the International Monetary Fund (IMF) only last year, will be expected to kick into motion another plan to restore the macroeconomic fundamentals to pre-COVID-19 levels. According to the Institute of Economic Affairs (IEA), the recovery charge must be led by fiscal policy, since it is uniquely placed to mobilise and manage the resources required. “To be able to play this role effectively, persistent rigidities in both revenue and expenditure must be addressed,” the policy think tank said. Just like the IMF, the policy think tank also believes that Ghana must use this pandemic to commence a path to solving its long-standing problem with revenue mobilisation. The country’s tax revenue/GDP ratio of between 12-13 percent falls below the average of 25 percent for middle-income countries and the minimum threshold of 20 percent under the proposed eco currency system of the Economic Community of West African States (ECOWAS). “Ghana’s situation of low tax revenues does not arise from the fact that it has low tax rates. On the contrary, Ghana’s personal income, corporate income and VAT rates are relatively high. The problem rather lies with tax losses, which experts estimate to be around 10-12 percent of

GDP. In other words, we lose about as much tax revenue as we collect. Ghana’s tax revenues should be significantly scaled up to support the recovery and long-term growth,” the IEA said. Controlling the purse Ghana’s path to recovery is also dependent on how well the government is able to control its expenditure. Already, the virus has brought with it unplanned expenditure at a time there is little fiscal space for any maneuvering. The first quarter fiscal performance paints a picture of rising spending, as government incurred a bill of GH¢20.8bn, representing year-onyear growth of 33 percent, in that period. With government projecting to spend GH¢86bn in 2020, the declining revenues only point to a nemesis government is too familiar with—fiscal deficit. Prior to the COVID-19 pandemic, government was attempting an audacious feat of keeping the deficit below five percent of GDP even in an election year. Although critics like former Finance Minister Seth Terkper have accused government of excluding the costs associated with the financial sector bailout in order to keep the deficit lower, it was the virus which threw the spanner into the works. The deficit, which was seen at 4.7 percent of GDP, could potentially

rise to nearly 10 percent, according to some forecasts. A few months ago, Mr. Ofori-Atta revealed that the five percent of GDP deficit ceiling in the Fiscal Responsibility Act would be suspended to accommodate the spike. But government’s path to recovery, Mr. Ofori-Atta knows, will be hinged on how quickly it is able to rein in the fiscal deficit. While revenue from oil has often come in handy and timeously, the pandemic has set yet another reminder that commodities are mostly not available when needed the most. Nevertheless, crude oil prices rising from the ruins seen in March will offer Ofori-Atta some respite in the midst of a strained environment to seek financing. The true path to recovery, as the IEA points out, lies with boosting productivity in the real sector—that is, agriculture and industrialisation. Mr. Ofori-Atta may argue that his government is already keen on those sectors, particularly with initiatives such as Planting for Food and Jobs, and One district, One factory. Government’s attempt to ride out the pandemic storm will largely depend on the seeds of recovery it sows in tomorrow’s mid-year budget review. Clearly, it is not a smooth journey ahead, but Mr. Ofori-Atta’s job will be to convince the country the economy is in the right hands with the December polls just around the corner.

WEDNESDAY JULY 22, 2020

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News

Oil revenue drop set to affect Free SHS funding BY BENSON AFFUL

Policy analyst Gideon OfosuPeasah, at the Africa Centre for Energy and Environmental Sustainability (ACEES), says he foresees a drop in funding for the government’s Free Senior High School (SHS) programme for the 2020 fiscal year, as the Finance Minister readies to present the mid-year budget review this month. Of the Free SHS programme’s 2020 funding allocation of GH¢2.43bn, 53 percent was expected to come from petroleum revenues. However, the oil sector revenue has suffered a setback since the outbreak of the global pandemic. The 2020 budget was based on an oil-price assumption of US$62.6 per barrel, and total petroleum revenue was projected at US$1.6bn. Finance Minister Ken Ofori-Atta

told Parliament earlier this year that at an average crude oil price of US$30 per barrel this year, the government will register a shortfall in crude oil receipts amounting to GH¢5.7bn. Mr. Ofosu-Peasah, who is an economist and the deputy director of ACEES, said he expects a downward review of the benchmark oil price from US$62.6 to a price between US$45 and US$50. “I expect a downward review of the benchmark petroleum revenue of US$1.5bn, to be slashed down by a range between 24 percent and 28 percent due to the dip in crude oil prices on the international market and the effect it will have on the various petroleum income streams, excluding surface rentals,” he told Business24. Hesaidalltheprojectsearmarked for funding through the Annual Budget Funding Amount (ABFA)

will witness reduced or delayed disbursement. President Akufo-Addo, during the Free SHS policy launch in September 2017, said his government will invest revenues from oil into one of the most ambitious social programmes in the country’s history. According to him, Free SHS is ensuring that the country’s oil revenues are being equitably distributed to the people—and not ending up in the pockets of a few. The first year of implementation of the policy saw the government earmark about GH¢400m to take care of over 300,000 students who were placed in Senior High Schools (SHS) across the country. With the full roll-out of the policy completed, total enrolment in SHS currently stands at 1.2m students, the highest ever in the country’s history. In 2019, out of the GH¢12.87bn

allocated to the Ministry of Education to fund its programmes and activities, GH¢1.68bn was earmarked for the Free SHS programme. Two years ago, in the second year of implementation of the policy, the government earmarked GH¢679.6m to be spent on the programme, out of a total GH¢2.1bn of oil money allocated to the ABFA.

Mid-year budget not the place to account for CAP funds—Assibey-Yeboah BY EUGENE DAVIS

The mid-year budget review expected to be delivered by the Finance Minister on Thursday to the legislature does not present an opportunity to account for the Coronavirus Alleviation Programme (CAP) funds, chairman of Parliament’s Finance Committee, Dr. Mark Assibey-Yeboah, has said. There have been calls for the Finance Minister, Ken Ofori-Atta, to provide details of the CAP allocations and expenditure in the mid-year budget presentation. However, Dr. Assibey-Yeboah said that is not the remit of the Finance Minister. “I hear people say the Minister should come and account for the coronavirus money. This is not the place for that thing. In this country, at the end of the year, all our expenditure is submitted

to the Auditor-General. He vets, audits it, and submits it back to Parliament. It is for the AuditorGeneral to vet the accounts and come and submit accounts to parliament. If the Minister comes and does any other thing, he will be straying into matters that are not required of him,” he told Business 24 in an interview. The Public Financial Management law mandates the Finance Minister to present a mid-year budget review to Parliament before the close of July of every financial year. The law, according to Dr. Assibey-Yeboah, spells out what is required of the minister, which includes to update the country on happenings at the macroeconomic level, revenue shortfalls, government expenditure, and update on government’s financing realignments. It

understood

that

Dr. Mark Assibey-Yeboah says the Finance Minister is not expected to account for the CAP funds during the mid-year budget review.

government is working to roll out unemployment benefits for Ghanaians soon, which is expected to be contained in the budget review. The move has been influenced by how conditions of some workers have been affected because of the coronavirus pandemic. Similarly,

another

stimulus

package for businesses is expected to be captured in the budget review. Government earlier this year introduced a GH¢1bn stimulus package for small businesses. This was aimed at assisting small firms that have been badly hid by the coronavirus. The next round of stimulus is expected to target large firms in the country.

WEDNESDAY JULY 22, 2020

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Spain-Ghana Chamber pays working visit to Business24 The leadership of the SpainGhana Chamber of Commerce has paid a working visit to Business24 Limited as part of efforts to familiarise themselves with the operations of the media house. The Chamber, led by its Secretary-General, Ingrid Asensio Ramos, expressed appreciation to Business24 for the support it has given to its members over the past few months that it has been in operation. Ms. Ramos stated that while the pandemic has dealt unfavourably with the business community, businesses are adapting to the new normal; adding that there is every indication there are better days ahead. She added that there is the need for businesses and the media to

forge a partnership which will be mutually beneficial, hence their decision to pay a visit to the offices of Business24. The Editor of Business24 e-Newspaper, Dominic Andoh, who received the leadership of the Chamber, also reiterated the company’s commitment to the cause of businesses, especially as businesses heavily impacted by the COVID-19 pandemic strategise to restart operations fully in the coming months. He stated that the doors of the media house are opened to partnerships that will support business growth and ultimately push the economy out of the stagnation caused by the coronavirus. The Spain-Ghana Chamber of Commerce currently has 48-member companies with

origin or ties to Spain as well as Ghana. The Chamber also organises trade missions to Spain as part of efforts to link Spanish businesses to Ghanaian partners. Ms. Ramos was accompanied by Bridget Akua Agyeiwaa Ampofo, Administrative Officer and Luck Ameko Nutakor, Events and Communications Coordinator.

The team from the Business24 Limited that held discussions with the delegation also included: Alexander Lartey Agyemang, Brands Manager; Ruth Fosua Tetteh, Deputy Business Development Manager; Evelyn Kanyoke, Snr. Events Consultant; and Nii Annerquaye Abbey, Online Editor.

Ghana’s seafood enters EU illegally, watchdog alleges BY BENSON AFFUL

The Environmental Justice Foundation (EJF) has alleged that seafood caught by vessels fishing illegally in Ghana is entering the European Union (EU) market. “Industrial trawlers authorised to export to the EU have been linked to illegal foreign ownership and implicated in the use of prohibited nets, fishing in the exclusion zone reserved for small-scale canoe fishers, and the illegal ‘saiko’ trade,” the EJF said in a statement. The fisheries watchdog said this practice is driving the collapse of crucial fish populations in Ghana and threatening the livelihoods of about 2.7m Ghanaians. The pressure group said in 2013, the European Commission issued Ghana with a “yellow card”—a formal warning over illegal fishing that can lead to import bans to the EU. This, the EJF said, was lifted in 2015 as a result of new legislation and a clear fisheries management plan. However, while these policies are well constructed, there are worrying indications that they are not being fully implemented or enforced, it said. Ghana’s industrial trawl fleet exports between 2,000 and 3,500 tonnes of cuttlefish, octopus and squid to the EU every year, primarily to Portugal, Italy and Spain, worth around €10m. The EJF said while most exports

to the EU are tuna, caught by different vessels, it is the trawl fleet that is cause for alarm. “Using data from satellite monitoring and at-sea observations, as well as pooling data from other organisations, EJF has been able to show multiple cases in which trawl vessels authorised to export to the EU have been involved in illegal activities. As a market for seafood caught by Ghana’s trawl fleet, EU consumers are inadvertently supporting illegal practices and severe overfishing in Ghana’s waters. This is having devastating impacts on local fishing communities and the 2.7m people in Ghana that rely on marine fisheries for their livelihoods,” it said. It alleged that products are apparently routed via China and imported to the EU as products of Chinese rather than Ghanaian origin. “Nine trawlers flying the Ghanaian flag have appeared in China’s list as authorised to export to the EU under EU health legislation when they should have been in Ghana’s list. This could mean that considerably more products from Ghana’s trawl fishery are finding their way to the EU market.” The group said its findings revealed that two of the trawlers authorised to export to the EU are registered to a small Ghanaian enterprise set up by a Chinese corporation.

This, the watchdog said, also links the illegal actions of the trawl fleet to the tuna vessels, because some trawlers with a history of illegal fishing are ultimately owned by the same Chinese fishing companies that export tuna to the EU and UK. The EJF called on the EU to use all tools available under its regulation to combat illegal, unreported and unregulated fishing to help Ghana bring an end to “saiko” and improve transparency in its fisheries. “All EU member states, but especially Portugal, Italy and Spain which receive the majority of imports from Ghana’s trawl fleet, as well as major tuna importers,

such as France, Germany, the Netherlands and the UK, should scrutinise seafood imports from Ghana and be alert to possible trade diversions. Importers, processors and retailers must also pay close attention to the situation, and examine all supply chains originating in Ghana, particularly from the trawl fleet.” Executive Director of EJF Steve Trent said the fact that EU consumers may be inadvertently driving or facilitating this dire situation is distressing news. “The European Commission can do much to help and encourage Ghana to end this situation once and for all,” he said.

WEDNESDAY JULY 22, 2020

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Pension Matters with Kimpton Trust Never take a loan against your retirement! When you pay interest against your retirement, you cost yourself interest. - “Dave Ramsey” Registration for Tier 1 Both employers and workers must register with SSNIT. SSNIT assigns registered organizations with Employer Registration Numbers once the registration is completed. Workers on the other hand will receive social security numbers. The employer who has engaged a worker is under a strict obligation to ensure that all workers are registered with SSNIT; and deductions made and paid on their behalf. The social security number is not transferable and must be used by the worker throughout the working life. In the event of multiple registrations, the worker must engage with SSNIT to have the accounts merged. Notwithstanding any agreement to the contrary, the employer is not entitled to deduct or recover the worker’s contribution from the worker’s salary. Where the worker has concurrently been employed by more than one employer, each employer will be responsible for only their obligation. Benefits & Qualifying Conditions There are four (4) types of benefit under the SSNIT scheme that members can enjoy depending on which contingency has occurred. • Superannuation Pension/ Old age Pension • Invalidity Pension • Survivor’s Lump sum. • Emigration benefit Superannuation/ Old age Pension To qualify for old age pension, the member must be at least 60 years and must have contributed a minimum of 180 months (15 yrs.) under act 766 and 240 months (20 yrs.) under PNDCL 247. The member who is 55 years but below 60 years receives reduced pension whilst the 60 year old receives full pension. Qualifying Conditions FULL PENSION To qualify for Full Pension, • You must be at least 60 years and • You must have made a minimum contribution of 180 months (15 yrs.) under act 766 and 240 months (20

yrs.) under PNDCL 247. BASIS FOR CALCULATION OF OLD AGE PENSION • Age • Average of Best 36 months / 3 years’ Salary • Earned Pension Right – Rating for the number of months you have contributed to the Scheme. You can earn a “pension right” between 37.5% and 60% depending on the number of months contributed at the time of retirement. E.g. the minimum contributions of 180 months give a “pension right” of 37.5%. Every additional month over the 180 months attracts an additional percentage of 0.09375% (1.125% for each year).

TO CALCULATE YOUR PENSION Multiply your best 36 months (3 years) average salary by your “pension right”. EARNED PENSION RIGHT UNDER THE NATIONAL PENSION ACT, 2008 ACT 766 The Pension Right is 2.5% for each year of contribution for the first 15 years and 1.125% for every additional year up to a maximum of 60.0%. Illustration Mr. Mensah will be 60 years in December 2021. He had his first formal employment in January 2004 on an annual salary of GH¢18,000 (GH¢1,500 monthly). Salaries are reviewed upward each year by 5%. What would be Mr. Mensah’s monthly pension

when he eventually retires? Solution Mr. Mensah’s total contributions would be for 18 years which qualify him for full pension under Act 766. He will earn a pension right of 40.88%. Again, the average of his best 3 years’ annual salary will GH¢39,323 (GH¢3,277). Hence, his pension would be Annual Pension = 39,323 * 40.88% = GH¢16,075 Monthly Pension = 3,277 * 40.88% = GH¢1,340 In our next episode, we shall consider voluntary pension benefits, invalidity benefits and survivors benefit. (Credit: SSNIT, Pensions Act)

WEDNESDAY JULY 22, 2020

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BUSINESS OUTLOOK SERIES PART V

The Business Model improvement and innovation

BY: CDC CONSULT LIMITED

n our last four (4) editions of the Business Outlook Series, we have helped business and their management understand what the major effects of COVID-19 have been as well as the opportunities and constraints it presents. We have further discussed how businesses can re-position themselves to take advantage of the opportunities amidst the pandemic. We have also taken time to explain what investors require of businesses and how businesses can position themselves to attract funding from investors. In our subsequent articles, we plan to walk business owners, business executives and managers through the various aspects of a business’ operations that require careful management, reviews and re-positioning as we work hard to keep our businesses afloat and sustainable in the coming years. In this article, we begin with Business Model Improvement and Innovation. Since the outbreak of the novel coronavirus (COVID-19), the business world is grappling and talking about business models, business model innovation, differentiation and competitive advantage. These terms may sound very nice and popular in management and business literature and are high on the agenda of many CEOs, MDs and the management teams and of businesses and organizations both profit and not-for-profit. Unfortunately, there is very little understanding of the concept

of business models in terms of design and improvement through innovations. We will have a two (2)-stage article to attempt to describe a business model and how to improve the existing business model of organizations. These articles aim at helping businesses and organizations and in particular SMEs describe and improve their business model to better compete especially in this COVID-19 era. This article in the series, will focus on designing and building a business model and the key elements or the building blocks while the next article will focus on the improvement in the business model amidst COVID-19 and beyond. An organization’s business model improvement and innovation process starts with drawing a clear picture of the existing business model. To simplify the understanding of a business model, we shall rely on the design tool called the Business Model Canvas, which was created by Osterwalder and Pigneur. According to them, a business model describes the rationale of how an organization creates, delivers, and captures value. The business model of a business enterprise is a simplified representation of its business logic. It describes what a company offers its customers, how it reaches them and relates to them, through which resources, activities and partners it achieves this and finally, how it earns money. For business entrepreneurs and executives who wish to design and build their business model, the business model can be described by looking at a set of nine (9) building blocks as presented:

Building Block 1: Customer Segments - These are the groups of people or organizations a business aims to reach and serve. In order to better satisfy customers’ need, a business may group its potential customers in distinct segments. This segmentation may be applied if the customers require distinct offer; need to be reached through different distribution channels; require different types of relationships; present substantially different profitability; and are willing to pay for different aspects of the offer. In the customer segments building block, it is important to identify for whom the company is creating value and who their most important customers are. Amidst the pandemic, a business may have to carry out this exercise to be able to re-focus its limited resources. Building Block 2: Value Proposition - The value proposition describes the bundle of products and services that create value for a specific customer segment identified in building block 1. The value can be of a quantitative or qualitative nature. It may be said to be the reason why customers turn to one entity over another. Examples of value for a customer may be: low cost, performance, customization, accessibility; getting the job done; convenience; usability; design; brand and price. When contemplating the value proposition, it is important for entrepreneurs and executives to identify a number of aspects such as: • What value is delivered to the customer? • Which one of the customers’

problems is solved with our products and services and; • What are the customer needs would be satisfied with our products and services? Customers’ needs are fast changing and businesses must understand which specific need they are meeting to remain relevant to the customer. Building Block 3: Key Channels - The channels describes how a business communicates with its customer segments and how it reaches them to deliver the value proposition. It includes communication, distribution, and sales channels (be it virtual or physical). Entrepreneurs and executives must understand that, the channels main objective is to raise awareness, clearly communicate the value proposed, help customers evaluate the value proposition and to allow customers to purchase specific products and services. Channels are all customer touch points – each of which play an important role in the customer experience. A business will have to decide whether to own the channel, or use partner channels. The right mix (balance great customer experience and maximize revenue) must be found. Building Block 4: Customer Relationships - The customer relationship describes the types of relationship a business establishes with each specific customer segments. When choosing which type of relationship a business wishes to maintain with a particular customer segment, entrepreneurs and executives must CONTINUED ON PAGE 11

WEDNESDAY JULY 22, 2020

Feature

CONTINUED FROM PAGE 9

understand that the motivation is often driven by the business’ objectives which may be customer acquisition and retention or boosting sales. However, a lasting relationship must be viewed from what constitutes value to the customer. This may be informed by the customer’s orientation and preferences. A skill is required in balancing a customer’s value with the business’ objective (congruence). One cannot be achieved without the other. Building Block 5: Revenue Streams – All the effort described in the business model is aimed at capturing value to the firm. Value to a firm is achieved when the benefit exceeds the cost. The revenue streams describe the income a business generates from each customer segment. The revenue stream is often considered to be the heart of the business model. As the saying goes, if customers comprise the heart of a business model, revenue streams are its arteries. It is important for entrepreneurs and executives to identify all revenues including transaction (one-time-buy) and recurring revenues. Building Block 6: Key Resources - Key resources include the most important assets required by the business to make the business model work. They describe what the business needs in order to be able to deliver the value proposition, reach its markets, maintain its relationships and earn revenues. A number of different types of resources may

be considered by entrepreneurs and executives including physical, intellectual, human, and financial resources. Building Block 7: Key Activities Key activities are considered to be critical things which entrepreneurs and executives of a business must undertake to successfully operate to achieve set objectives. These activities are those that are required to be undertaken in order to be able to deliver the value proposition, reach markets, customer relationships and to earn revenues. These may include procurement of inputs, processing of inputs, marketing, sales and delivery of products and services. Most importantly, a business needs to identify which activity is primary to the delivery of the proposed value, how they are inter-related and measures to be put in place to avoid service failure. Building Block 8: Key Partnerships - The key partnerships describe a business’ network of suppliers and other partners which is a requisite to making the business model work. Entrepreneurs and executives should consider the nature of partnerships they desire with the aim of optimization and economies of scale, reduction of risk and uncertainty, and acquisition of particular resources and activities. Apart from partnership with regulatory authorities, business partnership may be take the form of strategic partnerships with non-competitors, strategic partnerships with existing competitors, and partnership

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in the form of joint ventures to develop new businesses, buyersupplier relationships to assure reliable supplies. Building Block 9: Cost Structure - The cost structure describes all the costs which are incurred to operationalize the business model. COVID-19 is changing the cost structure and cost behavior of many businesses. These cost structures must therefore be the ones which are considered necessary when creating and delivering value, maintaining customer relationships and generating revenue. There are two main structures when applying a cost structure to a business model: cost-driven and value-driven. The focus of entrepreneurs and executives must be to minimize the cost wherever possible when opting for a cost-driven business model while cost is of lesser concern when opting for a valuedriven business model. For the latter the focus is on value creation for customers. A business model is not a business/strategic plan but forms the foundation for developing a well-thought through business/ strategic plan. Entrepreneurs and executives must understand that great business models work because the elements are aligned in support of the value creation process. A great business model is the foundation of a viable organization and so must: • meets a customer need; • build value for the business and the business partners; • leverage and extend valuable capabilities or resources;

• •

be efficient; differentiate the business; and • be sustainable beyond the near-term. As Raid Hoffman, the founder of LinkedIn indicated, you have to live your business model in permanent beta. The business model that you capture on paper should be treated as a running hypothesis that is constantly tested and questioned. The design and building of an effective business model requires planning, research, careful analysis and buy-in. There should be time for brainstorming, intuition, logic, data collection, analysis and revision. We encourage you to take a look at the business model you currently run. You may have not formalized it yet but somehow, your business delivers a distinct value. Spend time to review your business model in line with the building blocks discussed and consider the aspects that require improvement.

WATCH OUT FOR THE NEXT EDITION as we discuss how you can improve your current business model. Remember to wash your hand under running water, wear your face mask when going out and never forget to comply with the social distancing protocol. For more information and targeted services in financial management and investment advisory services, training and recruitment, market solutions and organizational development, and research, kindly contact CDC Consult Limited through info@cdcconsult. org, babilo@cdcconsult.org. You can also call 055332030/0244683042

Penplusbytes launches new Webinar Series focusing on Ghana’s Elections 2020 Penplusbytes has launched a webinar series to interrogate emerging issues in Ghana’s election 2020. The Webinar Series will look at ways in which technology, pointed advocacy, as well as civic education can ensure there are no unfair restrictions placed on segments of the society, especially people with disabilities, young persons, the elderly and the vulnerable when it comes to exercising their democratic rights. Executive Director of Penplusbytes, Juliet Amoah, noted that “The appropriate application of technology to elections can increase administrative efficiency, reduce long-term costs, enhance political transparency and promote wider participation which all lead to trust in the electoral results and a truly credible Ghana elections 2020”. “With the Covid19 pandemic raging on, this trust is already at risk and our electoral system under tremendous stress, and if nothing is done, we

face a potential political crisis on top of the health and economic crises, which is why we think dialoguing about issues is crucial”. She added. To tackle issues from an interdisciplinary perspective, so as to find solutions to the multifaceted issues of inclusivity, legitimacy and acceptance of fair election results in Ghana, Penplusbytes will convene a weekly panel of a diverse group of individuals, including tech experts, leading scholars and thinkers, policy makers and occasionally politicians themselves to tackle this issue from an interdisciplinary perspective. The series will look at the role of new digital technologies in ensuring that all citizens can, and will, participate fully in the exercise of their civic right of vote casting, open up discussions on practical issues such as the type of technologies that are currently in use around the world and also reference non-electronic innovations and techniques which may aid in improving electoral

processes. The Penplusbytes Webinar series will also treat issues such as hyperpolarization and the threat to security, the spread of misinformation on social media and the weaponization of information in the public virtual space, election administration errors and the increasingly incendiary rhetoric around the fairness of Ghanaian elections. It will also have panelists drawing up comparisons between full on electronic and mechanical voting systems, empowering young people with the civic education they need and deserve to actively participate in Ghana’s democracy, offer solutions to possible voting day challenges unique to Ghana election 2020 among others. Building on the first discussion on the challenges people with disabilities (PWDs) face during elections, a second session slated to take place on July 24, 2020 will have a panel of tech-experts mapping out

low cost tech solutions that can be used to enable PWD Participation. Besides its international appeal, which allows for divergent and discerning views of persons participating from across the globe, the Penplusbytes’ Webinar Series will also allow for corporate networking opportunities for its participants. The series will happen online via the Zoom app every Thursday till election day on December 7.

WEDNESDAY JULY 22, 2020

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Dominant currencies and the limits of exchange rate flexibility BY GUSTAVO ADLER, GITA GOPINATH AND CAROLINA OSORIO BUITRON

aced with an unprecedented shock of collapsing global demand and commodity prices, capital outflows, major supply chain disruptions and a generalized drop in global trade, many emerging markets and developing economies’ (EMDEs) currencies have weakened sharply. Will these currency movements support the recovery of these economies? Building on a new dataset, research laid out in a new IMF Staff Discussion Note indicates that the short-term gains from weaker currencies may be limited. This is especially true for EMDEs where firms price their international sales and finance themselves in a few foreign currencies, notably the US dollar—so-called Dominant Currency Pricing and Dominant Currency Financing. Dominant currency pricing The central assumption underlying the traditional view on exchange rates is that firms set their prices in their home currencies. As a result, domestically-produced goods and services become cheaper for trading partners when the domestic currency weakens, leading to more demand from them and, thus, more exports. Similarly, when a country’s currency depreciates, imports become more expensive in home currency terms, inducing consumers to import less in favor of domestically-produced goods. Thus, if prices are set in the exporter’s currency, a weaker currency can help the domestic economy recover from a negative shock. However, there is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar—a feature dubbed Dominant Currency Pricing or Dominant Currency Paradigm. In fact, the share of US dollar trade invoicing across countries far exceeds their share of trade with the US. This is especially true in EMDEs and, given their growing role in the global economy, increasingly relevant for the international monetary system. The inception of the euro initially reduced the dominance of the US dollar somewhat, but the latter has remained largely unabated since then. Other reserve currencies play a limited role. Dominant currency pricing is common both in goods and in services trade, although it is less prevalent in the latter—especially in some sectors, like tourism. The prevalence of dominant currencies like the US dollar in firms’ pricing decisions alters how

trade flows respond to exchange rates, especially in the short term. When export prices are set in US dollars or euros, a country’s depreciation does not make goods and services cheaper for foreign buyers, at least in the short term, creating little incentive to increase demand. Thus, in EMDEs, where dominant currency pricing is more common, the reaction of export quantities to the exchange rate is more muted and so is the shortterm boost of a depreciation to the domestic economy. Another important implication of the use of the US dollar in trade pricing is that a global strengthening of the US dollar entails short-term contractionary effects on trade. This is because the weakening of other countries’ currencies vis-à-vis the US dollar leads to higher domestic currency prices of their imports, including from countries other than the US, and, thus, a lower demand for them. Dominant currency financing The prevalence of the US dollar is also a feature of corporate financing in EMDEs. This feature—Dominant Currency Financing—means that exchange rate fluctuations can also have effects through their impact on firms’ balance sheets, a phenomenon widely studied in the literature. A depreciation that increases the value of a firm’s liabilities relative to its revenues weakens its balance sheet and hinders access to new financing, as firms’ capacity to repay deteriorates. However, this effect depends on the currency in which revenues are earned, that is, whether revenues are in foreign currency or in local currency. Exporting firms that use the US dollar or euros for both pricing and financing, are “naturally hedged” as liabilities and revenues move in tandem when exchange rates fluctuate. This means foreign currency financing is less of a concern when concentrated in exporting firms. Revenues and liabilities of importing firms, however, are typically not matched,

and exchange rate fluctuations bring about balance sheet effects that constrain financing and import volumes. Dominant currency financing tends to amplify the effect of a country’s depreciation on its imports. The prevalent use of the US dollar in corporate financing also means that a generalized strengthening of the US dollar can have globally contractionary effects through importing firms balance sheets. Dominant Currencies and the Great Lockdown Our analysis on dominant currencies suggests that the weakening of EMDE’s currencies is unlikely to provide a material boost to their economies in the short term as the response of most exports will be muted, besides the physical disruptions to trade from supply and demand disruptions. Meanwhile, key sectors that would normally respond more to

exchange rates—like tourism—are likely to be impaired by COVIDrelated containment measures and consumer behavior changes. Additionally, the global strengthening of the US dollar— which mainly reflects a flight to safe haven assets—is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the United States. Exchange rates still have a role to play to contain capital outflow pressures and support the recovery over the medium term, but sustaining the domestic economy in the short term requires a decisive use of other policy levers, such as fiscal and monetary stimuli, including through unconventional tools. (IMF.org)

WEDNESDAY JULY 22, 2020

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The debt predators BY KATHARINA PISTOR

hat do the C a l a b r i a n o r g a n i z e d crime syndicate ‘Ndrangheta, Hertz, China’s Sichuan Trust, and the US Federal Reserve have in common? They are all deeply entangled in a financial system that has turned credit intermediation into a debt mint that produces assets to enrich investors but leaves households, firms, and governments struggling with unsustainable liabilities. Investors have always been hungry for safety and yield. Logic suggests that you can’t have both, but that was before the age of structured finance and shadow banking. With the right legal coding strategy, simple payment obligations can be turned into liquid assets for investors. Minting debt has little to do with conventional credit intermediation. It is all about investors and fee-charging intermediaries, not about debtors. They and their assets only provide the input to sustain the production line. And whenever it breaks down, which it does when the quality of inputs deteriorates or external factors (like a pandemic) disturb its operation, central banks stand ready to absorb the risk and recycle the financial junk. The techniques for putting together this assembly line are relatively simple. You buy a bunch of claims at a discount from loan originators, pool them with other claims and transfer them to a special purpose vehicle. The SPV serves as a legal vessel to separate its assets from those of others so that investors who buy interests in the SPV do not have to worry about any exposure to loan originators, SPV trustees, or administrators. When mortgage-backed securities were still the hottest asset around, brokers originated loans and sold them wholesale to large banks, which set up offbalance-sheet SPVs that issued fixed-income assets to investors. Once in motion, the debt mint is insatiable. Not surprisingly, the quality of inputs (the loans

and the collateral) tends to deteriorate over time. This is what gave us the subprime mortgage crisis. Post-crisis regulatory reforms focused on banks and their role, but did not tackle the asset assembly line itself. If anything, debt mints – and the raw inputs that feed them and produce the assets investors want – have multiplied. For example, the ‘Ndrangheta sent its offspring to business schools, where they learned how to earn substantial returns by supplying inputs to the debt mint. Soon enough, the ‘Ndrangheta set up front companies to collect and often extort bills from health-service providers against regional governments and sold them at a premium to financial intermediaries that operate the mint. Conveniently, anti-money laundering and know-your-customer regulations do not apply to these shadow banking operations. Thus, no one questioned where these bills came from and how they had been obtained. When Hertz filed for bankruptcy in May 2020, it was $19 billion deep in liabilities. Most were owed to company-affiliated, but legally separate SPVs. The inputs for these SPVs were intracompany loan obligations. The first SPV raised funds from investors, lent them to the second, which offered the cars it owned as collateral and its leasing operations to produce the cash to pay back the loans. Investors were further protected by collateral calls in the event that the value of the collateral declined. For a while, the cash inflows boosted Hertz’s financial performance, but at the price of turning a car-rental company into a shadow bank whose core business was reduced to producing the collateral and cash flows for repayment. Hertz’s capital structure reflects this transformation: 90% liabilities and only 10% equity. This is what the capital structure of banks, not ordinary corporations, looks like. Even China, a country that carefully guards the stability of its financial system, has not been spared. The trust industry market, an alternative to China’s largely state-controlled banking system, witnessed its

“golden decade” in the 2000s and reached $3 trillion in 2020. Sichuan Trust Company Ltd. and other financial intermediaries packaged loans to real estate and infrastructure projects into assets for investors. As the practice expanded, the quality of loans declined. The COVID-19 crisis exposed the vulnerability of this scheme, forcing Sichuan and others to miss payments to investors and prompting government intervention. The ‘Ndrangheta, Hertz, and Sichuan Trust are all part of debt mints that follow the same script and are designed for a single purpose: to produce assets to enrich investors and generate fees for intermediaries. The debtors, their houses, cars, or business operations supply only the raw material to the mint. This system is not merely incidentally fragile; it is designed to produce excessive debt, which translates directly into systemic risk. Here is where the Federal Reserve and other central banks come in. The Fed backstops this system by facilitating, in times of distress, the recycling of these assets once investors have deemed them junk, and by offering liquidity support for unregulated financial intermediaries – even ordinary non-financial companies that find themselves in a liquidity

squeeze. It assures investors that they will always find a buyer, even in the midst of a crisis. No wonder that Goldman Sachs could make $4.24 billion in profits from its fixed-incomeasset division between April and June, at a time when the US economy was in lockdown and many businesses were in free fall. Just because the 2020 crisis was triggered by an event that was exogenous to finance should not stop us from reforming a system that has failed all but the entities that are running and feeding the debt mint. Households do not need more debt; they need income. Firms do not need liabilities on par with banks; they need operating income. And sovereign states do not need debt; they need viable currencies to boost their spending power and serve their citizens. None of these needs will be met unless and until the debt mint is curbed.

Katharina Pistor, Professor of Comparative Law at Columbia Law School, is the author of The Code of Capital: How the Law Creates Wealth and Inequality. Copyright: Project Syndicate, 2020. www.project-syndicate.org

WEDNESDAY JULY 22, 2020

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IEA’s analysis of key policy initiatives for Ghana’s post-covid19 recovery

he Covid-19 pandemic has caused extensive disruption to Ghana’s economy, severely affecting businesses, jobs and livelihoods. The post-pandemic recovery will be arduous and protracted and will require wellcoordinated and comprehensive policies to turn the situation around. The IEA presents here a summary of policy initiatives that we believe are key to achieving the immediate recovery and long-term growth (for further details see IEA Discussion Paper [hyperlink]...). The initiatives cover fiscal policy, monetary policy, natural resource policy, agricultural policy and industrial policy. The Institute wants to bring these policy initiatives to the attention of Government as it prepares its post-pandemic recovery plan. Fiscal Policy Fiscal policy must necessarily lead the recovery since it is uniquely placed to mobilise and manage the resources required. To be able to play this role effectively, persistent rigidities in both revenue and expenditure must be addressed. Scaling Up Revenue Ghana has a long-standing problem with revenue mobilisation. Currently, the country’s tax revenue/GDP ratio is 12-13%, which compares unfavourably with the average of 25% for middle income countries and the minimum threshold of 20% under the proposed eco currency system of the Economic Community of West African

States. Ghana’s situation of low tax revenues does not arise from the fact that it has low tax rates. On the contrary, Ghana’s personal income, corporate income and VAT rates are relatively high. The problem rather lies with tax losses, which experts estimate to be around 10-12% of GDP. In other words, we lose about as much tax revenue as we collect. Ghana’s tax revenues should be significantly scaled up to support the recovery and long-term growth. The following are some of the actions we recommend for achieving this all-important goal: • The informal sector remains almost entirely outside the tax net. The activities in the sector are largely small in scale, but on aggregate the sector accounts for nearly 30% of GDP. Therefore, it cannot be completely ignored when it comes to taxation. However, we should be taxing the mechanics, hairdressers, tailors and other artisans who employ at least a few people, rather than the tiny fish like kayayei, kenkey, waakye and ice-water sellers, who have tiny net incomes. To ensure that adequate taxes are collected from the informal sector, it must be integrated into the tax system through formalisation. Government’s initiative to digitise the economy is welldirected to bringing the informal sector into the tax net. This effort should be supplemented by leveraging new information and communication

•

technologies, such as mobile money and other tech platforms. Tax evasion is pervasive in Ghana. The act is often perpetrated through connivance between taxpayers and tax officials. The way to deal with the problem is to institute a strict surveillance system backed by a strong sanctions regime for offenders under the aegis of the commercial courts. Tax exemptions are also pervasive, enjoyed by selected companies, NGOs, diplomatic missions, public officials and other individuals. The system is subject to considerable abuse, characterised by pervasive lobbying for special treatment. Tax exemptions are estimated around GH¢5 billion currently. It is important that we reduce exemptions to an acceptable minimum. Recognising the magnitude of the problem and the need to do something about it, the government submitted a bill to Parliament about two years ago. The bill has languished before Parliament and there is no apparent desire by either of the two major parties to pass it. We urge prompt passage of the bill to plug a glaring hole in the tax system and save billions in revenue for the budget. Illicit financial flows in the form of trade mis-invoicing, transfer pricing and various

•

forms of money laundering are pervasive in Ghana. These underground dealings cost the nation huge amounts in tax losses, estimated to be around US $3-4 billion annually. We need a strongly investigative surveillance system to detect and curb these practices. Meanwhile, a strong sanctions regime is required to punish and deter culprits. Property taxes have huge potential in Ghana, given the sprawling mansions in urban centres, but they are barely collected. They should be made the responsibility of Metropolitan, Municipal and District Assemblies, which should be incentivised to collect and retain part as internally generated funds. They should be authorised to use those funds at their discretion to finance their development projects. Tax fraud and corruption are rampant and usually arise from connivance between taxpayers and tax officials to underestimate payable taxes. The pervasive humanhuman interface in the tax system is part of the problem. It can, therefore, be abated through a strong, multilayered surveillance system supported by automation and digitisation, not forgetting the need for a strong sanctions and punishment regime.

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WEDNESDAY JULY 22, 2020

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Inefficiencies in tax administration persist, despite efforts over the years to remedy the situation. These relate to timeliness, coverage and costs, among other things. There should be continual efforts to strengthen tax administration. Expanding automation and digitisation would go a long way to improve efficiency in tax administration. The pandemic has severely affected traditional revenue sources like personal income tax, corporate income tax and international trade tax. It is, therefore, critical that we step up efforts to plug these tax leakages in order to make up for the shortfall. Reforming Expenditure: The utilisation of Government revenue, on the other, is plagued by two key problems: i) inadequacy of revenue (noted above); and ii) excessive expenditure earmarking (or rigidities). The latter refers to obligatory payments for wages, debt service and statutory funds. In the end, capital expenditure that is needed for growth, is sacrificed. We suggest the following measures to tidy up the expenditure side of the budget and ensure efficient utilisation of revenue: The public sector wage bill is excessively high. In 2019, the wage bill used up as much as 47% of tax revenue, which is clearly unsustainable. The way to curtail the wage bill is to implement the longdelayed public sector reforms to downsize the sector and make it more efficient and productive. Debt service has become a major burden in the budget. In 2019, interest payments used up 46% of tax revenue. The way to bring debt service under control is to adopt a comprehensive debt management strategy, including restructuring, refinancing (or reprofiling) and buybacks. But the bottom line for reducing debt service over the long haul is to curtail the budget deficit and associated borrowing by bridging the revenueexpenditure gap, something that we are strongly advocating. Payments to statutory funds have also become an increasing burden on the government budget. Efficiency in the management of these funds has, however, been called into question.

The funds should be reviewed and reformed as necessary to improve their efficiency and make them more fit for purpose. They should be streamlined and aligned closely with the central government capital budget. • Expenditure on goods and services has been growing in line with an expanding public sector. In 2019, this line item used up 16.3% of tax revenue. The item should be controlled through streamlining, rationalisation and effective monitoring and oversight. Capital expenditure (CAPEX) has been unduly squeezed, bearing the brunt of inadequate revenue and competing recurrent-spending interests. In 2019, CAPEX was only 2.8% of GDP, which is extremely low by all standards and inimical to long-term growth. CAPEX should be scaled up by allocating a higher portion of an enlarged revenue envelope to it and through appropriate expenditure reforms. We recognise that the Public Financial Management and the Fiscal Responsibility Acts are directed at strengthening fiscal policy. But to be effective, they should be supported by measures to address underlying weaknesses in both revenue and expenditure, as outlined above. Monetary Policy Monetary policy must play a complementary role in the recovery effort. It is incumbent on the central bank to exercise its broad mandate, which goes beyond price stability and includes “support for the general economic policy of Government, economic growth and development.” We call on the bank to support post Covid-19 recovery especially in the following areas: The bank should directly support development projects and programmes. In particular, it should support the agricultural value chain, including in the buffer stock system, where it has been involved recently. This it can do either through its own department or through a separate development finance institution. The bank should create a regime of affordable lending rates for SMEs and strategic sectors of the economy like agriculture and industry. This it can do by subsidising credit from a developing finance institution to these sectors. The bank should restore its financing of the budget, which had been temporarily put on hold, subject to caps. This will allow Government to benefit from cheaper and more convenient supplementary funds to execute the recovery plan. Natural Resource Policy Ghana’s natural resources represent the low hanging fruits

for mobilising funds to support the recovery. The country has untapped natural resource wealth in the form of oil, gas, gold, manganese, bauxite and iron ore, inter alia, that is estimated to be worth over US$12 trillion. Invariably, we give away these resources to foreign investors through concession contracts that cede rights over mineral lands and oil plots to the investors, with minimal benefits to Ghana. We should exploit our natural resources more prudently and more beneficially through the following actions: We should refrain from signing any more concession contracts, which are actually in breach of the Petroleum Exploration and Production Act, 2016 (Act 919). The Act stipulates that all contracts should be on product-sharing basis, and that is what we should be doing. We should revisit our mineral contracts and, where possible, renegotiate the export retention and other generous terms granted to foreign investors. We should take full ownership of our natural resources and ensure that they deliver maximum benefits to Ghanaians. To the greatest extent possible, we should only contract foreign investors to exploit our resources for a fee that takes care of their costs plus a profit margin. We should include technology transfer clauses in all contracts to ensure that Ghanaians ultimately acquire the technical knowhow to exploit our resources. We should utilise our comparative advantage in natural resources to support industrialisation by adding value to them and thereby maximising their returns. Agricultural Policy Ghana needs to tap the huge potential of its agriculture, which employs over 60% of the labour force and contributes 19% of GDP currently, to support postCovid-19 recovery and long-term growth. Agricultural productivity should be increased to improve food affordability and security, while leveraging agriculture for industrialisation. The following actions are recommended to Government aimed at achieving these objectives: Increase availability of irrigation facilities, high-yielding seed varieties, fertiliser and quality extension services to peasant farmers. Reduce post-harvest losses to avoid waste, the disincentive to farmers and large markups of retail prices over farm-gate prices. This should be done by beefing up food preservation and storage facilities and improving transportation infrastructure and marketing facilities. The National Food and Buffer Stock Company

should be strengthened to play a more effective role in this regard. Provide affordable credit to agriculture through a designated development finance institution. Incorporate Government’s Planting and Rearing for Food and Jobs, One Village-One Dam and One District-One Warehouse initiatives into an integrated agricultural value chain from production to storage to processing to marketing. Leverage the country’s comparative advantage in agricultural resources to promote industrialisation (see next section). Increase support for large-scale commercial agriculture capable of leveraging modern equipment and farming methods. Industrial Policy Industrialisation is a key propeller of economic growth. Unfortunately, Ghana is less industrialised today than it was in 1970, with manufacturing output as a ratio of GDP dropping by about a third from 15% to 10%. This is the result of privatising and abandoning many of Nkrumah’s industries in the wake of extensive liberalisation of the economy. We should leverage our comparative advantage in natural resources to spur industrialisation and transformation of the economy. The following actions are recommended to Government: • Link industrialisation with agriculture, leveraging the resources of the latter. • Fully integrate production and extraction of raw materials with local processing and fabrication. • Ensure the One District One Factory (1D1F) initiative is informed by our historical industrialisation experience and international best practice. In particular, link factories to our natural resource supplies to ensure their competitiveness and sustainability. Carefully consider supply chain, product-type, factory sizes, locations, ownership and management structures. In addition to 1D1F, consider also the possibility of creating large industrial parks comprising strategic industrial conglomerates so that industries could benefit from contagion in terms of technology transfer and economies of scale. Support the private sector to be part of the industrialisation process with a relaxed regulatory framework, good infrastructure, affordable credit, stable and adequate markets, favourable trade policies, R&D support and a stable macroeconomic environment. (Source: Institute of Economic Affairs (IEA))

WEDNESDAY JULY 22, 2020

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Pursuing cybersecurity maturity at financial institutions BY SAM FRIEDMAN AND NIKHIL GOKHALE, DELOITTE & TOUCHE

E are entering an era in which digital and physical technologies are more combined and connected than ever. For financial institutions, developing an innate understanding of where and how they could encounter cyber risk in this environment is now of primary importance. At the same time, security teams must continuously strive to fulfill their fiduciary and regulatory responsibilities, while meeting rising expectations for consumer privacy and innovative business solutions. Over the past two years, Deloitte has worked with the Financial Services Information Sharing and Analysis Center (FS-ISAC) to survey members on how they are confronting these cyber challenges. The objective is to measure good stewardship of both the cybersecurity budget and overall cyber risk management program. Our 2018 pilot provided a snapshot of how the chief information security officers (CISOs) who responded to our survey were discharging their responsibilities, while offering preliminary insights into the industry’s broad spectrum of cybersecurity strategies, structures, and budget priorities.1 This year— in addition to identifying spending patterns across the industry by sector, size of company, and cyber risk management maturity level— we identified several core traits of those that have already reached the highest maturity level as defined by the National Institute of Standards and Technology (NIST). (See figure 1.) These defining characteristics of “adaptive” companies, which are alluded to in the NIST cybersecurity maturity framework,2 include: • Securing the involvement of senior leadership, both top executives and the board; • Raising cybersecurity’s profile within the organization beyond the information technology (IT) department to give the security function higher-level attention and greater clout; and • Aligning cybersecurity efforts more closely with the company’s business strategy. Organizations that can integrate these fundamental elements and follow the example set by leading cybersecurity programs will more likely become and remain adaptive in the face of an ever-evolving business and threat landscape. The survey indicated that money alone is probably not the answer, as higher cybersecurity spending did not necessarily translate into a higher maturity level. That likely means exactly how—and how well—financial institutions go about securing their digital fortress is at least as important as the amount of

money devoted to cybersecurity. Partial: Organizational cybersecurity risk management practices are not formalized, and risk is managed in an ad hoc and sometimes reactive manner. • Informed: Risk management practices are approved by management but may not be established as policy across the organization. • Repeatable: The organization’s risk management practices are formally approved and expressed as policy. Adaptive: The organization adapts its cybersecurity practices based on lessons learned and predictive indicators derived from previous and current cybersecurity activities. Spotlight on spending Understanding the resources that firms devote to cyber risk was one of the more important data points we wanted to gather from this effort (figure 2). Those responding to the survey spent anywhere from 6 percent to 14 percent of their IT budget on cybersecurity, with an average of 10 percent. This amount translated to a range of around 0.2 percent to 0.9 percent of company revenue, with an average of about 0.3 percent. In terms of spending per employee, respondents spent between US$1,300 to US$3,000 per full-time or equivalent employee (FTE) on cybersecurity, with an average of around US$2,300. The ranges represent the diversity we saw in the sample—varying, for example, by the size of the responding company (figure 3). At first glance, it appears smaller companies have some catching up to do to match the financial commitment of larger respondents. Small institutions surveyed spent a lower percentage of their revenue (0.2 percent) on cyber than did midsize (0.5 percent) or large companies (0.4 percent), and while their average spending of US$2,100 per FTE matched that of midsize firms, it is far lower than the US$2,700 cited by their large counterparts. That could be

explained by the greater complexity of larger institutions, which often offer more products and services and have multiple business units and delivery channels to account for. Smaller companies surveyed did commit a higher percentage of their IT budget (12 percent) to cybersecurity than did large and midsize firms (9 percent). This may indicate that smaller firms realize they need to commit a larger piece of the IT pie to meeting new regulatory requirements and operational needs on cyber. Digging deeper into spending decisions, larger firms allocated nearly one-fifth of their cybersecurity budget to identity and access management—nearly twice the percentage of midsize and smaller companies, which tended to spend more heavily on endpoint and network security. (For more about how respondents compared based on their revenue segment, see the sidebar, “Size drives divergent strategies.”) There were also differences by industry segment. For example, bank respondents reported that they allocated a slightly higher than average percentage (close to 11 percent) of their IT budget to cybersecurity, while insurance and nonbanking financial services companies were slightly below the overall respondent average of 10 percent—although at around 0.33 percent, all three were nearly even as a percentage of company revenue. Yet in terms of dollars spent per FTE, nonbanking financial services companies allocated considerably more—about US$2,800—than did banks (about US$2,000) or insurers (nearly US$2,200). The highest spending group among this survey sample were the financial utilities, such as clearinghouses, exchanges, and payment processors, which averaged around 15 percent of their IT budget on cybersecurity, 0.75 percent of revenue, and about US$3,600 per FTE. Service providers (financial products/services/applications) also

reported spending slightly more, at nearly 11 percent of the IT budget and about 0.60 percent of revenue, yet only averaged US$2,000 or so per FTE—about the same as bank respondents. Most interestingly, while there were slight differences in spending by maturity level, adaptive companies did not necessarily spend more than the sample’s overall average on their cybersecurity programs. This is in line with our central theme: How a security program is planned, executed, and governed is likely as important as how much money is devoted to cybersecurity. So, what differentiates adaptive companies in their cybersecurity approaches? Defining characteristics of advanced cybersecurity programs CISOs work through a multitude of systems and processes in their ongoing efforts to secure their organizations against cyber intrusions, establish heightened vigilance to spot attacks before they can do serious harm, and be resilient when recovering from a significant event. With so many varied risk management activities going on simultaneously, CISOs at times may find it difficult to prioritize their efforts. What fundamental elements should be in place to accelerate an financial institution’s cybersecurity maturity and maintain a high level once it is attained? While there are many factors that go into making a cybersecurity program successful, we found three common denominators that typically separate adaptive companies from the rest. Adaptive companies were generally best able to: 1) secure executive leadership and board involvement; 2) raise cybersecurity’s profile beyond the IT department; and 3) align cyber risk management more closely with business strategy (figure 4). These findings conform to the NIST description of what an adaptive organization looks like. That is encouraging, because almost all the respondents who classified their CONTINUED ON PAGE 23

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CONTINUED FROM PAGE 21 organizations as “adaptive” did so with a self-assessment, meaning they fully appreciate what they needed to do to indeed reach the highest maturity level. These adaptive companies can serve as a role model for less mature organizations aiming to reach the next level. Financial institutions that can successfully emulate these defining characteristics are likely to improve their cybersecurity maturity in the short term as well as continue to bolster their defenses over the long haul. By emulating adaptive companies, CISOs can also expand beyond their traditional roles as technologists and guardians. This can enable them to devote more time as strategists and advisors to better support the broader operations and goals of their business units, management teams, and boards.3 Characteristic No. 1: Secure leadership and board involvement Adaptive companies, as defined by NIST, call for senior executives to monitor cybersecurity risk in the same context as financial risk and other organizational risks.4 That certainly tracks with our survey’s finding that lack of management support/inadequate funding was cited as a CISO’s top challenge in managing cybersecurity by companies with a lower (informed) level of maturity. Our analysis went beyond senior executives, finding that the boards and management committees of those survey respondents who classified themselves as adaptive were more interested in nearly all areas of cybersecurity than were those at the informed level (figure 5). Indeed, boards and management committees at the lowest maturity companies appear to be interested in fewer areas of cybersecurity activities. By comparison, interest rises dramatically among the next level up on the maturity curve (“repetitive”), from overall security strategy to reviews of threats and security risks, cybersecurity program progress, vulnerability to a third-party breach, as well as review of security testing results. In most areas, board and management committee interest peaks among adaptive companies. Better education of the board and the management committee by CISOs and other C-suite executives around current threats and security risks and their implications for the business could galvanize increased engagement. Having an engaged board that works closely with senior management on cybersecurity issues can help focus the entire organization on the challenge while assuring that adequate resources are allocated to the task. For example, the survey found that five out of 14 adaptive companies compared to only one in 12 informed ones assigned a high priority to investing in organizationwide awareness and training, something that requires resources and support from multiple functions. More adaptive companies tend to be

better able to engage and enlist the whole organization across all functions and embed securityminded practices into day-to-day work routines, from new product development to customer service to core processes. Characteristic No. 2: Raising cybersecurity’s profile within the organization beyond IT Cybersecurity as a discipline originated within the IT function. Therefore, it is not surprising that one-half of all respondents— including those from adaptive companies—reported that the security team was part of the IT function at their organization. After all, a company’s technology systems are not only the target of cyberattacks, but a large part of the solution in preventing intrusions from succeeding and limiting the damage if they do. That said, cyber threats are increasingly being acknowledged as one of the most critical risk exposures facing an organization, and cybersecurity today is not merely a technology challenge. More mature companies have therefore recognized the need to raise the profile of the security function, enabling decisions that are above and independent of other IT considerations or constraints. The survey findings (figure 6) showed that adaptive respondents were more likely to elevate the cybersecurityfunctionbycompletely segregating cybersecurity from IT. Repetitive respondents appear to be moving in this direction; their organizations were more likely to segregate the two functions but still maintain common lines of reporting. Informed respondents were by far the most likely to keep cybersecurity as part of IT, and least likely to split the functions and give cyber a separate identity. In addition, about one-half of adaptive companies (nine out of 17) operated a first line and second line of defense with complete independence, versus only two out of 14 of informed respondents. The theme of raising cybersecurity’s profile and segregating it from IT was also reflected in the reporting structure at adaptive companies surveyed (figure 7), where more CISOs reported to chief operating officers (COOs) and chief risk officers (CROs) than to chief information officers (CIOs) and chief technology officers (CTOs). The survey also found that nearly all the CISOs at adaptive companies reported no lower than two levels down from the chief executive officer (CEO), compared with three of four at repetitive organizations, and two of three among informed respondents. That said, across the complete sample surveyed, very few CISOs reported to a general counsel or a chief compliance officer (CCO). This indicates that most cybersecurity programs at financial institutions have moved beyond just compliance; they are becoming a part of the broader security function responsible for combating cyber risk and are touching every part of the organization. For most

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progressive CISOs, the next step would likely be providing strategic inputs during the business planning and decision-making phases. Characteristic No. 3: Aligning cybersecurity more closely with business strategy In today’s increasingly digital and data-driven world, business functions across the board rely heavily on technology to carry out day-to-day operations internally and externally. How well companies leverage emerging technology to innovate and change the way they operate is often what differentiates them from competitors. New technology, however, may also expose companies to additional cyber vulnerabilities. For example, most respondents said the top two emerging technologies their companies plan to adopt over the next two years were cloud and data analytics. Yet as Deloitte’s 2019 Insurance Outlook noted, as insurers increase cloud usage to speed up transformation and free up resources, regulators have been raising concerns about the potential for cybersecurity issues, because core systems and critical data are essentially being moved offsite to a third party.5 While service providers are accountable for the security of their hardware and software, the ultimate responsibility for ensuring cybersecurity of cloud functions remains with the insurer, and any breach of cloud data could have regulatory and reputational implications for the company.6 Bank CISOs often face similar challenges. “As more data is used in AI applications, concerns over data protection and privacy could escalate institutions’ risk profile,” noted Deloitte’s 2019 Banking Outlook. “Increased connectivity with third-party providers and the potential for increased cyber risk is another growing concern.”7 Adaptive respondents seem to already recognize that cybersecurity needs to be more closely tied to overall strategy, as business growth and expansion was identified as their second biggest challenge when managing cybersecurity (figure 8), trailing only rapid IT changes and rising complexities—an issue that faces all CISOs, regardless of company maturity level. As companies grow by adding new platforms, products, geographic regions, apps, and Web capabilities, cybersecurity considerations can multiply along with the introduction of each new element. In contrast, companies with less mature cybersecurity programs were often still contending with much more basic issues than how to cope with growth challenges. The second largest problem repetitive companies face, for instance, is prioritizing options for securing the enterprise, while the biggest challenge facing informed respondents was lack of management support and inadequate funding. Better alignment with business plans will likely help CISOs identify and respond to emerging exposures. Those from adaptive and repetitive companies recognized third-party/ supply chain control deficiencies as

one of the top three cybersecurity threats to their organization. Respondents from informed companies, meanwhile, seemed to be grappling with more internal issues, such as unauthorized access to systems, as well as inadequate detection and response capabilities. Embedding cyber professionals into strategic initiatives and transformational projects right from the onset will likely help the security function better manage cyber risk across the enterprise and foster greater collaboration and innovation.8 Cybersecurity maturity should be an ongoing effort There are many other factors beyond the maturity level to consider when examining a financial institution’s cybersecurity program. Size is one such consideration (see sidebar, “Size drives divergent strategies”); another is industry sector. Yet no matter how an institution stacks up against its competitors or how those comparisons are made, cybersecurity will remain a work in progress for all financial organizations. Indeed, regardless of who is ultimately in charge and how governance is structured, cybersecurity awareness, responsibility, and accountability should be part of every department within every financial services firm. Even highly mature companies should keep adapting Respondents from adaptive companies should not rest on their laurels. While the survey indicated that high maturity respondents may have settled on a solid governance system and laid the foundation for an effective cyber risk management program, there’s likely still much work to be done to keep fortifying defenses and response capabilities. As noted, even adaptive companies are racing to keep up with rapid IT changes and rising complexities in tech systems, which was cited as a top challenge for CISOs regardless of company size or maturity level. Such efforts have taken on a new sense of urgency in this age of heightened consumer sensitivity about data security and privacy, as well as additional regulatory demands. Achieving excellence in cybersecurity will therefore likely remain an ongoing journey, with many twists and turns, rather than an ultimate destination. Cyberattacks continue to be bolder and more sophisticated, challenging financial institutions to respond in kind. Companies will need to continuously upgrade their capabilities—both human and technological—to remain secure, vigilant, and resilient. CISOs should also keep getting better at being proactive, anticipating potential exposures and preparing to counter them, rather than reacting to new modes of attack as they arise. Even an adaptive organization could be vulnerable without a sustained effort to stay one step ahead of those seeking to penetrate its digital fortress and compromise its operations.

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