CFI.co Autumn 2015

Capital Finance International

Autumn 2015

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AS WORLD ECONOMIES CONVERGE

Dr Jim Yong Kim, President of the World Bank Group:

THE ROAD FROM LIMA ALSO IN THIS ISSUE // WORLD BANK GROUP: PUBLIC MONEY // IFC: CAPITAL MARKETS OTAVIANO CANUTO, IMF: TRADE GROWTH FOR BRAZIL // IFC: ASEAN CORPORATE GOVERNANCE MIGA’S KEIKO HONDA: INVESTMENT GUARANTEES // UNCTAD: DEVELOPING BUSINESS LEADERS

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Autumn 2015 Issue

WELCOME TO MY WORLD

CHRONOMAT 44

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Autumn 2015 Issue

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Editor’s Column

Please Mr Putin Look and See become a refrain of late, but the key to the solution is held by Vladimir Putin. The sensible thing to do, would now be for the European Union to politely ask the Russian president to help end the war in Syria in return for a get-out-of-jail-free card.

Meanwhile at the main point of entry – the Greek islands in the eastern part of the Aegean Sea – literally thousands of people wade ashore each week, all yearning to reach a safe haven in Germany. Greek authorities are beyond overwhelmed and can do little more than provide ferries to shuttle the refugees to the mainland from where they may embark on their long trek.

This is, of course, not likely to happen anytime soon as it presupposes the EU’s leaders possess at least a rudimentary notion of geopolitics and its workings. Brought up under the wing of Uncle Sam and with their empires long gone, Europe’s current crop of political leaders is rather clueless when it comes to conducting diplomacy on steroids.

“Give me your tired, your poor, your huddled masses yearning to breathe free.” The quote is of course from Emma Lazarus’ sonnet New Colossus and graces the pedestal upon which the Statue of Liberty sits in New York harbour.

Not particularly good at dealing with any crisis surpassing the mundane, the European Union seems utterly clueless. The Dublin Treaty on the processing of asylum claimants has been summarily ditched at the behest of the Germans.

As a result, the EU currently lacks a common policy on refugees.

Today’s tired, poor, and huddled masses are finding their way in the hundreds of thousands to the Old World from which but a century or so ago their predecessors in misfortune departed for the New Jerusalem on the other side of the Atlantic.

The tables have now turned and Europe is asked to open its gates to the masses fleeing political oppressors, religious zealots, and the civil strife they stoke.

Closing the borders, one of the options discussed, does not seem to offer any solace to either the refugees or the xenophobes: it will only discourage the weakest of the involuntary migrants from coming over while the more enterprising – or desperate – ones will still find a way across with many undoubtedly perishing in the attempt.

Trying to catch up with developments on the ground, European political leaders donning grave expressions and uttering prosaic assurances, may be observed scurrying from one summit meeting to the next debating solutions already overtaken by events and generally failing to get a handle on the continent-wide emergency.

In its longing to be – for once – on the good guide of history, Germany rolled out the red carpet with Chancellor Angela Merkel announcing that she would readily welcome up to a million refugees this year and the next. That clarion call from Berlin was all it took to spur the huddled masses gathered in Turkey and Greece into action.

Editor’s Column

shores, but Denmark doesn’t play ball and refuses to let refugees through, turning them back at the border. The Netherlands and Belgium are a bit more welcoming while France and Spain prefer not to get noted by keeping very silent.

Braving inclement weather and often unfriendly natives, untold thousands of refugees started moving in north-westerly direction. A few made it through until Hungary – never known for its overly welcoming attitude towards outsiders – closed the border and hastily erected a fence to keep the riffraff out. Croatia soon followed suit, trapping many thousands in Serbia. For them, the road from the Balkans to Germany is now effectively blocked.

So far, the Germans stand alone with their arms open. The countries of Eastern Europe have made it perfectly clear that refugees need not apply for asylum. Sweden still accepts anyone reaching its 6

There is a better alternative: place a call to the Kremlin. Its inhabitant, President Putin, seems eager to lend a helping hand and is sure to pick up the phone. The Russian leader is the only one who exerts any degree of influence over Syrian president Bashar al-Assad. In fact, President Putin is responsible for propping up the dictator and keeping his battered army supplied with just enough hardware to avoid it from falling apart.

In September, it transpired that already last year President Putin had suggested through diplomatic back channels that he could probably get the Syrian president to take up early retirement. Perhaps an offer to resettle him in the amenable climate of the Crimea could do the trick. The Europeans were not amused and refused to entertain the suggestion – in hindsight, not a particularly smart move.

The only way to stem the flow of refugees from Syria is to end the civil war in that country. For that to happen, it would seem that President alAssad will need to relinquish power. He will not do so without some gentle prodding from Moscow.

The fate of post-war Syria may then be discussed at length with the now rehabilitated Russians taking the lead, perhaps helping out a bit with the disassembly of the pesky Islamic State as well.

Meanwhile, the German attitude towards the refugees may not entirely be ascribed to that nation’s newfound altruism. With a solid, if not close to booming, economy, Germany can easily put a few hundred thousand well-educated immigrants to work. The Syrians now making their way to a new fatherland may be tired, poor, and huddled – they are not without valuable skills.

Many have enjoyed a university education and were quite well off before war shattered their lives.

Branded tired and yesterday’s news only a year ago by the most of the emerging world – with the one-day-wonder BRICS countries leading the choir – Europe should perhaps feel privileged that whenever humanity is on the move, it tends to drift towards its shores. Why not flee to the airconditioned tents readily available in almost-nextdoor Saudi Arabia? Or indeed, why not hang around in Turkey with its strong economy and hospitable people? Well, as it happens most refugees know that Europe, for all its shortcomings, simply is The Place to Be. Europe’s leaders may be a little less effectual and visionary than most, they generally do adhere to humanistic traditions and principles. When called upon, all but a few nations of that continent will ultimately do what is right: shelter fellow human beings from want and naked aggression.

That said, and duly confirmed by the increased footfall of refugees, Europe cannot possibly cope with millions upon millions streaming across its borders. Thus, ending the war in Syria is of paramount importance. Should that require forgiving President Putin for his past faux-pas, then so be it: if not for Europe’s own sake, then certainly for that of the millions of Syrians caught in the crossfire and still waiting for a chance to escape their ravaged country.

Wim Romeijn Whichever way the refugee crisis is looked at, the fighting in Syria needs to be stopped lest nearly all of its 18 million inhabitants head for Europe. It has CFI.co | Capital Finance International

Editor CFI.co

Editor’s Column

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> Letters to the Editor

“ “ “ “

Rosalind Franklin (summer issue) could certainly be cranky and was often insensitive to the feelings of others. However, she was every inch the outstanding scientist – doing critical work in uncovering the double helix. I should perhaps correct the notion (referred to once again in your Science & Technology feature) that Dr Franklin was passed over because of her gender. This was most certainly not the case. The Nobel committee would have been delighted to make an award to this extraordinarily talented woman. But she died several years before Watson, Crick, and Wilkins were recognised. As your writer points out: the Nobel Prize is never awarded posthumously.

MICHAEL BARRYSON (Cambridge)

Do I detect a dose of positive discrimination in your summer listing of Heroes?

How surprising that your editor could only come up with two male worthies. And it was a further surprise to me that the two token men were a politician soon to be rightly forgotten (Nick Clegg) and the rather odd but engaging Prince Janek Zylinski – who provided some side line entertainment at the time of the last general election. Nigel Farage may have got his comeuppance from the UK electorate but there is something more obviously heroic about this man than the other two I mention above. Time will tell.

JAMES CRAWFORD (Bristol)

I have some sympathy with Mr Romeijn’s plea for greater privacy from official eavesdroppers (Editor’s Column) but we should be careful what we wish for. Battles in the fight against crime and terror are often won because of good intelligence gathering and prompt subsequent action. Are we really so concerned about being easily noticed? If we are just going about our business in an honest way I rather doubt it. But the writing is on the wall, Mr Romeijn; things are not going your way, I fear.

GEORGES BRUSSON (Paris)

Saudi Arabia has long dealt with the challenge of embracing modernity whilst holding true to the traditional and enduring values of its society. Your summer issue provides a timely report on two fascinating recent developments namely, the cautious opening up of our stock exchange to foreign participation and the inevitable change now made in the way of deciding on royal succession. Your article Pragmatism as a Driver of Change closes with the suggestion that Saudi Arabia considers modernity a value to be feared.

We do not fear modernity. But we do things in our own way and at our own pace. There is too much at risk for us to throw caution to the wind.

BASHIR BAJBAIR (Jeddah)

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Peru: Lima

Autumn 2015 Issue

““ “ “

Mr Marinus rightly reflects on the passing of Eduardo Galeano (Remembering a Forgotten Continent). A writer can perhaps be forgiven for being less argumentative than usual in describing a lost literary life but surely the predicament of post-colonial Latin America was not unavoidable as Galeano suggests in his seminal work. We can and must make our own choices and determine our futures.

VITOR CARDOSO (Rio de Janeiro)

I take issue with Mr Churchman (Letters) who dismisses with scorn the efforts of Jeremy Clarkson to entertain car enthusiasts and TV viewers around the world with his unique blend of reporting and entertainment skills. The BBC’s loss is Amazon’s gain and I look forward to see the trio of Clarkson, Hammond, and May soon reunited. Do lighten up, Mr Churchman. Don’t vote for too dreary a world.

JOACHIM AMSEL (Bonn)

As the father of several teenage children I question the assertion that anyone, even the redoubtable Sarah-Jane Blakemore, can truly decipher the teenage brain. There would seem to be a subtle but very effective mechanism in play in the minds of young people that at times locks out all enquiring adults. Your writer suggests that because of late day melatonin release teenagers are not slothful but inhabit a different time zone. From my observations it could well be that the one does not rule out the other. But more seriously, congratulations to Professor Blakemore on sterling work in an important field of research.

RANDOLPH PATON (Cape Town)

I noticed that Casinos Austria International was announced as an award winner in the summer issue of your magazine. I do not gamble. I do not altogether approve of gambling either. But I do know that popular interest in games of chance is unlikely to wane anytime soon.

Apparently your winner empowers staff to protect customers from getting caught up in the moment and losing more than they can afford.

I wonder how this can be achieved in practice but appreciate the sentiment. Your winner does seem to place the proper emphasis on the entertainment side of things and there is certainly nothing shady going on here.

GUSTAV FAUSTNER (VIENNA)

You are quite right, Mr Romeijn: the attacks on our privacy have gone too far and it is wrong to blame everything on the so called War on Terror. We are under almost constant surveillance and the civil liberties we are trying to defend from terrorist attacks are being trampled underfoot by our so-called protectors.

LAURENCE WILDE (London)

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Editor Wim Romeijn Assistant Editor Sarah Worthington Executive Editor George Kingsley Contributing Editor Darren Parkin Features Editor Penny Hitchin Production Editor Jackie Chapman

Editorial William Adam Diana French David Gough-Price Ellen Langford John Marinus Columnists Otaviano Canuto Ross Jackson Tor Svensson

> COVER STORIES Otaviano Canuto, IMF: Trade Growth for Brazil (12 – 13)

Cover Story: World Bank - No Direction Home (26 – 29)

MIGA’s Keiko Honda: Investment Guarantees (36 – 37)

Distribution Manager Len Collingwood Subscriptions Maggie Arts

IFC: Capital Markets (104 – 106)

Commercial Director Jon Gerben Director, Operations Marten Mark Publisher Mark Harrison

Capital Finance International Meridien House 69 - 71 Clarendon Road Watford Hertfordshire WD17 1DS United Kingdom

World Bank Group: Public Money (160 - 162)

IFC: ASEAN Corporate Governance (176 – 178)

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UNCTAD: Developing Business Leaders (180 – 181) Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers www.magprint.co.uk

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CFI.co | Capital Finance International

Autumn 2015 Issue

FULL CONTENTS 12 – 37

As World Economies Converge

Otaviano Canuto

Nouriel Roubini

Joseph E Stiglitz

Jean-Claude Trichet

Tor Svensson

Ross Jackson

Keiko Honda

38 – 49

Autumn 2015 Special: Economic Thinkers - Softening a Hard Science

50 – 73

Europe

WIR Finanzierer

deVere Group

Earthport

FinecoBank Ray-Ban

John Marinus

Darren Parkin

74 – 91

CFI.co Awards

Rewarding Global Excellence

92 – 119

Africa

Anjarwalla & Khanna

Banco de Fomento de Angola

Edgars Stores

IFC

COOP Mortgage Bank

Sentinel Retirement Fund

Banco Millennium Angola

Development Bank of Rwanda

AfroCentric Health

120 – 133

Middle East

Penny Hitchin

Qatar

134 – 145

Editor’s Heroes

Ten Men and Women Who are Making a Real Difference

146 – 163

Americas

Commonwealth Bank

Grupo Financiero Interacciones

World Bank Group

Mack International

CIBC FirstCaribbean

164 – 181

Asia Pacific

Michael Pettis

ABC Banking Corporation

IFC

UNCTAD

182

Greek Drama: Winners and Losers CFI.co | Capital Finance International

11

> Otaviano Canuto, IMF:

Trade Opening Could Be a Source of Growth for Brazil

I

nternational trade has undergone a radical transformation in the past decades as production processes have fragmented along cross-border value chains. The Brazilian economy has remained on the fringes of this production revolution, maintaining a very high density of local supply chains, the flipside of which has been low levels of trade integration with the rest of the world. Such option has meant opportunity costs in terms of foregone productivity gains and a reversal might contribute to restoring economic growth in that country.

In terms of foreign trade, Brazil is a relatively closed economy. While the Brazilian economy is financially integrated abroad and relatively open to foreign direct investment, it is closed in terms of foreign trade. Its degree of trade integration as measured by ratios of exports and imports to GDP rank the country among the closest economies (see figure 1).

As one can see in the graph, Brazil’s size does not explain its low level of trade penetration: “Even among the six countries with a larger economy than Brazil, the average trade-to-GDP ratio is 55 percent. In fact, just looking at size of GDP we would expect Brazil’s trade to stand at 85 percent of GDP, three times the observed 28 percent.”

CFI.co Columnist

As demonstrated by Canuto, Fleischhaker, and Schellekens (2015b), even when taking into account other dimensions of country size (surface area and population) and other features often associated with trade openness (urbanisation rate, manufacturing share in GDP) still Brazil stands out as a case of relatively low trade integration.

Brazil’s trade figures contrast with those of its peers and reflect the fact that the country’s economy remained relatively segmented from a deep transformation that took place in the global economic geography in the last decades. From 1990-2008, world trade volume expanded at a pace of six percent annually, well above the global real GDP growth of 3.2 percent a year over the same period. To a large extent, such high elasticities of trade with respect to global growth was the expression of an underlying mutation taking place in production processes and in the global economic geography.

A RESHAPED GLOBAL ECONOMIC GEOGRAPHY In recent decades, international trade has gone through a revolution, with the wide extension of the organisation of production in the form of 12

“It looks hard to state that the recent performance and macroeconomic prospects of Brazil can be predominantly explained by the commodity price super-cycle.” cross-border value chains. This extension was a result of the reduction of tariff and non-tariff barriers, the incorporation of large swaths of workers in the global market economy in Asia and Central Europe, and technological innovations that allowed modularisation and geographic distribution of production stages in a growing universe of activities. International trade has grown faster than world GDP and, within the former, the sales of intermediate products has risen faster than the sale of final goods.

The geography of industrial production has changed dramatically, with unskilled labourintensive sectors moving out of advanced economies rapidly. Although the “hollowing out” of such jobs in advanced economies may have been, to a greater or lesser extent, determined by biases in trends of technological progress, the transfer of unskilled labour-intensive segments of supply chains has been part of the explanation.

On the other side of such transfers, low-income countries have experienced rapid economic growth processes stemming from the structural transformation that has resulted from the largescale migration of workers from subsistence to modern tradable activities.

Sharp changes in relative prices in the global economy have accompanied this process.

While labour prices fell – as well as prices of manufactured products, according to their labour intensiveness – prices rose for natural resourceintensive goods, following an increase in demand coming from economically-growing low-income areas.

The logic of value chains was also extended to sectors beyond manufacturing. Producers are opting for less self-sufficient, in-house capacities, choosing instead to subcontract activities that are not essential to their business. This is also one reason for the expansion of services in GDP accounting in recent decades. Commodity chains have increasingly relied on sophisticated services both upstream and downstream. The content of services embedded in industrial products CFI.co | Capital Finance International

has also increased. Additionally, technological innovations have increased the marketability of various services, as expressed in the growth of international trade in services.

The opportunities and challenges of the international industrial division of labour are reconfigured in this new world of cross-border value chains. For low-income economies, one can say that it has become relatively easier – especially for small countries – to increase their local industrial production, since joining the market through labour-intensive segments of existing chains allows them to circumvent the limits of (a lack of) scale and sophistication in local markets. Nevertheless, such entry is volatile and can easily be undone and relocated soon after any adverse signal comes out. This process of entry – with easy exit – corresponds to a window of opportunity for local accumulation of skills and a leap forward.

For high- and middle-income economies, in turn, it has become increasingly difficult to maintain competitiveness in those segments. It should also be noted that some technological trajectories currently in early stage – such as 3D printing – may require the substitution of qualified for unqualified labour in a wide range of segments of existing chains, partly reversing the spatial dynamics described above.

Middle-income economies are also facing a new landscape in other aspects. On the one hand, technological spill overs, productivity increases, and wider market access are now facilitated via entry at points that require intermediate sophistication levels within existing value chains.

On the other hand, the consolidation of existing value chains raises the stakes in terms of the competition for core positions. For consolidated and mature branches, creating new chains and challenging established ones is the only alternative.

THE FLIPSIDE OF LOW TRADE INTEGRATION Value-added trade statistics give a view of how Brazil maintains a level of density in its chains of domestic industrial production above what one would expect in the case of a middle-income country. Figure 2 shows ratios of value added relative to gross exports in various countries.

While the weight of commodities partly explains why the ratio is so high in the case of the total export bill (left side), the index is also very high in manufacturing branches (93 percent), as illustrated on the right side of figure 2.

Autumn 2015 Issue

Brazil’s immersion into global value chains would allow the country to leverage its comparative advantages which clearly exists in natural resource-associated industries but which could also emerge in specific activities in manufacturing or services, once industries have access to cheaper inputs.

As productivity gains from participation in global production networks increase, so does the opportunity cost associated with the ongoing closed-ness of the Brazilian economy.

The alternative approach, vertically integrated supply chains behind protectionist barriers, is likely to be futile in the longer term. Despite rising trade barriers, Mercosur’s coefficient of imports from China has continued to increase in recent years (World Bank, 2014). Private investors understand this, as they shy away from activities which are viable only under permanent protection.

Figure 1: Trade Penetration. Source: Canuto, Fleischhaker and Schellekens (2015a).

Selected large Economies: Exports as percent of GDP (2013) (left) and Imports as percent of GDP (2013) (right).

Brazil United States Indonesia Japan Norway Australia South Africa China New Zealand Chile Canada Turkey EU Korea Mexico Israel

Russian Fed. Brazil United States Australia Norway Indonesia Japan South Africa Chile New Zealand Canada Turkey India China Mexico EU Israel Iceland Korea 0

20

40

60

80

100

0

20

40

60

80

100

Figure 2: Domestic value added as percent of exports.

Source: Canuto, Fleischhaker and Schellekens (2015a).

The high level of domestic value added in exports shows that the fragmentation of the production process along cross-border value chains has largely bypassed Brazil. Geographic distances from advanced economies – reduced but not completely annulled by revolutions in transport and communications – partially explain why Brazil’s production-chain density remains well above its notional counterfactual. After all, in many branches, cross-border production chains are regional and focus on dynamic markets of high-income countries (Asia, Europe, and North America).

However, the Brazilian deviation from its notional density levels also reflects trade and localcontent policies which have remained more prevalent than in most of Brazil’s peer countries including China (World Bank, 2014). Likewise, Brazil’s precarious logistics and high transaction costs in trading across borders are incompatible with the logic of cross-border value chains.

Brazil has remained outside the process of cross-border production fragmentation. The technological dynamics and cost reductions in the global economy due to the increase in value-

There are few exceptions, like Embraer, which operates in the centre of its own global value chain. The automotive Mercosur regional network also seems to escape the rule, but it is in fact the extension of a chain with a low degree of integration with the rest of the world.

High coefficients of value-added to exports demonstrate local levels of production far above what one would expect for a middle-income economy with average levels of technological sophistication.

OPENING UP TO SUPPORT BRAZIL’S GROWTH AGENDA Opening up and integrating more deeply in global value chains would result in the closure of uncompetitive production chain segments and their substitution with imports. The surviving businesses would be more competitive due to access to imported inputs, allowing them to create products of lower costs and higher quality. Furthermore, in dynamic terms, integration in global value chains would allow scarce domestic resources such as skilled labour to be reallocated to the most productive firms and activities, increasing overall productivity.

In an economy with a propensity to face skilledlabour shortages and a generalised aspiration of rising worker purchasing power, productive activities would be strengthened by the availability of cheaper local consumer goods and equipment, as wage and investment costs would be lower. That would facilitate the creation of global value chains with a core in the country in natural resource-associated industries, where there clearly exists a greater scope.

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ABOUT THE AUTHOR Otaviano Canuto is the executive director at the Board of the International Monetary Fund (IMF) for Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor Leste and Trinidad and Tobago.

Views expressed here are his own and do not necessarily reflect those of the IMF or any of the governments he represents.

Mr. Canuto has previously served as vice president, executive director and senior adviser on BRICS economies at the World Bank, as well as vice president at the Inter-American Development Bank. He has also served at the Government of Brazil where he was state secretary for international affairs at the ministry of finance. He has also an extensive academic background, serving as professor of economics at the University of São Paulo and University of Campinas (UNICAMP) in Brazil.

The views expressed are those of the author and do not necessarily reflect the views of the IMF. REFERENCES Canuto, O, Fleischhaker, C, and Schellekens, P (2015a). The cost of Brazil’s closed economy, Financial Times – January 14.

Canuto, O, Fleischhaker, C, and Schellekens, P (2015b). The curious case of Brazil’s closedness to trade, World Bank Policy Research Working Paper 7228 – April.

World Bank (2014). Implications of a changing China for Brazil: A window of opportunity? – World Bank.

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CFI.co Columnist

Eliminating these factors would reduce the deviation between actual and notional densities, leading to a corresponding closure of less competitive production chain segments and a rise in import substitution. On the other hand, the businesses left standing would be more competitive and final products would have lower production costs and/or higher quality.

Furthermore, in dynamic terms, such as when the adjustment implications of changing chain densities unfold, gains would increase by dint of greater technological spill overs and market extension relative to the current scenario.

chain fragmentation have been significant, increasing the opportunity cost of the ongoing gap between actual and notional production densities.

Of course, public policy support remains essential. However, this support should be more horizontal in nature, rather than further encouraging the ongoing high density of production chains and perpetuating the extraordinary closed-ness of the Brazilian economy. i

> Nouriel Roubini:

A Financial Early-Warning System

R

ecent market volatility – in emerging and developed economies alike – is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities. Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears 14

abruptly and causing exaggerated market swings.

Given the nature of market turmoil, an earlywarning system for financial tsunamis may be difficult to create; but the world needs one more than ever. Few people foresaw the subprime crisis of 2008, the risk of default in the Eurozone, or the current turbulence in financial markets worldwide. Fingers have been pointed at CFI.co | Capital Finance International

politicians, banks, and supranational institutions.

But ratings agencies and analysts who misjudged the repayment ability of debtors – including governments – have gotten off too lightly.

In principle, credit ratings are based on statistical models of past defaults; in practice, however, with few national defaults having actually occurred, sovereign ratings are often a subjective affair.

Autumn 2015 Issue

Analysts at ratings agencies follow developments in the country for which they are responsible and, when necessary, travel there to review the situation.

Using 200 quantitative variables and factors to score 174 countries on a quarterly basis, we have identified a number of countries where investors are missing risks – and opportunities.

This process means that ratings are often backward-looking, downgrades occur too late, and countries are typically rerated based on when analysts visit, rather than when fundamentals change. Moreover, ratings agencies lack the tools to track consistently vital factors such as changes in social inclusion, the country’s ability to innovate, and private-sector balancesheet risk.

China is a perfect example. The country’s home developers, local governments, and state-owned enterprises are severely over-indebted.

China has the balance-sheet strength to bail them out, but the authorities would then face a choice: embrace reform or rely once again on leverage to stimulate the economy. Even if China continues on the latter course, it will fail to achieve its growth targets and will look more fragile over time.

And yet sovereign ratings matter tremendously. For many investors, credit ratings dictate where and how much they can invest. Ratings affect how much banks are willing to lend, and how much developing countries – and their citizens – must pay to borrow.

They inform corporations’ decisions regarding whom to do business with, and on what terms.

Given the problems with ratings agencies, investors and regulators recognise the need for a different approach. Investors have tried to identify good alternatives – and have largely failed. Assessments of risk such as sovereign interest-rate spreads and credit default swaps react (and often over-react) fast; but, because they reflect only the market’s understanding of risk, they are not a systematic mechanism for uncovering hidden risks and avoiding crises. Indeed, the recent sudden rise in market volatility suggests that they are as bad as rating agencies at detecting the early warning signs of trouble.

Regulators, meanwhile, are now starting to require banks to develop their own internal ratings processes. The problem is that few institutions have the tools and expertise to do this alone.

“Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create; but the world needs one more than ever.”

A comprehensive assessment of a country’s macro investment risk requires looking systematically at the stocks and flows of the national account to capture all dangers, including risk in the financial system and the real economy, as well as wider risk issues. As we have seen in recent crises, private risk taking and debt are socialised when a crisis occurs. So, even when public deficits and debt are low before a crisis, they can rise sharply after one erupts. Governments that looked fiscally sound suddenly appear insolvent.

CFI.co | Capital Finance International

Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing economy-wide debt burden, and a weak and worsening business environment. The corruption scandal at energy giant Petrobras is finally causing ratings agencies to reassess Brazil, but the move comes too late, and their downgrades probably will not be sufficient to reflect the true risk. Other emerging markets also look fragile and at risk of an eventual downgrade.

In the Eurozone, shadow ratings already signalled red flags in the late 2000s in Greece and the other countries of the periphery. More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms. Greece, however, remains a basket case. Even with substantial reform to improve its growth potential, Greece will never be able to repay its sovereign debt and needs substantial relief.

An assessment of sovereign risk that is systematic and data-driven could help to spot the risks that changing global headwinds imply. To that extent, it provides exactly what the world needs now: an approach that removes the need to rely on the ad hoc and slowmoving approach of ratings agencies and the noisy and volatile signals coming from markets. i

ABOUT THE AUTHOR Nouriel Roubini is Chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business.

Copyright: Project Syndicate, 2015. www.project-syndicate.org 15

> Joseph E Stiglitz:

Fed Up with the Fed

A

t the end of every August, central bankers and financiers from around the world meet in Jackson Hole, Wyoming, for the US Federal Reserve’s economic symposium. This year, the participants were greeted by a large group of mostly young people, including many African- and Hispanic Americans.

The group was not there so much to protest as to inform. They wanted the assembled policymakers to know that their decisions affect 16

ordinary people, not just the financiers who are worried about what inflation does to the value of their bonds or what interest-rate hikes might do to their stock portfolios. And their green tee shirts were emblazoned with the message that for these Americans, there has been no recovery.

Even now, seven years after the global financial crisis triggered the Great Recession, “official” unemployment among African-Americans is more than 9%. According to a broader (and more appropriate) definition, which includes part-time CFI.co | Capital Finance International

employees seeking full-time jobs and marginally employed workers, the unemployment rate for the United States as a whole is 10.3%. But, for African-Americans – especially the young – the rate is much higher. For example, for AfricanAmericans aged 17-20 who have graduated high school but not enrolled in college, the unemployment rate is over 50%. The “jobs gap” – the difference between today’s employment and what it should be – is some three million.

With so many people out of work, downward

Autumn 2015 Issue

pressure on wages is showing up in official statistics as well. So far this year, real wages for non-supervisory workers fell by nearly 0.5%. This is part of a long-term trend that explains why household incomes in the middle of the distribution are lower than they were a quarter century ago.

Wage stagnation also helps to explain why statements from Fed officials that the economy has virtually returned to normal are met with derision. Perhaps that is true in the neighbourhoods where the officials live. But, with the bulk of the increase in incomes since the US “recovery” began going to the top 1% of earners, it is not true for most communities. The young people at Jackson Hole, representing a national movement called, naturally, Fed Up, could attest to that.

There is strong evidence that economies perform better with a tight labour market and, as the International Monetary Fund has shown, lower inequality (and the former typically leads to the latter). Of course, the financiers and corporate executives who pay $1,000 to attend the Jackson Hole meeting see things differently: low wages mean high profits, and low interest rates mean high stock prices.

The Fed has a dual mandate – to promote full employment and price stability. It has been more than successful at the second, partly because it has been less than successful at the first. So why will policymakers be considering an interestrate hike at the Fed’s September meeting?

“The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high. That is obviously not the case now.”

The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high. That is obviously not the case now. Indeed, given wage stagnation and the strong dollar, inflation is well below the Fed’s own 2% target, not to mention the 4% rate for which many economists (including the International Monetary Fund’s former chief economist, Olivier Blanchard) have argued.

Inflation hawks argue that the inflation dragon must be slayed before one sees the whites of its eyes: Fail to act now and it will burn you in a year or two. But, under the current circumstances, higher inflation would be good for the economy.

There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation. Whatever the

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unemployment rate at which inflationary pressures become significant – a key question for policymakers – we know that it is far lower than the rate today.

If the Fed focuses excessively on inflation, it worsens inequality, which in turn worsens overall economic performance. Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth, workers’ share will be ratcheted down – never recovering what was lost in the downturn.

The argument for raising interest rates focuses not on the wellbeing of workers, but that of the financiers. The worry is that in a low-interest-rate environment, investors’ irrational “search for yield” fuels financial-sector distortions. In a well-functioning economy, one would have expected the low cost of capital to be the basis of healthy growth. In the US, workers are being asked to sacrifice their livelihoods and wellbeing to protect well-heeled financiers from the consequences of their own recklessness.

The Fed should simultaneously stimulate the economy and tame the financial markets. Good regulation means more than just preventing the banking sector from harming the rest of us, though the Fed didn’t do a very good job of that before the crisis. It also means adopting and enforcing rules that restrict the flow of funds into speculation and encourage the financial sector to play the constructive role in our economy that it should, by providing capital to establish new firms and enable successful companies to expand.

I often feel a great deal of sympathy for Fed officials, because they must make close calls in an environment of considerable uncertainty. But the call right now is not a close one. On the contrary, it is as close to a no-brainer as such decisions can be: now is not the time to tighten credit and slow down the economy. i

ABOUT THE AUTHOR Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book, co-authored with Bruce Greenwald, is Creating a Learning Society: A New Approach to Growth, Development, and Social Progress.

Copyright: Project Syndicate, 2015. www.project-syndicate.org 17

> Jean-Claude Trichet:

Getting Bank Culture Right

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anks and banking rely on trust. But while trust takes years to establish, it can be squandered abruptly if a particular bank’s ethics are weak, its values poor, and its behaviour simply wrong.

The events that triggered the 2008 global financial crisis, together with the subsequent scandals that have emerged – from the rigging of the London Interbank Offered Rate (Libor) to sanctionsbusting and money-laundering – amount to a catalogue of cultural failures within our financial institutions. Yes, extensive measures have been taken since the crisis to strengthen the financial 18

system. But a profound weakness remains: to be blunt, it concerns the risk-taking culture that still prevails within some departments of global banks and in the financial system itself.

Too often, bank bosses’ promises to change the “corporate culture” and ensure their employees’ good conduct have not been matched by fully effective implementation. In too many cases, banks are still failing to fulfil their obligations in serving their communities and the public at large.

It is true that the banking sector is paying a high price for its misdeeds: fines, litigation, and CFI.co | Capital Finance International

regulatory tightening have cost approximately $300 billion so far. But the tax-paying public – innocent of any wrongdoing – has also had to bear costs, both direct and indirect. And, while a handful of “rogue traders” (and, most recently, one Libor manipulator) have ended up in prison, it would be overly optimistic to conclude that the punishment has been sufficient to transform bank culture.

If banks and other financial institutions are to perform their crucial role in providing support for growth and employment, it is imperative that they take steps to regain the public’s trust. But how?

Autumn 2015 Issue

More regulation is not necessarily the best path forward: The rules and norms that define a “right” and “wrong” culture are beyond the wit of regulators and supervisory bodies. But the pressure to devise such rules is bound to mount if banks do not demonstrate that they are grappling effectively with the challenge of cultural change. Sadly, until now, many banks have adopted an unconvincing piecemeal approach.

It is not enough to strengthen legal compliance. A new report published by the Group of Thirty argues that banks must do far more. Real change must go to the core of an institution’s day-to-day operations. Banks must change compensation practices that reward excessive risk; protect whistle blowers; recruit and train staff to reflect proper ethics; and ensure that their boards of directors play a more active oversight role. I believe that if boards had been aware of the egregious behaviour being perpetrated within some institutions, from product miss selling to price-fixing, they would have acted to stop it.

Let me be clear: setting values and shaping an organisational culture take a long time and a great deal of work. Successful reform requires changing people’s mind set and habituating them to self-regulation. A written code – emphasising the commercial benefits of ethical business conduct, and the negative consequences of falling short – is part of that effort and may help preserve and strengthen a culture; but a code alone is not enough.

Constant reminders and repetition are essential.

Employees must understand instinctively what may be done and what should never be done. They must internalise a culture that values strict adherence to high ethical standards of conduct.

To that end, banks should make their values and culture integral to their hiring, firing, and promotion decisions. Indeed, the values and conduct of a bank’s risk-takers should account for 50% of their annual performance review. Failing to live up to a bank’s desired cultural norms should have an impact on an employee’s career – and, when necessary, end it.

Banking regulators and supervisors also have a decisive role to play. They need to work with boards and senior management to ensure that major reforms are implemented and then consistently applied. Regular exchanges of views between oversight officials and the banks should be regarded as a crucial component of this process.

London: Bank of England

“If banks and other financial institutions are to perform their crucial role in providing support for growth and employment, it is imperative that they take steps to regain the public’s trust.”

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Central bankers have been dismayed by many banks’ failure to move forward decisively to address the difficult internal issues of conduct and culture.

And now the concerns have grown to the point that delay is no longer an option. Either the banks reform themselves, or public authorities will intervene still further. i ABOUT THE AUTHOR Jean-Claude Trichet, Chairman and CEO of the Group of Thirty, is a former president of the European Central Bank and a former governor of the Banque de France.

Copyright: Project Syndicate, 2015. www.project-syndicate.org 19

> Tor Svensson:

Global Economic Slowdown, Deflation, and… a Spark

T

he International Monetary Fund expects global growth to hover around four percent this year. The more advanced economies will see growth pick up a bit, while the emerging and frontier economies are already slowing down – exemplified by erstwhile buoyant Malaysia and Nigeria, both now suffering from decelerated growth rates. What happened?

Depressed oil and commodities prices did not cause the slowdown. These were the harbingers of a global slowdown and as such merely represent the dead canary in the mine. Confusing cause and effect is a common mistake.

There are a number of different reasons for the current slowdown. One common theme for the BRICS (Brazil, Russia, India, China, and South Africa) is poor leadership in addition to faulty systemic governance, weak institutions, failed economic policies, and corruption. Taken together, these issues could be amassed under a “poor governance” heading. As it happens, empirical evidence shows that poor governance and economic growth are inversely correlated.

Another commonality of the BRICS economies is a sharp rise in inequality. The BRICS share this tendency with the newly-minted MINT countries (Mexico, Indonesia, Nigeria, and Turkey).

Excessive inequality encumbers growth. A growing, forward-looking, and prosperous middle class is a veritable guarantor – and engine – of sustainable growth.

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Contrary to what a few endearing tree-huggers may proclaim, growth matters; it drives employment and prosperity. When they rise, tax receipts increase and public service such as education and healthcare improve as a result.

Moreover, strong growth provides plenty policy options.

Good governance and relative equality – including a strong middle class – places a country on a sustainable growth path – just observe the Dutch and the Danes. A rich and well-informed society will not show any tolerance towards incompetent and/or corrupt leaders. They are swiftly jettisoned from power.

Just as economic policies are formulated in response to movements in the economy, they also dynamically shape events in a dialectic interchange between causes and effects. The Eurozone enjoys less fiscal freedom and suffers 20

“Good governance and relative equality – including a strong middle class – places a country on a sustainable growth path.” from anaemic growth resulting from austerity and the currency straightjacket. Germany made all the Eurozone member states’ taxpayers pick up the tab for the bailout of the European banking system in order to limit the fallout of the Greek debt crisis. This amazing transfer of liabilities from the private to the public sphere has ultimately necessitated yet more austerity.

Meanwhile, Brazil is suffering the morning-after effects of a great party that now has ended. During the good times, real wage increases outpaced productivity gains. The country still suffers from a lack of skilled workers. Its byzantine tax system, with excessively high rates that would seem more at home in Scandinavia, hampers and inhibits job creation. Brazil’s infamous protectionist policies – the country has one of the world’s most shielded and inward looking economies – sustain an industry largely unable to compete on world markets and mired in nefarious schemes that seriously harm consumers – while lining the pockets of incompetent entrepreneurs – by producing shoddy goods and like services at outrageously high prices.

Brazil’s arcane trade policy merely protects the interests of monopolies and oligarchs who may wallow, undisturbed and unperturbed, in their illgotten profits. Corruption is thus engraved in the society’s very fabric at all levels. Foreign direct investment is discouraged if not in theory than most certainly in practice.

The ruling pseudo-socialist parties in Brazil – and the same holds true for South Africa – seem to have little interest in actually advancing the cause of national development: investment in education is limited and, as a result, upward social mobility is limited. Cynics may argue that a better educated population could quite conceivably catch on to their government’s spin and demand proper public services as well as an end to incompetence and corruption.

A better educated population would ensure that the current ruling political class could find its time in office severely curtailed. While professing to further the cause of equality and CFI.co | Capital Finance International

progress, these powers-that-be are, in real life, perpetuating inequality and ignorance. How ironic.

In countries like Brazil and South Africa there is a glimmer of hope from a small, but emerging, middle class that demands change. However, in both countries corruption is not waning: in fact, it’s getting worse.

Still, Russia outdoes them all. With its institutionalised kleptocracy – in which a few oligarchs add to their already formidable fortunes at the expense of the entire nation – the country has become akin to a private domain for the chosen few. To maintain this perfidious system, war mongering and homophobic demagoguery are widely employed by those in power. Futile wars – of military conquest and of the cold and trade varieties – are used to play on the public sentiment.

All the while, the Russian government is engaged in literally killing off opposition and journalists.

As a consequence, the country suffers a brain drain of significant proportions. Just as in Brazil, restrictions on trade protect the interests of a few domestic producers the expense of the wider society. This governance Russian-style virtually ensures an absence of growth and diminishing levels of national prosperity. Only the extraordinary pride and resilience of the Russian people keep the country’s social order ticking – sort of.

China – the world’s steam engine – is slowing down and losing pressure. The country’s growth rate has been adjusted down from 7.7% in 2013 to a still quite impressive 6.3% in 2016. China is now trying to engineer a transition from an economic model based on export and investment in infrastructure to one with a higher emphasis on domestic consumption.

In China, corruption has led to environmental disasters. Beijing’s air – a toxic soup of noxious chemicals – constitutes a reminder of how destructive capitalism unbound can be. Choking on $4 trillion or so of foreign denominated securities, the Chinese are flexing their fiscal muscle in order to quickly buy up international assets. This way, the country hopes to secure the resources – including the real estate – it needs to empower sustainable growth. The Chinese are now also beefing up their dilapidated financial institutions. Additionally, they have launched the new Asian Infrastructure Investment Bank

Autumn 2015 Issue

which is to underwrite regional development on a vast scale. One wonders if China’s newfound assertiveness on the international stage, and its ambition to become a first-amongst equals global power, match the size and strength of its economy.

To encourage export-led growth China depreciated its currency. The same strategy is being employed

by Russia, South Africa, and Brazil in a mindless race to the bottom. With asset values declining in hard currency, international investors are now much more cautious and hesitant to take positions in emerging markets. Poor governance, again, comes to the fore as a contributing – if not driving – factor.

Latin America’s development has historically been held back by poor governance. The exception to this rule is the continent’s lone enduring success story – Chile. The country boasts strong and well-run institutions largely free from corruption. According to Transparency International the country ranks near the very top (number seven) of the world’s least corrupt nations.

Most Chileans are proud of this accomplishment and collectively thumb their noses at the rest of the continent. Chile not only enjoys the rule of law; it is also a champion of free trade with a simplified regime that applies a 6% flat tariff on any and all imported goods. Moreover, Chile has cemented free-trade agreements with over 62% of the world’s economies. The country’s legislative framework provides solid protection to foreign investors. As a result of this and other sensible policies, Chile has enjoyed steady economic growth with a marked decrease in social inequality.

In Nigeria, the country’s new government recognises the momentous obstacle that poor governance represents when attempting to provide a modicum of prosperity to the 178 million or so people of the country. The president has courageously attacked corruption as the root of much evil from his first day in office. The nation is now waiting for him to deliver on that promise.

Moving to the Middle East where declining oil prices have hurt several countries. However, largescale efforts at diversification are working and now provide a welcome cushion – and some resilience – to Saudi Arabia, the United Arab Emirates, and Qatar.

Still, for all its growth and job creation, the austerity policies in the UK have not been quite vindicated yet. On the contrary, the UK’s success occurs not because of austerity, but in spite of it. BusinessCFI.co | Capital Finance International

In the UK, social security contributions amount to just 13.8% of salaries paid. In Spain that number is a staggering 38%. A Spanish employer is expected to pay as much in income taxes and social contributions combined as the employee receives in net salary. This represents a 50% income tax applied from the first euro earned. It puts Spain’s 23% overall unemployment rate – and the country’s 51% youth unemployment rate – into perspective.

The US has managed to attain decent growth. But, hang on: the country’s economic buoyancy is very much driven by its population growth and increases in productivity. The newfound wealth of shale gas and oil also help. The US population is stands at about 319 million – up from 293 million only a decade ago. Wages have stagnated while profits as a share of the economy have ballooned. In the US, upward social mobility is nearly non-existent. If you want to move up in the world, move to Denmark instead. It’s the world’s best country for those who wish to improve their lot.

US unemployment remains fairly low at 5.5%.

However, statistics do not paint the complete picture. The US is plagued by significant underemployment levels. In fact, Gallup’s rate of underemployment is 14.2%. Some observers estimate that the US’ true unemployment level may be approaching 20%. Certainly, both US workers and employers get docked with high taxes, once all direct and indirect components are included.

Also, the US suffers from a rather high corporate tax rates of 34%-35%. The government compensates this with industry-specific exemptions and loopholes hacked into the tax code by lobbyists.

There are a number of international double-taxation avoidance schemes as well. Still, the US tax system could benefit from sprucing up.

Similarly, in the EU taxes on salaries and small businesses should be further reduced to promote full employment and corporate growth.

In short, the monetary expansionary policies in US and Europe have created lots of debt, boosted asset prices, and promoted inequality. It has so far not done much for workers since employment levels and growth rates remain anaemic.

The world is hooked on debt. This includes emerging markets debt, derivatives, and structured finance.

A financial disaster may be lurking just around the corner: the struggling currencies of emerging markets and deflation both encourage the dumping of assets. With today’s intertwined and technologydependent global financial markets, it takes but a tiny spark to set the entire system alight. i ABOUT THE AUTHOR Tor Svensson is the Chairman of Capital Finance International.

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Over in Europe, the UK has been a beacon of growth. In contrast, the Eurozone – with the notable exceptions of The Netherlands and Germany – is still flat lining. The UK enjoys good governance and strong FDI. Employment levels are strong as payroll taxes are kept at a minimum. Also, the corporate profit tax rate is soon to be lowered to just 18%.

Small businesses dedicate relatively little time to tax filing and other mandatory endeavours. At a start-up cost of only £50, new companies are easily formed with a minimum of red tape.

friendly fiscal policies and strong immigration lay at the root of the economic upswing. Also, the UK still runs an alarmingly large primary fiscal deficit that – for all the austerity – hasn’t been cleared.

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> Ross Jackson:

Eurozone: The End Game

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t has become clear to most EU citizens, but not yet to the EU leaders, that neoliberal economics has been a total fiasco for the environment, increased inequality, and decreased the overall sense of well-being for over thirty years. When will the EU leadership recognise this reality and get more in line with the desires and concerns of EU citizens?

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Not quite yet, apparently. The neoliberal line of prioritising the repayment of bank loans over the interests of real people – the centrepiece of the negotiations between the EU and Greece – constitutes the very essence of neoliberalism.

This priority seems logical enough if we are to assume that saving the euro is the overriding priority of the EU’s leadership.

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When currency devaluation becomes impossible, there is no other route than internal devaluation which leads inevitably to forced austerity. A growing number as citizens is questioning this line of economic thinking. Is it not time to acknowledge that the euro project is killing the EU and that a continuation essentially implies that we are all now working for the benefit of the corporatocracy. We

Autumn 2015 Issue

THE UNIFICATION DREAM Total unification has never been the aspiration of most EU citizens. They are primarily interested in maintaining their local culture and national priorities, living a joyful life in peace and with a maximum of self-determination. The two goals – unification and self-determination – are of course mutually exclusive.

The EU’s leadership has always been aware of this but hoped that citizens’ attitudes would gradually change. Hence the need for subterfuge, hidden agendas, and outright lies. The EU’s strategy has always been to assure the people that their leaders had no such intention, all the while planning the next step on the way to full integration and the centralisation of power. The pacifying pronouncements uttered from time to time by politicians, exemplified by the Danish Prime Minister’s proclamation to his sceptical countrymen and -women in 1986 that the union is “stone dead”, did not stand in the way of greater integration.

The greatest fear of the EU’s leadership has always been that voters, if given the chance, would reject their unification plans. Indeed, there is little doubt that a majority of people would reject a proposal for transforming the current union into a single Eurostate. Fortunately, for the powers that be in Brussels, only a few member states require a referendum when ceding sovereignty.

By using the salami technique of small incremental change, the EU is now well on its way to achieving the objective of the integrationists.

The few member states with restrictions on ceding sovereignty – Denmark, Ireland, France, and The Netherlands – are the same that have rejected the most far-reaching initiatives on a number of occasions (e.g. Maastricht in 1992) thus slowing down progress. Even so, these countries have been unable to stop the relentless drive towards a single Eurostate.

“The euro was a big mistake A backdoor to a Eurostate That citizens would rather be without.”

(Occupy World Street: The Song)

are now well on our way to becoming part of a neofeudal global empire. We are approaching a point where either the euro or the union goes. Either the EU continues to align itself with a failed economic philosophy in opposition to its own citizens, or it risks a violent breakup when some member states jump ship. Over the long run, the current situation is untenable.

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I say this because economists are fully aware that a currency zone is not a good idea. All previous attempts at forging a currency union has failed miserably. The reasons for this ought to be fairly obvious: any two or more economies will always develop a little differently, in particular as regards price inflation.

Thus, the one with higher inflation becomes less 23

CFI.co Columnist

ANOTHER FAILED CURRENCY ZONE Which brings us to the euro. The introduction of the euro in 1999 represented a major chunk of salami. It was conceived to force integration onto unwilling citizens via a common currency. This was a fully political project – not an economic or financial one. Any economist that supported the official line was either supremely naïve, a self-deluded optimist, or so deeply a part of the establishment that good judgement was impaired.

and less competitive and is forced to undergo an “internal devaluation” since a depreciation of its currency is now no longer possible.

Hence, harsh measures such as wage freezes, rising unemployment, spending cuts, etc. are required, often for several years on end, before competitiveness can be re-established.

Compare this scenario to one in which two currencies are free to float. In this case the higher inflation automatically results in a slightly lower foreign exchange rate via a very effective negative feedback process that is relatively quick, simple, and painless. This is hardly rocket science. Why then go ahead with a common currency zone? Well, it’s all about politics.

The euro planners were of course aware of the risks. However, rather than allowing for the possibility of a troubled country to exit from the zone – if even only temporarily – they did not incorporate such a possibility at all. This was a major mistake not unlike an attempt to outlaw divorce. Couples will split up anyway.

The planners’ thinking, no doubt, was perhaps motivated by the fear that the mere existence of such an exit clause might encourage it to be used.

The euro was meant to be a permanent state of affairs and the forerunner of the Eurostate to follow. The thinking was that limits on budget deficits and debt-to-GDP ratios would suffice to keep the members’ economies in line. That was seriously naïve. In the real world, budget deficits are notoriously unpredictable and are bound to get out of hand every so often with such a colourful array of member states.

Their very distinct economies, work ethic, competitiveness, and cultures meant that continual crises were entirely predictable and will continue to occur as long as the EU refuses to acknowledge reality.

CFI.co Columnist

THE ALTERNATIVES What is that reality? As I have stated on more than one occasion, there is one – and only one – stable long-term solution and that is for the EU to ask each member state to determine by a referendum either to join a new Eurostate (with single currency, government, treasury department, central bank, president, etc.) or to maintain national sovereignty which includes a national currency.

If the EU’s leadership had been totally honest, it would have already done this back in 1999.

However, they were rightly afraid that such a vote would derail the entire unification process. The new Eurostate that is in the work will in reality be a Germany +. It will of course be christened the United States of Europe or some equally Orwellian name.

The Greek debt crisis has demonstrated to everyone willing to see that the EU in its current guise has already degraded into a Germany +.

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“The people want a deal that’s fair Where bankers pay their rightful share Until that day they’ll roam the streets and shout.”

(Occupy World Street: The Song)

Recall Henry Kissinger’s question to the EU many years ago: “Who should I call in a crisis?”

Today we know the answer: call Angela Merkel.

AN OPTIMISTIC NOTE The reality is that few EU member states would vote yes to such a referendum; maybe three or four at most would merrily join Germany. That would not necessarily be a tragedy. The euro is not the EU and, conversely, the EU is not the euro. Germany + would easily become the largest of the EU member states. However, the EU as such could continue to function as a free trade zone among sovereign nations.

If the EU does not opt for the referendum route, then I suspect it will eventually break up and leave a terrible mess behind. Either way would offer relief from the constant crises that we can expect as long as the current structures are maintained.

Best of all, a restructuring along the above lines would open up a very important game-changing possibility: sovereign EU member states would be able to reject neoliberalism as a failed concept, demand a new EU treaty giving first priority to sustainability and survival, rather than to uneconomic growth, insisting on the right to take back control of their economies from nonEU corporations – including control over the flow of goods and capital. For once, there would be an alignment between the political leadership and the people – a most powerful combination that could inspire real global reform.

If other non-EU countries were inspired to follow suit, and I think they would, it could be the beginning of the end of the domination of the 0.1% and could, if done properly, put humanity on a new pathway towards the kind of future that the people want – local democracy, thriving local communities, more equality, preservation of cultures, a clean and healthy environment, a meaningful life, and freedom from exploitative and destructive multinational corporations with no social or environmental dimensions. i

ABOUT THE AUTHOR Ross Jackson, PhD, worked for 25 years in the foreign exchange world as currency adviser to international corporations, currency fund manager, and research head of a team of mathematicians and IT experts. He is author of Occupy World Street: A Roadmap for Radical Economic and Political Reform (Chelsea Green, 2012).

CFI.co | Capital Finance International

World Bank:

No Direction Home

By Wim Romeijn

Restructure, redefine or become irrelevant. The reality may not be quite that stark yet, but the World Bank Group does face a rising number of challenges that, if left unaddressed, may chip away at its institutional relevance and relegate the bank to the margins of the global development scene.

Cover Story

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s levels of dire poverty are waning across the world and a number of largescale development initiatives gain steam, the five constituent members of the World Bank Group are looking for ways to adapt their vast operations to a fastchanging global picture that lacks the clarity and predictability of times past. Gone are the days when the world could conveniently be split up in a few haves and a great many have-nots. Now, the inbetweeners – aka the emerging markets – are ready to set the agenda and clamour for their voices to be heard.

Formed at the close of 1945, the World Bank Group is about to celebrate its seventieth 26

institutional birthday. Back then, the group came into existence as the tangible result of the 1944 United Nations Monetary and Financial Conference – better known as Bretton Woods – which remapped the global monetary order to facilitate and provide for post-war reconstruction.

With its mission to end extreme poverty and build shared prosperity well advanced, the World Bank Group now aims to embrace wider concerns that stretch its original remit, such as environmental preservation and good governance. Its one-sizefits-all development model is being dismantled to make way for – what is hoped – a much more nuanced sectorial approach that allows the

bank’s accumulated technical expertise to be fielded more efficiently. To that end, fourteen global practices are to be formed – education, healthcare, transportation, telecom, etc. – that deliver more bespoke solutions to client states.

Notwithstanding the input received from an impressive army of consultants and other gurusfor-hire, the World Bank Group still appears rather clueless about its future role. Part of the confusion stems from a dichotomy rooted in the group’s past: is the World Bank Group to behave as a multilateral development agency or as a globe-spanning financial institution. Being a mix of the two can, at times, lead to ambiguities of an existential nature.

CFI.co | Capital Finance International

Spring 2015 Issue

President of the World Bank: Jim Yong Kim

THE REFORMER Tradition has it that the World Bank Group is presided over by an appointee of the US president while its twin, the International Monetary Fund (IMF), is headed by a European managing-director. In July 2012, US President Barack Obama duly named Korean American physician and anthropologist Jim Yong Kim to the position for a five-year term, raising a few eyebrows in the process.

Dr Kim is a distinguished academic with a long career in public health. In the 1990s, he helped pioneer a revolutionary community-based approach to the delivery of health services which slashed treatment costs and for the first time enabled poor countries to tackle multi-drugresistant tuberculosis on a large scale.

Between 1993 and 2012, Dr Kim lectured at Harvard Medical School, where he held professorships in social medicine and human rights amongst others, and served as president of Dartmouth College, an Ivy League research university in New Hampshire.

A brilliant and knowledgeable public healthcare expert and policymaker, Dr Kim’s appointment to the presidency of the World Bank Group surprised many who argued that the job requires both tact and managerial skills and experience.

It did not take a long time for Dr Kim to ripple the placid waters at the World Bank Group. While he received much praise for masterminding the World Bank’s fast and effective response to the Ebola crisis in West Africa, Dr Kim also ruffled

The shake-up is meant to cut $400m off the bank’s budget – eight percent of total spending – over three years and will result in about 500 redundancies. Before the restructuring exercise was launched in October 2014, the World Bank employed around 4,500 people at its internal divisions – about a quarter of the bank’s global workforce.

The reorganisation is meant to transform the World Bank into a “solutions provider” that adheres to, and sets, “global practices.” Staff have been told to adjust and adapt to the new ways imposed by Dr Kim. Travel expenses have been curtailed and car parking privileges revoked.

While on the road, staffers will now have to pay for their own breakfast and may have to travel coach. At the Washington head office, 48 top managers had to reapply for their jobs with the three most senior ones amongst them receiving pink slips without further explanation. A hiring freeze was decreed with any vacancy to be filled only after clearance from the highest level has been obtained.

“While the intention is good, and a revamp of operations welcome, it is perhaps counterproductive to antagonise staff by scrapping small perks. In the grand order of things, having people pay for their own breakfasts is not going to make much difference to the bottom line,” says former World Bank official Uri Dadush now employed at the Carnegie Endowment for International Peace.

PROMISING BEGINNINGS A last-minute choice of the Obama Administration, Dr Kim may have been an outsider but nonetheless received a warm welcome at the World Bank. His predecessor Robert Zoellick – a former managing-director

of investment bank Goldman Sachs and deputy US secretary of state (2005-2006) – was widely respected but also ruled the institution by memo in a way most considered standoffish.

Upon his arrival at the World Bank, Dr Kim insisted on asking questions and recording the answers all the while keeping mum. He soon learned that the World Bank suffered from a severe case of silo syndrome: isolated groups working alongside – rather than with – each other. In an interview, Dr Kim concluded: “We were working as six regional banks, each an island unto itself, with knowledge and expertise jealously guarded rather than shared.” The WBG president also discovered that the bank’s $329bn loan portfolio represented but a drop in the proverbial bucket: “I was told that our money was becoming insignificant and with it our bank.”

Thus Dr Kim discovered that an increasing number of middle-income countries – Brazil, Mexico, China, etc. – no longer need the World Bank to provide financing for large-scale projects with the international capital markets offering ready and cheaper alternatives. This also offers a way to circumvent the World Bank’s notoriously strict and cumbersome environmental and governance controls.

The solution Dr Kim imposed was to subject his vast organisation to a thorough restructuring programme. Management consultants were brought in by the busload. McKinsey was tasked with drawing up an “organisational health assessment” – curiously enough, the same firm laid the groundwork for the World Bank’s current structure – while Deloitte and Booz Allen received an invitation to x-ray the bank’s finances. The consultants charged slightly less than $13m for their words of wisdom and outside perspective.

While not unison in their advice, the consultants suggested the World Bank reorganise its 27

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During his time at Dartmouth College, Dr Kim was criticised by students and some faculty members for refusing to provide details on the school’s budget and for his high-handed ways in dealing with other concerns. A student newspaper called Dr Kim’s presidency of the college an “aberration” and a “failure.”

feathers with his top-down initiative to streamline processes, rethink operational philosophy, and overhaul the entire entity.

operations into fourteen global practices which are expected to break down the silo mentality.

Sceptics, of whom there are many, point out that the plan seems to replace vertical silos with horizontal ones.

However, Dr Kim is certain that the vertical realignment of the World Bank’s operations will encourage information and expertise to flow more freely: “The great secret that most people don’t understand, is that the structure of our work at country level is not going to change very much,” adding that the new model represent a “significant shift” that provides ample incentive for people to cooperate.

Former World Bank executive Paul Cadario, presently a senior fellow at the Munk School of Global Affairs in Toronto, takes issue with the way Dr Kim set about transforming the bank: “In any change effort you need a message, you need messengers, and you need an end date.”

Mr Cadario argues that the World Bank president failed on all counts.

Apart from pursuing a tighter and more integrated organisation, Dr Kim hopes that his approach may reinvigorate the bank to serve clients better and faster. The stated goal of the World Bank remains the elimination of extreme poverty by bolstering the income of the poorest 40% of people in developing nations.

While it is hard to gauge the World Bank’s progress and measure the results of its policies, one way of determining the outcome of Dr Kim’s intervention is to monitor the bank’s balance sheet. For a number of years, the World Bank has failed to use its lending capacity fully. The spare room available is a sign that some of the bank’s clients are turning elsewhere for their financing needs.

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LEAN AND LARGE Dr Kim not only wants to leverage the World Bank’s lending capacity to the max, he also want to build a much bigger bank – up to 75% larger in ten years’ time: “We are going to be a leaner bank, but a bigger one.”

Putting words into action, Dr Kim urged the bank’s board to approve a $73m loan to the Democratic Republic of Congo (DRC) to finance a feasibility study and environmental impact assessment of the previously shelved Grand Inga hydroelectric project. The plan entails building an additional six dams to supplement the existing two at Inga Falls, about 200 kilometres southwest of Kinshasa where the Congo River drops almost a hundred metres. The resulting hydroelectric complex would generate close to 39,000MW, making it the largest power producer of its kind in the world and twice the size of the Three Gorges Dam in China.

A massive undertaking, the Grand Inga dams are expected to cost anywhere from $50bn to $80bn to build and require an additional $10bn for power lines to plug into the major urban centres of Sub-Saharan Africa. That said, Grand Inga 28

would instantly double the continent’s installed power generating capacity and, thus, in a single stroke quench Africa’s almost insatiable thirst for affordable electricity.

A number of studies have clearly shown that the shortage of electrical power and its unreliable delivery are holding back growth. Grand Inga will not just boost the economies of an entire continent, the mega-project can also provide the World Bank with a renewed sense of purpose. The undertaking offers the bank a unique opportunity to showcase its unrivalled prowess in forging ahead into territory others fear to explore.

Set in one of the world’s most challenging political environments, Grand Inga is a project no private investment bank will touch. However, Dr Kim thinks the World Bank’s involvement may change that. The bank’s solid track record of risk mitigation, and its unparalleled experience in project management under adverse conditions, may help get Grand Inga off the ground at long last.

The Inga Falls were first earmarked for large-scale hydroelectric development in the late 1950s by Belgian colonial authorities who drew up detailed plans for the Inga Scheme and brought in the chief-engineer of the United States Tennessee Valley Authority to oversee the work. In 1957, the Belgian government approved the $3.2bn plan which was expected to generate up to 25,000MW of power and enable the country to develop heavy industry. The Belgians’ vision for the Congo was as bold as their hold on the colony was tenuous.

In the end, independence and political turmoil intervened. Only after Mobutu Sésé Seko seized power in late 1965, and a semblance of fearinspired stability returned to the country, did the Inga Scheme resurface. A small first dam was built with government funding between 1968 and 1972 to supply 350MW of power to Kinshasa.

Inga II, a larger second dam, was completed in 1982 and was designed to generate in excess of 1,400MW. Currently, both dams are suffering from neglect, producing power at only 40% of capacity.

Attempts at refurbishing the power stations have so far netted no results. In 2003, the World Bank tried to engage with German engineering company Siemens and the DRC to rehabilitate both Inga dams to the tune of $450m. This initiative also went nowhere.

With increased stability and a mending economy, the World Bank thinks that the DRC may be ready to revisit the Inga Scheme. There are eager buyers for Inga energy. South Africa has repeatedly assured that it would buy 2,500MW from the future Inga III dam while the Congolese mining industry – long starved for power – will readily commit to acquiring 1,300MW. The remaining capacity, some 1,000MW, would help power the domestic economy. The Inga III dam is expected to require an investment of up to $12bn, without accounting for the inevitable cost overruns.

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ONLY ONE OR NOT? The World Bank’s Dr Kim is quite convinced that his institution can make the project “bankable” for other investors by laying down the governance groundwork and making a solid business case that includes the requisite environmental and social safeguards. In fact, the World Bank is the only institution that is able to tackle such a large-scale undertaking and carry it to a successful conclusion.

Dr Kim has no doubt that his bank’s involvement will whet the appetites of private investors who – ultimately – need to provide the lion’s share of the Inga Scheme’s financing.

As it looks for the meaning of life, the World Bank needs to show that it remains as much an essential part of the global financial system as it was when set-up seventy years ago. It can do this only by applying its special skill set to eyecatching initiatives such as the Inga Scheme. The bank’s new slogan could well be: Accomplishing the Impossible.

The bank is in a hurry to prove its usefulness to all who care to look. Not any longer the only global development bank but rather a first amongst a growing number of equals, the World Bank now has to contend with a number of upstarts. The World Bank does hold a trump card: its long experience and deep reservoirs of knowledge in kick-starting economic development via big infrastructure projects is peerless.

Nonetheless, this year two new global development banks were launched: the BRICS Bank, since renamed New Development Bank (NDB), and the Asian Infrastructure Investment Bank (AIIB).

Both initiatives have China at their core and are widely considered part of the Beijing Consensus – defined as the “pragmatic use of innovation and experimentation in the service of equitable and peaceful growth.” Others have defined the Chinese model, now being readied for export, as the “use of stable, if moderately repressive, politics to promote high-speed growth.”

Both upstarts were duly welcomed by existing multilateral financial institutions with the World Bank Group and the International Monetary Fund pledging their support and showing a willingness to share operational expertise and lend a hand in helping establish the two banks as pillars in the world of development finance.

However, taking a longer view, the Beijing Consensus is squarely aimed at undermining the financial balance of power established at Bretton Woods in July 1944. One of the institutions to come out of this landmark conference, the World Bank still suffers from the perception that it remains a tool of western powers in general and the United States in particular.

The location of its headquarters, just a few blocks down from 1600 Pennsylvania Avenue NW, doesn’t help either. While the US holds just 16.4% of the votes on the bank’s board of governors, it can block any changes to the World Bank’s charter as these require the approval of an 85% majority.

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SHIFTING BALANCE With barely five percent of voting power, China increasingly feels undervalued considering the country’s vast global economic and financial weight.

Other emerging economies such as Brazil (2%), India (3.2%), and South Africa (0.8%) also feel underrepresented. Jason Hickel, an anthropologist and lecturer at the London School of Economics (LSE), thinks these countries have a good point: “Bretton Woods institutions such as the World Bank and the IMF mostly serve the interests of the north while harming those of the developing south.

Moreover, they preclude poor countries from using the same strategies that allowed the north to build its prosperity.”

Mr Hickel also argues that both the World Bank and the IMF are instrumental in furthering the sphere of western-style capitalism and have, as such, a role not dissimilar to that which colonialism once played for Europe. The LSE lecturer finds that the structural adjustment programmes often prescribed by the IMF, and the conditions attached to World Bank loans, represent “punitive policies” that most western nations would never implement in their own markets.

Though Mr Hickel may push the boundaries slightly north of reason, it is undeniable that developing countries now represent close to half of the world’s GDP and may expect to see their market share rise considerably in the years to come. According to World Bank data, average annual economic growth in high-income countries will hover around 2.2% until 2020, while developing economies can anticipate growth rates of around 5.2% for a global median of 3.3%. The most buoyant markets are to be found in Asia with growth averaging at up to 7.6% annually with Sub-Saharan Africa coming in second at 4.6%.

If the world already now looks very different from what it was when both the World Bank and the IMF came into being, the balance of power will only move away further from the West over the next five to ten years.

Rather than hanging on to the realities of a bygone age, the Bretton Woods institutions would be well advised to get with the times and latch on to the moving pendulum. The IMF has already signalled its willingness to catch up and has launched a number of reform initiatives aimed at rebuilding the world’s financial architecture. The fund is also busy re-evaluating its operating procedures to allow for a more bespoke – some would say, sensible – approach to financial crises.

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Whereas Europe and North America jointly possess around 60% of the voting rights at both the World Bank and the IMF, the two new development banks reflect the new global reality much better. At the NDB, voting rights are held in equal shares by the five founding members, while at the AIIB, Asian countries are in the driver’s seat – China and India leading the pack.

Development experts see the new development banks as possible game-changers: “By blending in the old with a lot of the new, in areas such as means of financing and institutional involvement, the New Development Bank promises exactly what its title suggests – a new way of development banking.”

Shubh Soni of the Observer Research Foundation, a think-tank in India, notes that the increasingly strict conditions attached to World Bank loans cause significant irritation in addition to stretching the timeline of large-sale projects: “This grumbling has been going on for quite some time. It may be considered an expression of frustration at the lack of alternative financing sources and options for major government-backed undertakings.”

According to Mr Soni, both the NDB and the AIIB will revolutionise the way in which developing nations will underwrite their progress: “For the first time, projects will be evaluated by people who truly understand the needs of emerging markets and have suffered first-hand the grievances of dealing with the old-style multilaterals. The New Development Bank in particular is a unique institution that unites a group of five emerging economies, with varying political systems and structures, and geographically spread wide apart.

Their diversity notwithstanding, these countries have taken up the mantle of development in the Global South.”

And what of World Bank reformer Dr Kim? While heading the most venerable of global development banks, Dr Kim may want to prepare for yet another bold move: fully engage with the new start-ups to jointly tackle the global fight against poverty.

Politics aside, both Pax Americana and the Beijing Consensus aim to relieve the world of dire want.

Moreover, the various institutions may coexist peacefully while competing – perhaps even fiercely – for the business of underwriting development goals and aspirations. Now that the Sustainable Development Goals (SDGs) are almost defined, the time has come to think about sourcing additional financing. Capital markets can play a major role, but only after projects have been properly vetted by development banks. The World Bank now has company and Dr Kim must reach out to ensure that he keeps good company. Three can be a crowd, but also carry the beginnings of a party. i 29

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Washington: World Bank

However, the World Bank – mired in a vast restructuring exercise that fails to address its perceived shortcomings – has so far not budged and under President Jim Yong Kim is merely seeking to maintain its position as the largest global development bank. While the World Bank remains an essential component lodged at the heart of the global development effort, the bank’s apparent diffused sense of purpose – following, rather than setting, the agenda – is eroding its preeminence.

The two new Beijing Consensus banks – NDB and AIIB – are almost ready to field their billions onto the developing world. The Asian Infrastructure Investment Bank will have around $100bn to leverage while the New Development Bank set up by the BRICS countries (Brazil, Russia, India, China, and South Africa) can deploy about half that sum.

> Jim Yong Kim:

A Barnstorming Genius

By Wim Romeijn

A public health expert rather than a banker or diplomat, World Bank President Jim Yong Kim realises as few others do that the spread of sickness and contagion pose serious threats to the global economy. Using data gathered by the Bill & Melinda Gates Foundation, Dr Kim recently warned that the world is woefully unprepared to deal with a pandemic on the scale of the Spanish Flu outbreak of 1918 which is estimated to have killed between three and five percent of the world’s population.

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repeat of such a health emergency could cause up to 33 million deaths and cost the world almost ten percent of its GDP or $7.5tn. Extrapolating the losses from the avian flu outbreak and the more recent Ebola epidemic, Dr Kim cautions against ignoring the gravity of the threat. In Sierra Leone, hard hit by Ebola, the economy almost ground to a halt with national income shrinking by almost 24% over the course of a single disease-ridden year.

“Transposing public health emergencies onto sustainable development frameworks is but one of the novelties Jim Yong Kim introduced at the World Bank since taking over as the institution’s president in 2012.”

Jim Yong Kim was born in Seoul, South Korea, in 1959 and at age five moved to the US with his family. Growing up in rural Iowa, he launched his academic studies at the University of Iowa before moving to Brown University, an Ivy League research university in Providence, Rhode Island, from which he graduated magna cum laude with a Bachelor of Arts degree in Human Biology. He went on to obtain a Doctor of Medicine (MD) degree at Harvard Medical School and in 1993 left Harvard University with a PhD in Anthropology.

While the World Bank was quick to respond to the Ebola outbreak in West Africa and managed to put together a $1bn emergency aid package in record time, Dr Kim was not at all satisfied: “We just about managed to scrape by.” The World Bank chief has now suggested to set up a dedicated pandemic fund. “The idea behind a pandemic emergency facility is to mobilise and leverage public and private sector resources through public funding, and through market and private insurance mechanisms.”

Just as he supports the drive towards universal education, Dr Kim is an ardent advocate of universal healthcare. He argues that keeping all people healthy all the time is simply another component of a sound economic policy: “I believe not providing health, education, and social protection is fundamentally unjust – in addition to being a bad economic and political strategy. Investments in people, investing in health is imperative for economic growth and poverty reduction.”

While studying for his degrees, Jim Yong Kim helped found Partners in Health and designed a number of revolutionary treatment protocols for community-based healthcare programmes. His approach drastically reduced service delivery costs and allowed for the treatment of diseases such as multi-drug-resistant tuberculosis, previously deemed too expensive for poor nations.

Transposing public health emergencies onto sustainable development frameworks is but one of the novelties Jim Yong Kim introduced at the World Bank since taking over as the institution’s president in 2012. Shifting the bank’s focus slightly away from underwriting big ticket items such as roadworks and hydroelectric power plants, Dr Kim wants to see more attention – and money – awarded to soft development drivers such as education and healthcare.

Echoing the words of Nobel laureate Michael Spence, a US economist and recipient of the 2001 Nobel Memorial Prize in Economic Sciences, the World Bank president noted that all research points to universal education and healthcare leading to “dramatically improved income and welfare levels.” Dr Kim refuses to accept the argument that providing expanded social services is the preserve of richer nations and argues that the path to sustainable development starts with addressing the basic needs of the poorest.

While the World Bank has long financed an untold number of projects in both fields, these were mostly community-based primary care initiatives aimed at providing immediate relief from want. Now that a good part of the emerging world has attained middle-income status, Dr Kim sees a need for the bank to help finance high-end care facilities that treat the afflictions of urbanites – rare cancers, cardiovascular diseases, and diabetes.

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Jim Yong Kim is the twelfth president of the World Bank and the first with no discernible background in finance. He was appointed to the job by US President Barack Obama. It is a well-established tradition that the World Bank is headed by a US appointee while the International Monetary Fund (IMF) is entrusted to a European.

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In 2003, Dr Kim joined the World Health Organization (WHO) as an adviser to its directorgeneral. Within a year, he was named director of the WHO HIV/AIDS department where he managed to apply the techniques developed at Partners in Health to radically expand the treatment of AIDS patients in Africa. By the time Dr Kim left his position to return to Harvard Medical School as a lecturer, the WHO had provided AIDS treatment to an additional three million people in the developing world.

A brilliant academic and visionary public healthcare expert, Dr Kim was invited to assume the presidency of the prestigious Dartmouth College, a research university in Hanover, New Hampshire, in 2009. While nobody questioned his academic credentials, Dr Kim proved to be less apt as a manager. His know-it-all-andbetter way did not sit well with either faculty or students. He soon was embroiled in a number of conflicts that started as small household

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affairs only to escalate into running battles of will between radicalised antagonists.

In light of his inability to address parochial controversies at Dartmouth College, Dr Kim’s appointment to the World Bank presidency

While he has certainly ruffled the feathers across all levels of the bank’s hierarchy, Jim Yong Kim cannot be accused of lacking vision.

His only fault – if it indeed is one – concerns the pursuit of that vision in ways perhaps a tad CFI.co | Capital Finance International

bit too bold for the venerable institution. That, however, may be excused as the World Bank stands in need of realigning itself with new global realities, challenges, and threats. Under Dr Kim, business as usual has been ditched in favour of a more revolutionary approach to the bank’s mission: that of ridding the world of poverty. Such a momentous task requires a leader who aspires to greatness. The jury is still out on Dr Kim. If he should fail at the World Bank – and that is by no means a given as some would have it – it certainly will not be for a lack of trying. i 31

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Students considered Dr Kim aloof and vociferously criticised his handling of the college’s finances. Most were glad to see him leave for the World Bank after a tenure lasting only three years and described by some as “unfortunate” and “disastrous”.

caused surprise, and a little consternation. While the World Bank president need not necessarily have a background in banking, a great deal of diplomatic tact is a requisite for the job. At the World Bank, Dr Kim did not take long to stir up polemic with his top-down approach to management and plans for far-reaching reform.

> IMF:

Steep Learning Curve

By Wim Romeijn

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wo unlikely champions of the 99.9% have stepped out of the shadows to claim centre stage in the fight againsta rising income and wealth inequality. SecretaryGeneral Ángel Gurría of the Organization for Economic Cooperation and Development (OECD) and Managing-Director Christine Lagarde of the International Monetary Fund (IMF) have stopped short of signing up for the Occupy Movement, but are nonetheless concerned that wealth is increasingly defying gravity and conventional wisdom by trickling up rather than down.

Speaking at a conference in Brussels, Ms Lagarde admitted to almost choking on her morning yoghurt when she recently learned that the world’s best-paid hedge fund manager takes home an annual pay package worth in excess of $1.3bn.

She noted that while the hedge fund industry as a whole suffers from underperformance, its 25 best paid managers together pocketed more than $12bn in compensation last year. Ms Lagarde went on to assure her audience that she was not about to issue a call for revolution – just yet: “Too many people are now convinced that the system is somehow rigged, that the odds are stacked against them. Reducing excessive inequality is not just morally and politically correct, but is good economics.”

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The OECD concurs and late last year released a study that aims to show that countries with less inequality grow faster than those suffering from a widening gap between rich and poor. Interestingly enough, Dwight D Eisenhower – the 34th US president, a military man, and as far from an economist as it is possible to get – had that already figured out in the 1950s when he presided over an era of rapidly expanding prosperity, high taxes, and shrinking income and wealth gaps. Somehow, Ike’s wisdom got waylaid.

In its study, the OECD concludes that rising inequality has cost countries such as Mexico and New Zealand over ten percentage point in economic growth over the past two decade. The United States, the United Kingdom, and even egalitarian Sweden lost between six and nine percentage points of growth over the same period due to increased inequality. France, Spain, and Ireland moved in the opposite direction. OECD Secretary-General Ángel Gurría obligingly opened a door to the obvious by stating: “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

In a conclusion that borders on blasphemy, the OECD clearly states that it has found no evidence of higher taxes, redistributive policies, and social 32

“IMF researchers found that too much credit distorts income distribution, corrodes political processes, and undermines economic stability and growth.” benefits hampering economic growth in the slightest. The OECD is currently updating the analytical frameworks it uses to investigate and chart global economic trends. The organisation’s New Approaches to Economic Challenges Initiative aims to absorb the lesson learned from the Great Recession and is expected to reposition the OECD to a slightly more progressive stance.

LISTENING TO OXFAM Meanwhile, the IMF is likewise reviewing its procedures and the underlying philosophy. Ms Lagarde now even heeds warnings issued by Oxfam – the international poverty relief organisation – which recently divulged statistical data that shows already next year the richest one percent of the world’s inhabitants will own more wealth than the other 99% combined. That said, Ms Lagarde also noted that inequality between nations has decreased significantly over the last twenty or so years. It is the inequality within nations that now has the IMF’s managing-director’s attention.

China and India are cases in point. While the former has succeeded in lifting some 600 million people out of dire poverty – no mean feat! – it also has become one of the world’s most lopsided societies with a huge gap arising between a countryside mired in crushing poverty and prosperous urban centres that rival New York, London, and Paris for glitter and pizazz.

Belatedly the IMF has now published its own study showing that inequality is bad for growth.

The IMF study show that increasing the income share of the poor and lower middle classes by one percent results in a 0.38 percentage point GDP growth. Detracting one percent for their share of the national income, reduces GDP growth by 0.08 percentage points. Empowering the poor is sensible economics and, as such, good for business.

Ms Lagarde concluded that neoliberalism has it all wrong. While she did not quite say that aloud, her analysis leaves little to the imagination: “inequality holds back growth because it discourages investment in skills and human capital – which leads to lower productivity in a large part of the economy. The most important drivers of extreme CFI.co | Capital Finance International

inequality are well known – technological progress and financial globalisation.” Ouch!

The IMF managing-director goes on to criticise countries such as the United States and Japan for their overreliance on easy credit to keep their economies humming. IMF researchers found that too much credit distorts income distribution, corrodes political processes, and undermines economic stability and growth. It is as if Pope Francis was put in charge of running the IMF. IMF 2.0 The restyled fund now presents fiscal discipline, Keynesian prudence, and a bespoke countryspecific approach – “smart policies” in the fund’s parlance – as the new panacea for all who come knocking at its doors for help. Ms Lagarde considers Europe a noteworthy example of how not to proceed. She wants the continent’s countries to stop penalising employers with high taxes and social security contributions in order that they may hire more people in fulltime jobs. The IMF chief deplores the surge in zero hour contracts and other modalities of part-time labour agreements and sees their prevalence as a root cause of rising inequality.

While the IMF may be about to travel a more enlightened path, its newfound social conscience has so far failed to address the issue at the root of all inequality – the one so eloquently and convincingly described by the French economist Thomas Piketty – rents. The world’s economic edifice is increasingly supported by the proceeds of high finance. Some countries – the UK comes to mind – have ditched a large part of their real economy to concentrate on producing the grease that makes the world go round – money in its many complex forms and guises. Though this may initially seem a worthwhile pursuit, it necessitates the adoption of a freewheeling model that channels the nation’s wealth up into an ever tighter canal.

Economic rents allow a fortunate few to grow fatter at the expense of all others, essentially rigging the game in such a way that upward social mobility becomes all but impossible. The IMF and the OECD fail to address this issue. Labour market reforms, fiscal discipline and other policies now deemed smart do not change the reality that the have-nots have few places to go. Moreover, it was precisely the fund’s standard policy recipe that kept untold millions locked in poverty. By forcing troubled states to devalue both internally and externally – the shock therapy of the 1980s that delivered Latin America its “lost decade” – the fund depressed wages and exacerbated already pronounced inequalities thus undermining longterm growth.

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Only when countries defaulted on their debts and kicked out the fund’s advisors did growth return. Brazil and Argentina showed the way. Both countries have managed to reduce social want to a surprising degree by deviating, each in its own way, from IMF-approved solutions. However, it was the sorry plight of Greece that drove the message home.

BEWARE OF GREECE Under its previous managing director, Dominique Strauss-Kahn, the fund was goaded into providing assistance to Greece even though its brightest economic minds considered the exercise futile since the country would not be able to stay solvent for long. The first $125bn bailout indeed failed to provide lasting solace to the Greeks. In order to sign off on the rescue package, the fund had to bend its own rules which preclude it from lending money to countries – such as Greece – that will likely be unable to meet their repayment obligations. The IMF’s participation in the first two bailouts was not so much driven by a desire to help Greece overcome its troubles as it was by a need to prevent the crisis spilling over into other Eurozone member states. Siddharth Tiwari, a member of the fund’s executive board in 2010, admitted that avoiding wider contagion was the principal motivator at the time.

Normally in the driver’s seat, this time around the IMF had to accept guidance from the European Union on Greece. In effect, the Eurogroup of finance ministers – an informal and wholly unregulated entity – dictated the terms of the rescue packages. It was IMF Managing-Director Strauss-Kahn who insisted the fund latch on to Europe’s largely misguided efforts to keep Greece aboard the euro. The Europeans were, at first, reluctant to allow the fund a role in solving the crisis. At the time, President Nikolas Sarkozy of France assured Greek Finance Minister George Papaconstantinou that he would “never” allow the IMF into Europe.

While originally conceived and set up to be a lender of last resort to the countries of Europe as they struggled to rebuild their economies in the wake of World War II, the IMF soon after became the last port of call for smaller developing countries that could not cope and needed financing to underwrite structural reforms. In contemporary Europe, the IMF was only briefly involved with Denmark and Sweden as both countries suffered a run on their currencies.

With Mr Strauss-Kahn snapping to attention, the IMF promptly set to work. However, it soon found that its traditional recipes could not be applied in Greece since there was no local currency to devalue. Also, the fund discovered early on that both the European Commission (EC) and the ECB were less interested in helping Greece than they were in protecting their financial system. Now part of a troika with the EC and the ECB, the IMF lost its independence and had to conform to the wishes of its partners.

BLAME IT ON THE COPS While the IMF insisted that Greece’s debt load was unsustainable and needed restructuring – another way of saying the country needed part of its debts cancelled – its troika partners would entertain no such option. After the first bailout package failed to deliver results and the Greek economy tanked – as the IMF had expected all along – ManagingDirector Strauss-Kahn gathered the courage to stand up to the German chancellor. However, as he made his way to Germany, Mr Strauss-Kahn was arrested in New York on suspicion of sexual assault. Though he was eventually cleared of any and all charges, his career was over and the meeting with Chancellor Merkel never took place.

So we may now blame all the fund’s woes on the NYPD. Though the second bailout deal for Greece CFI.co | Capital Finance International

did include a “haircut” of slightly over 50% on $200bn worth of Greek government bonds, Mr Strauss-Kahn’s replacement at the fund, Christine Lagarde, warned European finance ministers repeatedly that the country would still not be able to stay afloat. Under new management, the fund now openly admits that its economic forecasts on Greece were dead wrong, underestimating the damage wrought by the austerity measures imposed and being too bullish on the Athens government’s ability to speedily implement the required reforms.

The debacle in Greece has led to the IMF revisiting the very premises of its existence. The process involves extensive soul-searching and has resulted in a radical rethink of its approach to financial crises. As a first step, the fund declined to partake in Europe’s third rescue package for Greece considering it insufficient to ensure the country’s long-time well-being.

The IMF also tries to move out of the European and North American orbit. As it happens, larger developing nations such as Brazil, China, and India have already for some time been clamouring for more say in the organization’s running. They now have added arguments to present a stronger case for a rebalancing of power within the IMF. Managing-Director Christine Lagarde, possibly up for a second term at the helm of the fund, is willing to lend an ear. As it happens, a power shift may just allow the IMF to regain its independence and solidify its new, and slightly more heterodox, approach to its institutional mission. i 33

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The powers that be in Brussels considered it “unthinkable” that a Eurozone member state should ever require IMF assistance. Jean-Claude Trichet, president of the European Central Bank (ECB) in 2010 when the crisis broke, was hostile to the idea that the fund should take the lead on Greece and only slightly less unreceptive to the IMF being allowed a minor role in the operation.

In the end it was the German Chancellor Angela Merkel who appealed to IMF Managing-Director Strauss-Kahn to join the effort. Frau Merkel was not at all impressed by the European Commission’s

approach to the Greek crisis. She considered that only the IMF’s involvement could convince markets that the situation was under control.

> Christine Lagarde:

Predictably Efficient, Surprisingly Pragmatic

By Wim Romeijn

Charming, elegant, intelligent, opinionated, and – according to some – ruthlessly efficient, Christine Lagarde was destined for greatness. She did not disappoint. Managing-director of the International Monetary Fund (IMF) since 2011, when she replaced her disgraced predecessor Dominique Strauss-Kahn, Ms Lagarde reached the pinnacle of the financial world in a relatively straightforward way.

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graduate from the University Nanterre La Défense, where she obtained Master’s degrees in English Literature, Labour Law, and Social Law, Ms Lagarde joined the Chicago-based international law firm Baker & McKenzie to handle major antitrust cases before taking over as the first-ever female chair of the office’s executive committee.

In 2005, she returned to her native France and entered headlong into the country’s notorious political fray. She did so with a double handicap: not being a graduate of the prestigious École Nationale d’Administration – she flunked the entrance exams twice – and not being a man. Far from discouraged, Christine Lagarde managed to obtain a toehold in the cabinet of Prime-Minister Dominique de Villepin as minister of commerce and industry.

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During her two years at the ministry, she frequently upset fellow ministers with stinging criticism of the French work ethic, particularly the national obsession with the sanctity of weekends and long vacations. Barely two days into her job, Ms Lagarde received a verbal clobbering from PrimeMinister De Villepin for having dared to publically point at the complexity of French labour law as one of the reasons for the country’s mediocre economic performance.

Initially considered too corrupted by American values to be of any use or promise in French politics, Ms Lagarde surprised both friend and foe with her flair for getting things done even in the face of stiff opposition. A straight talker who does not hide behind a façade of techno babble and spin phrases, Ms Lagarde usually calls things by their proper name and is not afraid to either step on toes or broach taboos. Presenting clear arguments, warning of dire consequences, and employing her considerable charm, she more often than not manages to impose her sensible way.

Via a one-month stint at the Ministry of Agriculture, Ms Lagarde became France’s first34

“At the IMF, Ms Lagarde insisted that timehonoured development models be revisited with a view to providing for the empowerment of women.” ever female minister of finance in June, 2007.

Invariably described as a European diplomat provided with common sense and an American work ethic, she promptly set about clearing the decks of legal clutter in order to make room for economic growth. With wit and determination, Ms Lagarde imposed her very own style of leadership which may perhaps best be branded as performance-based feminism with an infusion of pragmatism.

RUNNING THE NUMBERS At the IMF, Ms Lagarde insisted that timehonoured development models be revisited with a view to providing for the empowerment of women. Running the numbers and compiling statistics, IMF economists have now shown that increasing the female labour participation rate vastly accelerates GDP growth and helps reduce poverty. While not exactly Columbus’ egg, Ms Lagarde did manage to introduce a measure of new thinking into her male-dominated bastion of financial orthodoxy.

In fact, Ms Lagarde has been shaking things up a bit at the IMF by challenging conventional wisdom. She does so not out of ideological conviction, but for more pragmatic reasons.

Ms Lagarde has been known to become quite irritated, albeit in a classy way, with those who refuse to catch up with the changing times. Ms Lagarde perhaps had her finest hour at the 2011 Davos Economic Forum when she put Barclays Bank CEO Bob Diamond in his place after the unsuspecting American-British banker had thanked the assembled ministers of finance for improving the economic climate.

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Mr Diamond’s innocuous remark elicited a razor-sharp response from the then-French finance minister: “The best way for the banking sector to say thank you would be to actually have good financing of the economy [and] sensible compensation systems in place and [provide] reinforcement of their capital.” That was game over for Mr Diamond who wisely remained silent for the rest of the proceedings.

However, Ms Lagarde’s no-nonsense approach is not always appreciated. When, in 2012, she urged the Greeks to pay their taxes – reminding them that the “nice times” were now over – politicians of all persuasions in Athens rallied to the defence of the offended nation. Some were quick to point out that Ms Lagarde enjoys an annual salary of about $470,000 plus perks over which she pays no taxes at all.

In the end, the IMF chief proved to be Greece’s best friend in the troika of powers that goaded and cajoled the debt-stricken country into compliance with its creditors’ harsh demands for additional austerity. While the European Central Bank and the European Commission insisted Greece accept a third bailout package, the IMF refused to sign off on the deal arguing that it failed to provide a workable long-term solution for the country’s debt problem.

While a fiscal conservative and Adam Smith acolyte, much like her predecessors at the IMF, Ms Lagarde is not entirely opposed to regulation.

In fact, she advocates for the introduction of additional rules to keep the financial industry in line and wants to see women in general assume more prominent – and powerful – positions in banking, though not necessarily via quota or other forms of affirmative action. However, she did mention that a “surplus of testosterone” at the top usually does not contribute to the resolution of any given problem.

LEHMAN SISTERS Ms Lagarde famously quipped that recent world history would have taken a different, and quite

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possibly more benign, turn had Lehman Brother been Lehman Sisters instead. She has also not forgotten, as many others conveniently did, that the 2008 global financial meltdown started in the US. Ms Lagarde has since repeatedly urged the United States to clean up its fiscal mess, warning that the IMF would be unable to provide assistance due to the outsized proportions of the issue.

A negotiator at heart, and unafraid to take over the helm when things go awry, Ms Lagarde has ensured that the International Monetary Fund is as relevant in today’s multipolar world as it was twenty odd years ago when global finance has to contend merely with a north-south divide.

Recognising the urgent need for an upgrade of the fund’s own policies and masterplans, Ms Lagarde has introduced a small measure CFI.co | Capital Finance International

of heterodoxy into the IMF’s economic handbook, offering a glimmer of hope to those clamouring for an end to the unchecked might of international financiers.

While not about to become a den of unorthodox economic thought any time soon, Ms Lagarde’s IMF has developed a keen eye for gauging the side effects of its remedies. The fund now boasts the beginnings of an understanding that debtor nations need an outlook that stretches beyond immediate payback and includes a return to sustained growth and, hopefully, lasting prosperity. Pragmatism is key and Ms Lagarde makes sure that all concerned keep their focus on the attainable, rather than the desirable. i 35

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Seeking to insert a modicum of sense and compassion into the world of high finance, Ms Lagarde may seem seriously out of tune with her peers. Then again, she is somewhat peerless as an outsider who reached the top by keeping a steady hand and a cool head. While former French president Nicholas Sarkozy

called her “predictable” and Nobel laureate Paul Krugman worried about her “ fiscal virtue and prudence” in the New York Times, Ms Lagarde has proven both wrong by effortlessly adapting to new issues as they arise and finding common ground between all protagonists from where challenges may be tackled efficiently.

Crucial Role for Investment Guarantees

o I.c ive CF lus c Ex

> Keiko Honda, CEO MIGA:

By Wim Romeijn

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he Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, is a financial institution exclusively dedicated to political risk insurance and credit guarantees that offer investors a hedge against risk in developing countries. The agency was established in 1988 with the mission to promote direct foreign investment in countries shunned by investors due to perceived non-commercial risk. MIGA particularly focuses on the member countries of the International Development Association – also member of the World Bank Group – and countries ravaged by war.

MIGA CEO and Executive Vice-President Keiko Honda joined the agency in 2013 from McKinsey and Co where she was a director. Mrs Honda has much experience in public and private sector banking with an emphasis on corporate finance and private equity. She served on a number of government committees in her native Japan such as the Council of Regulatory Reform and the Committee on the Promotion of Free Trade Agreements.

In this interview, Mrs Keiko explains the workings of MIGA and its outlook.

WHAT IS MIGA’S ROLE IN, AND CONTRIBUTION TO, FINANCING FOR DEVELOPMENT? The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector. In fact, I believe that a good deal of the success of the Financing for Development push will be up to organisations like ours. By this I mean that our role as a bridge between the private sector’s resources and countries’ development goals is absolutely vital.

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In particular, there is a good deal of attention to public-private partnerships, de-risking, and blended finance in the Financing for Development discussions, which I welcome. But I want to emphasise that, at MIGA, we’ve been executing these models on the ground for some time now.

Political risk insurance is a very effective, markettested tool. At MIGA, we hear time and again from clients that they would not have invested in a given country unless they are backed by our guarantees. This is a significant impact that strikes at the heart of the discussions around capital mobilisation that we’re having right now.

WHAT ARE THE BENEFITS OF MIGA’S SOVEREIGN CREDIT ENHANCEMENT SOLUTIONS AND WHICH COUNTRIES AND ORGANISATIONS MAY BENEFIT? WHAT ARE THE CHARGING MODELS? 36

“The big news in recent conversations on Financing for Development is the very high level of recognition of the role of the international private sector.”

Our credit enhancement product suite – what we call non-honouring of financial obligations coverage – is used for investments involving sovereign and sub-sovereign entities, as well as state-owned enterprises. Commercial lenders that provide loans to developing-country public sector entities with a satisfactory credit rating are our target clients. The product has become an increasingly important tool, especially for large infrastructure investments.

One of the primary advantages to MIGA’s credit enhancement is that it complies with Basel II, meaning that banks can receive capital relief and, as a result, boost their lending capacity in a given country. This allows them to fund strong projects that cannot be financed in the traditional markets with the needed tenors.

I want to underline that this additional lending capacity is especially critical in a post-global financial crisis world where an unfortunate and unintended by-product of regulation has been tightening of lending for large infrastructure projects in developing countries.

CAN YOU GIVE SOME EXAMPLES OF MIGA’S FINANCIAL INNOVATION? I just mentioned capital relief as it relates to our credit enhancement projects. But we have also deployed our coverage against expropriation to achieve capital relief for global retail banks with significant exposures to central banks in developing markets. With this model, a parent bank obtains coverage against the expropriation of mandatory reserves by the host country. This results in a reduction of the risk weight and frees up capacity that can be used to grow a loan book in these developing countries.

Germany-based ProCredit, which operates an emerging-market network of 21 microfinance subsidiaries, was our first client to use this capital optimisation product. To streamline the process we used a portfolio approach to insure a maximum amount of more than €200 million in guarantees for the bank’s subsidiaries across the globe.

Other innovations involve our work around bond issuances. In Senegal, MIGA’s credit enhancement backs a US dollar cross-currency CFI.co | Capital Finance International

swap arrangement between Standard Bank Plc and the government. Senegal entered into the swap with Standard Bank as a hedge against currency risk exposure related to a 10-year, $500 million Senegal Eurobond. The proceeds of the Eurobond are being used to finance new infrastructure projects, including an extension of the toll road to the airport and critical energy sector investments.

Also, MIGA’s credit enhancement support to Hungary’s Export-Import Bank (EXIM) helped it achieve a savings that it will use to directly support Hungarian exporters. MIGA’s backing for a €400 million bond issue by EXIM went so far as to raise the bond issue from non-investment to investment grade.

WHAT IS THE ROLE FOR TRADITIONAL RISK INSURANCE FOR INFRASTRUCTURE INVESTMENTS? Before we launched our credit enhancement product line in 2010, we had more than twenty years of experience supporting infrastructure investments, so the role of what we call our traditional political risk insurance is certainly significant.

Our coverage protects against the risks of currency inconvertibility and transfer restriction; expropriation; war, terrorism, and civil disturbance; and breach of contract.

The reality is that, while the world looks increasingly to the private sector to take the lead in delivering infrastructure, investors and lenders are often wary of entering these relatively untested markets. The risks that concern them often relate to low confidence in the judiciary system, weak or untested regulatory frameworks, poor governance, lack of enforcement of contracts, and macroeconomic instability. In some countries, the threat of political instability, war, and civil disturbance poses a danger to physical assets and makes financing difficult and expensive.

MIGA’s guarantees help companies overcome this risk aversion, knowing they’ll be compensated in the event of a loss. But our guarantees also carry a very important intangible benefit that comes from our status as an arm of the World Bank Group: once a deal is in place, MIGA guarantees provide an added measure of security that can help keep a project stable and reinforce positive relations with host governments.

While all of our coverages have been used for infrastructure investments, I’d like to highlight that MIGA’s breach of contract coverage can be designed to cover selected contract clauses

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that are of particular concern to infrastructure investors, including performance-related clauses and payment obligations of the government related to output-based assistance and termination amounts.

CAN YOU PLEASE ELABORATE ON THE IMPACT OF PROGRAMMES THAT ARE DESIGNED TO PROMOTE FOREIGN DIRECT INVESTMENT IN SMALL AND MEDIUMSIZED ENTERPRISES? Cheese production in the West Bank, cashmerescouring in Afghanistan, bottle manufacturing in Libya, tilapia farming in Zambia – these are all very recent examples of the productive investments MIGA has supported through our Small Investment Programme.

We established this programme more than ten years ago to fill an unmet demand for political risk coverage for small investment projects that was largely unavailable from commercial insurers.

With this programme, we offer a streamlined approval process and aim to get MIGA coverage in place for investors quickly. The projects we insure under the Small Investment Programme are highly relevant for MIGA’s mission, as they are often located in markets where small investments have the potential for a much larger impact on private sector development through upstream and downstream economic linkages – as well as demonstration effects.

MYANMAR WAS ONE OF THE MOST RECENT COUNTRIES TO JOIN MIGA (2014). AS A CASE STUDY, HOW DOES MIGA FIT INTO MYANMAR’S DEVELOPMENT POLICY FRAMEWORK AND HOW MAY THE COUNTRY BENEFIT FROM ITS MIGA MEMBERSHIP? Myanmar is a country at a crossroads and we are eager to support investments that help the country succeed in its transformation. I was in the country a year ago and met with government officials, members of parliament, and the private sector to emphasise that MIGA is ready to assist Myanmar in meeting its urgent need for electricity, other infrastructure, and a thriving finance sector. These are critical elements of the country’s development policy framework.

While the government is promoting an ambitious economic reform agenda to drive stronger growth, challenges remain. Here the involvement and attention of the international community is key.

MIGA-supported investments into the country will have an important signalling effect for other investors that are watching conditions and opportunities in the country very closely. Our involvement will also ensure that investments meet social and environmental standards that are considered global best practice.

We also want to use our guarantees to support investments that have a positive impact on climate change. For this, we need investors who have feasible projects in renewable energy, mass transit, sustainable agriculture, and much more.

We urge more of these investors to bring their projects for MIGA’s consideration, as we need all hands on deck to shift the climate change trajectory. i

WHAT WILL THE FUTURE HOLD FOR MIGA – I.E. ARE THERE ANY NEW / NOVEL POLICY INITIATIVES UNDERWAY? CFI.co | Capital Finance International

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I’m very excited that we’re on the verge of announcing the first use of MIGA guarantees in the country. We may have already announced it by the time this interview is published.

We are looking very closely for ways in which we can work with institutional investors to get more capital into developing countries. As we’ve been discussing in Financing for Development circles, this is an important frontier with huge resources that we need to explore more deeply.

This past year, MIGA insured our first investment in the pension-funds sector, so we have some momentum here.

> Autumn 2015 Special:

Economic Thinkers Softening a Hard Science

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ost economists see themselves as hard scientists, analysing data and drawing conclusions upon which solid policy frameworks may be erected. However, most of their peers in the hard sciences beg to disagree and treat economists with only slightly less disdain than that reserved for sociologists and others peddling the soft disciplines.

Whilst an undoubtedly worthwhile pursuit, the study of economics does resemble a dark art: the data may be hard, their interpretation fluctuates wildly with wishful thinking, more often than not, determining the outcome. Economists who doggedly insist that theirs is a hard science compound the problem by steadfastly ignoring the human factor.

As serious stock traders well know, the movement of indices on exchanges is seldom explained or predicted by fundamentals alone. Market sentiment plays a major role with herd behaviour causing the largest price swings. The most recent example of this is offered

by China where investors drove share prices into the stratosphere only to exit the market en masse, removing its floor in the process. All this happened with barely anyone looking at the health – or lack thereof – of the equities being traded.

Human emotions are a big – but largely overlooked – part of economics. Ignore emotions at your peril. Culture is another of the great unknowns in economic science. What works in one country does not necessarily produce stellar results in another. The economists of the International Monetary Fund (IMF) have just figured this out and are now busy adjusting their recipes for success accordingly, allowing for a more bespoke approach to crises.

So far, no economist has been able to come up with a formula to end the

boom and bust nature of the prevailing capitalist model – quite possibly the worst system of economic management, except for all the others. John Maynard Keynes came close, but failed to account for the tendency of politicians to please the electorate to the detriment of national interests.

Instead of expanding state spending in lean times to lessen recessionary pains – and cutting expenditures when the going gets good – governments the world over do precisely the opposite – mostly with disastrous results. While Mr Keynes’ simple, yet elegant, rationale is surprisingly easy to grasp, it remains firmly outside the purview of the political classes.

Whereas economists are generally lousy at predicting the outcome of policy initiatives, they usually fare much better at explaining past events. French superstar economist Thomas Piketty has produced a wonderful tome filled with statistical data that clarifies how fortunes are accumulated and come to rule the world. Capital in the 21st Century explains how the 85 richest people of the world came to possess the same wealth as the 3.5 billion poorest people inhabiting the planet. Apart from suggesting a monumentally impractical global tax on wealth, Mr Piketty falls woefully short when it comes to offering a solution to the conundrum he mapped so expertly.

Still, Mr Piketty’s endeavours do provide valuable insights into the workings of an economy. The other economic thinkers featured in this issue also contributed significantly to the body of knowledge on economics. Interestingly enough, for all their genius, even the biggest minds have so far been unable to produce a universal theory of economics that stretches much beyond the elementary law of supply and demand. i

New Haven, USA: Yale University Art Gallery

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Autumn 2015 Issue

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39

> ADAM SMITH The Original Economic Thinker The year 1776 marked the dawn of modern capitalism: nothing to do with a few rebellious colonies unleashing a revolutionary war against the crown of England. It was in 1776 – 239 years ago – that Adam Smith published The Wealth of Nations: a book that marked the birth of financial understanding and left its author – a mild-mannered scholar from the east coast of Scotland – forever known as the Father of Economics.

Born in Kirkcaldy in the summer of 1723, Adam Smith quickly learned to adapt in the world. His widowed mother lived hand-to-mouth working in a mill or helping process fish in the harbour.

Deprived of a father, the young Adam Smith had to quickly assume as the man of the house. He displayed a talent for helping his mother run the home while dedicating himself to the study of Latin, mathematics, writing and history at nearby Burgh School. He quickly mastered skills that would serve him well when, at the age of 14, the intelligent young man was offered a scholarship at the University of Glasgow.

It was in Glasgow that both tutors and peers began to notice Mr Smith’s aptitude for translating complex problems into layman’s terms. By 1740 he had been urged to take his talents to Oxford where his burgeoning ingenuity could be further honed.

In 1748, Mr Smith returned to his native Scotland, delivering public lectures at the University of Edinburgh where he was discovered

by David Hume, the philosopher and economist.

The two became great friends. Mr Hume helped him to write The Theory of Moral Sentiments in which Adam Smith examined human morality.

Although the book didn’t change the world, it did set him on a new path. Before long, Mr Smith had become the tutor of the future Duke of Buccleuch whom he accompanied on his travels to France. It was during these trips that Adam Smith rubbed shoulders with some of the most known thinkers of his generation such as Benjamin Franklin and Anne-Robert-Jacques Turgot.

While forging these chance friendships, Adam Smith spent time examining the infrastructure of other countries, allowing his growing appetite for economics to blossom. In his usual style, he quickly grasped the complexity of it all, and then set about compiling something that really would change the world.

Despite his analytical mind and gift for swift interpretation, it took nine years to publish An Inquiry into the Nature and Causes of the Wealth of Nations. Above all else, Adam Smith was a 40

perfectionist. He always had been. Perfection takes time, so he didn’t allow the manuscript to leave his desk until he knew it was ready.

The book was an instant sensation. It focused the great minds of a generation on what really made economies tick.

At the time, a country’s wealth was largely determined by how much gold it had locked away in vaults. In The Wealth of Nations, however, Smith had determined that it was in fact the sum of production and commerce (known today as gross national product, or GDP) which accounted for financial worth. He also explained division of labour and the productive capacity.

His work could not have been better timed.

Great Britain was poised and twitching in the starting blocks of the Industrial Revolution, and, suddenly, here was the book – often playfully labelled The Capitalists’ Bible – that provided a practical guide on how to leverage capitalism’s inner logic. In a nutshell, The Wealth of Nations explains how and why free-market economies become not only the most prosperous, but also the most beneficial, to society and the people therein.

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It’s hard to imagine if Adam Smith ever fully appreciated the unprecedented and lasting impact his classic book would have on the world of economics. It remains, to this day, one of the most influential works ever published. And although some critics at the time complained Adam Smith had not, in fact, originated many of the ideas within the book’s pages, he was undoubtedly the first person ever to compile and join them, together with his own philosophies, into a format that easily explained the intricate workings of a contemporary economy.

Fine restaurants may serve as a simple analogy.

Nearly all the world’s best chefs are “classically trained,” in as much as they have all benefited from a thorough schooling in the cooking of the classic dishes. In the same way, most of the leading economists of our time will have spent their formative years with their noses in the pages of Adam Smith’s work. A copy of his book even had a permanent place in the handbag of the late British Prime Minister, Margaret Thatcher – a fact which is often considered to be the reason his image features on the back of a £20 banknote.

Adam Smith isn’t just regarded as a great economic thinker: he was the original economic thinker.

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> DAMBISA MOYO Looking from a Unique Angle Growing up in Zambia, amid a failing economy where prospects were far from plentiful, Dambisa Moyo was constantly told that she would not be able to achieve anything. But when her dream of being educated at places like Harvard or Oxford was laughed at, it was all the incentive she needed to succeed.

Dedicating her younger years to education, the determined Ms Moyo became a chemistry student at the University of Zambia, being able to complete her degree through a scholarship at Washington’s American University where she landed a Chemistry BSc. This was quickly followed by a Masters in Finance. Not content with reaching impressive academic heights, Ms Moyo then headed to Harvard where she acquired a Master of Public Administration degree.

Most scholars would have stopped there, realising their CV would make them profoundly employable.

Not Dambisa Moyo. She had one more mountain to climb before believing her education to be complete – Oxford. With the doctoral dissertation Savings Rates in Developing Countries, she gained a PhD in Economics from St Antony’s College after studying macroeconomics – a subject she would later become a world authority on.

Ms Moyo then served a demanding apprenticeship as a consultant at the World Bank for two years.

Before that, she worked for just under a decade at Goldman Sachs as a research economist and consultant. Throughout her time with both organisations she kept herself below the radar, content with using the experience to learn her trade thoroughly. Then, six years ago, she was propelled onto the world stage with her first book Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. It was an instant hit and became a New York Times bestseller, as would two more of her works.

Within months of the book flying off the shelves, she was being courted by some of the world’s biggest financial institutions. Ms Moyo now sits on the board of Barclays, Lundin Petroleum, Barrick Gold, and SABMiller. Although her tireless work has taken her to more than 70 countries, Ms Moyo proudly describes herself as one of the original NyLon brigade, splitting most of her time between New York and London.

Such has been the impact of her books, that she was recently named in the exclusive Time magazine list of the 100 most influential people in the world.

But what is the essence of that success? What sets Dambisa Moyo apart from her peers? No doubt many commentators would be quick to suggest it is the very fact that she has risen from a start in life

that doesn’t normally lead to such dizzying heights, or that she has carried the flag for womankind through the thick mire of a largely male-dominated environment. Perhaps there is a small element to be mined from both Column A and Column B in that respect, but the most obvious answer comes from Ms Moyo’s education – science.

The 46-year-old author can offer such tantalisingly unique viewpoints on the financial infrastructure of the US and UK because she sees economics as a science, rather than a guessing game full of opinions and well-informed conjecture. “The gap between science and finance is narrow,” she declares at every opportunity. “It’s not a science in its purest form, but we do believe there are closeform solutions to many of the world’s economic problems, which means we can take a scientific approach.”

It is this modus operandi which gives her an almost unique angle on translating market trends, regulatory matters, and world economics into their anticipated impacts on business. Add this to her expert insights into the frontier and emerging markets, and it isn’t difficult to see why she’s a leader in her field.

This also explains the runaway success of her books. Not only can Ms Moyo offer discerning CFI.co | Capital Finance International

dialogue; she can also interlace it with her pet hate – international aid. She has long been a critic of what she describes as “short term myopic policy” and the damage it can cause.

Her first book – Dead Aid – is a detailed explanation of the wastefulness involved in huge foreign aid operations and the multiple limitations faced when trying to simultaneously reduce poverty yet create some form of economic stability and growth. She concedes that the failures in foreign policies are purely unintended consequences, but those consequences are failures nonetheless.

Not one to retreat to the shadows when controversy casts its light, Dambisa Moyo has also waded in to a recent polarising debate involving China’s colossal business interests in Africa. The adopted New Yorker comes down on the side of China when it comes to deciding who possesses the best policy for Africa. She says Africa has the commodities that China needs, and China is best place to provide the infrastructure that Africa needs. They are, she says, the best match.

Before considering if Ms Moyo deserves economic thinker status, remember this… she rose from nothing to become one of the most influential thinkers on the planet. All because people told her she couldn’t.

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> FRANCIS FUKUYAMA Success and Failure Explained When Francis Fukuyama penned the first draft of his book The End of History and the Last Man in 1989, he was a little-known academic who had kept pretty much under the radar since graduating from Harvard with a PhD in Political Science, then slipping almost unnoticed into the RAND Corporation – a (in)famous US think-tank.

However, within months of the publication of his book in 1992, the then 40-year-old Yoshihiro Francis Fukuyama suddenly became one of the biggest sensations in the world of politics and economics. His work flew off the shelves, catapulting the quiet and studious man who grew up in Manhattan onto the world stage. The End of History and the Last Man was – and still is – regarded as the seminal post-Cold War thesis hailing a triumph for liberal democracy in the face of a rapidly-diminishing Soviet Union.

The Chicago born academic’s joy with the success of his well-received work was, however, short lived.

Most people would have basked in their fifteen minutes of fame and carried on with their day-today work, reasonably content at the prospect of being a one-hit wonder. Not Fukuyama. Realising he had a talent for economics and political science that people were prepared to listen to, he set about refining his knowledge and views in order to make a difference to the world.

However, the sudden success of The End of History and the Last Man is the one thing that keeps rearing its head and haunts Fukuyama at every turn. No matter what he has achieved over the last two decades, he is relentlessly questioned about the book.

Although undoubtedly defined by something he wrote half a lifetime ago, Mr Fukuyama is still warm and engaging with anyone who asks him about the book, even if the same question is asked a thousand times over. Instead, he maintains that the principles set out in the work are as relevant today as they were in 1992. It’s just that he’s grown up an awful lot since then.

One thing he does appear to grow tired of is constantly having to set the record straight about the contents of The End of History and the Last Man, and the preceding 1989 essay The End of History. The backlash from critics (notably from many who hadn’t read either of the works) was so severe that it even spawned its own phrase: The Fukuyama Scale. The name was coined by peers to jokingly assess the level of wild denunciation from critics who had never even seen what they were condemning.

“People still misunderstand in a fundamental way what I argued,” Mr Fukuyama says, referring 42

to the naysayers who are still keen to assail his book.

It’s not as if he hasn’t written anything since.

Quite the contrary. In fact, Mr Fukuyama has enjoyed runaway success with many tomes currently straining the shelves of the economics section in libraries across the world. His latest offering – Political Order and Political Decay (a follow-up to his well-received The Origins of Political Order) – examines how some countries have thrived after creating highly structured governments while others struggle continually.

It’s heavy going, weighing in at some 658 pages, and explores whether or not it is possible to have an effective democracy before establishing a rule of law – the opposite of which has generally proven to be the more successful formula.

Thankfully for the author, it has landed without the triumphant fireworks and subsequent venom that greeted his first hardback. Obviously delighted, he says the latest book “fills in all the things that I didn’t know when I got all that fame”.

It’s a tellingly witty response that does little to hide the fact Mr Fukuyama feels his thinking has matured immensely.

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The reason his current work sets him apart as a hero of economics is his unique approach to solving the world’s problems. Gone are the ideas that, eventually, all failing countries will only be set upon the path to success by becoming liberal democracies. Instead, he now suggests that even the world’s most celebrated free and just societies are fragile enough to suffer from political decay.

Everywhere he goes, Mr Fukuyama tries to emphasise his belief that Islam is not a threat to western democracy. It is a view born from his opposition to the Iraq War and his public denunciation of the “neoconservative agenda of the Bush administration.” Instead, he maintains the US has a responsibility to kindle economic (and therefore political) development in order to gain a better understanding of other countries.

This, he stresses, can be done by setting an example and by providing education and foreign aid rather than looking to military intervention.

Yoshihiro Francis Fukuyama – Frank to his friends – is by no means a fashionable economist.

He doesn’t ruffle feathers, he doesn’t seek publicity, and rarely courts controversy lightly, but his humanitarian views in a tough political environment have made him a cult figure to many.

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> HERNANDO DE SOTO Battling the Bureaucrats Few economists attract the label Man of the People.

But when dealing with a well-respected figure like Hernando de Soto – a man who describes himself as a third-worlder – it becomes instantly clear what he’s about.

Mr De Soto is not a radical. He doesn’t stand at the vanguard of marches against the machine, nor does he thrust himself into the limelight at every opportunity. Instead, he’s one of life’s real thinkers: a man who understands that the world economy is exactly that – the entire world and not a make-believe financial axis that connects New York and London to the exclusion of all else.

The head of an internationally-acclaimed thinktank in his native Peru, 74-year-old De Soto is obsessed with framework and structure. As president of the Lima-based Institute for Liberty and Democracy (ILD), he argues that countries throughout the world cannot sustain a strong market economy without a comprehensive record of economic information and, above all, property ownership. Without this basic formal structure, he stresses that small businesses throughout the world lack the ability and the opportunity to reach their full potential. Fair, long-term growth, in Mr De Soto’s eyes, comes from sound infrastructure.

Born the son of a Peruvian diplomat in 1941, his family was exiled to Europe following the 1948 military coup. The move saw him benefit from an excellent education at the International School of Geneva, Switzerland, before advancing to the Graduate Institute of International Studies. By the age of 38, he returned to the country of his birth where he became an economic consultant and advisor.

By 1988, Mr De Soto had become a key figure at the ILD where he provided fundamental contributions to a raft of changes that resulted in significant reforms to Peru’s economic structure.

The most noteworthy achievement was the administrative reform of Peru’s shambolic property system – a move which has now seen deeds and titles given to more than a million families and assisted almost half a million private companies become part of a recognised economic structure.

It was Mr De Soto’s determination to remove complicated bureaucracy out of the system. This stroke of genius enabled the ILD to become such a dramatic force for change in Peru.

Of course, Mr De Soto’s heroic status on the economic landscape isn’t limited to his beloved homeland. He has travelled the world to deliver his ideas and lend his skills to both organisations and governments, allowing dozens of countries to advance with his reforms on property rights.

Surprisingly, his approach isn’t always as methodical as one might expect from such a proponent of rigid structure. While working in Bali, he was walking from one rice field to another where none of the officials really knew who owned what or even where the boundaries were. What he did notice was that the farmers’ dogs appeared to have a better clue. “Humans really had no idea who owned what, but,” says Mr De Soto, “the Indonesian dogs – ignorant of formal law – were positive about which assets their masters controlled.”

Often, comparisons are drawn to Robin Hood.

True, he manages to give to the poor, and he has a trusty band of merry men at his Lima institute, but stealing from the rich is simply not his style. And until someone can work “tactful and thoughtful redistribution of wealth while protecting the rights and lands of hard working small enterprises” into a song, the similarities may have to end there.

Mr De Soto would be embarrassed if anyone were to suggest he is some kind of folk hero. Instead, Mr De Soto is merely content to continue his seemingly endless quest for fairness.

Although now an anecdote which Mr De Soto has recited countless times, the story of the Indonesian dogs is now used as a symbol to represent the ILD’s approach to determining boundaries from the realities which already exist on the ground.

For all his loveable quirks and charming ideals, it would be pure madness to imagine that Mr De Soto has no critics. There are many who wave an indignant hand at his apparent overthinking of property legislation and land rights. Many more quickly dismiss his championing of the poor as fairy-tale politics. But when you encounter a man with a mind as sharp and measured as Mr De Soto – a person who was described by former US President Bill Clinton as “the world’s greatest living economist,” then he certainly deserves to be taken very seriously.

It is this ability to draw a visible path between the impoverished people of the world to the leviathan economies dominating the globe’s financial institutions that makes Mr De Soto’s work so endearing.

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> JOHN MAYNARD KEYNES A Simple Theory Hard to Follow When commentators discuss the most important people of the 20th century, names like Albert Einstein, Franklin D Roosevelt, and Winston Churchill are usually the first out of the hat. From the world of economics, add to that list John Maynard Keynes.

No doubt those from outside the circle of business and finance might be forgiven for raising an eyebrow and muttering “John who?”, but for anyone with even so much as a passing interest in economics, the name John Maynard Keynes carries nothing short of legendary status.

Born on June 5, 1883, in Cambridge, Mr Keynes undoubtedly came into this world with the proverbial silver spoon duly provided for. His wealthy father was a well-to-do philosopher and economist, while his mother was a high-flying local politician who went on to become the city’s first female mayor.

Both parents were fanatical academics and packed their son off to Eton at the first opportunity.

The promising lad was a studious pupil and excelled at the famous Berkshire boarding school before gaining a place at Cambridge University where he studied mathematics - all the while rubbing shoulders with the intellectuals of the exclusive Bloomsbury Group. It was here that Mr Keynes began taking an interest in the largescale finances of European countries.

When war broke out in 1914, Mr Keynes was appointed to the Treasury where he tirelessly pondered over the nation’s coffers and worked hard at keeping Britain’s war chest filled. His experiences led him to publish the post-war phenomenon The Economic Consequences of the Peace in which he slammed inflated demands imposed on the defeated German Reich for war reparations.

Within the pages, he also somewhat prophetically suggested that the economic downfall of a defeated foe would only fan the flames of a desire to seek revenge. It was likely, he argued, that Germany would rise again, seeking further hostilities. Many agreed with his point of view, but few believed it could possibly happen.

However, only 21 years later Britain found itself at war with Germany all over again.

Mr Keynes’ first book had been an unexpected sensation and gave its author world-wide fame.

It also filled his already solid bank account with a small fortune. With his acumen for finance, he used the cash to play the markets and amass considerable riches. He increased his private wealth five-fold, even while the UK stock markets crashed.

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Speculation was his out-and-out forte. Yet he was a careful man and a measured thinker, not the sort of loose-cannon gambler often seen playing the numbers. He would often offer advice to novices by stating, in typically brilliant fashion: “Markets can remain irrational far longer than you or I can remain solvent.”

times of downturn, governments should look to use borrowed money and spend it in order to boost economic activity before shaving off the proceeds of the resulting growth to shrink the debt. In other words, tax lightly and spend heavily during hard times and jack up taxes and cut spending in boom times.

To his credit, Keynes didn’t squander his millions. As bursar of Kings College, much of his wealth was funnelled straight into the university.

At the time, it seemed a wild and dangerous idea to many, but it is now a virtual template for most of the modern world’s economies, even if politicians mostly get the sequence of the policy wrong and then heap blame onto John M Keynes when thing fail to work out as promised.

He soon married Russian ballerina and socialite Lydia Lopokova, became a leading arts patron, and was a prominent board member of numerous successful companies. He had it all. But Keynes wasn’t done yet.

In 1936, he published The General Theory of Employment. It offered an insight like no other and firmly established John Maynard Keynes as Britain’s most influential economic thinker since Adam Smith. To this day, The General Theory of Employment is widely regarded as the benchmark for economic thought.

For Mr Keynes, the runaway success of the book did not even visit him with slightest scent of surprise – he’d already sniffed out what a triumph it would be long before. In a letter to his friend George Bernard Shaw, he wrote: “I believe myself to be writing a book on economic theory which will largely revolutionise – not, I suppose, at once but in the course of the next ten years – how the world thinks about economic problems.”

One of his key proposals was the idea that, in CFI.co | Capital Finance International

However, unlike his incredibly successful book, John Maynard Keynes’ greatest contribution to the western world is less well known. As the final shots of the Second World War rang through the air, he set about drawing up plans for the economic shape of post-war Britain and the USA. Both countries were still heavily engaged in fighting in several theatres of war, but Mr Keynes was keen to stay one step ahead and avert a global crisis. He led the British delegation to the Bretton Woods Conference in the US where he instigated much of the planning of what would become the International Monetary Fund and the World Bank.

John Maynard Keynes was a remarkable man, and deserves his place in the Hall of Fame of the world’s greatest thinkers. Not only did he lay the foundation stones of modern economics, he also helped save the world from a post-war economic meltdown.

Autumn 2015 Issue

> JOSEPH STIGLITZ The Social Dimension of Economics After receiving the Nobel Memorial Prize for Economics in 2001, American university professor Joseph Stiglitz dedicated his working life to making the world a better place. As ambitions go, it may be more suited to a beauty pageant speech than the aspirations of one of the world’s most influential economists. But for all his critics – of which Dr Stiglitz has assembled a fair collection – there can be few among them who would deny the 72-year-old has thrown himself behind many a social crusade, holding aloft the flag of economic justice.

Like his chosen field, Mr Stiglitz is rather complicated. To understand the man, one needs to understand the causes he fights for. Most recently, he’s been a vociferous antagonist in debates over the Greek economy and also an active participant in the I Foro Social del 15M Madrid marches in Spain. Cut him open, and he would bleed anti-austerity.

It’s almost implausible to imagine that someone with a CV laced with potent measures of the world’s most hard-nosed tasks – he is a former member and chairman of the US president’s Council of Economic Advisers as well as a former senior vice president and chief economist of the World Bank – can still have a conscience almost overflowing with compassion.

Yet, Mr Stiglitz finds himself rallying to the call of listing economic ships the world over, no matter how rough the seas that surround them. “I entered economics with the hope that it might enable me to do something about unemployment, poverty, and discrimination,” he confessed to the gathered masses at his postNobel Award lecture.

“As an economic researcher, I have been lucky enough to hit upon some ideas that I think do enhance our understanding of these phenomena.

As an educator, I have been lucky enough to have had the opportunity to reduce some of the asymmetries of information, especially concerning what the new information paradigm and other developments in modern economic science have to say about these phenomena, and to have had some first rate students who themselves have pushed the research agenda forward.”

“As an individual, I have however not been content just to let others translate these ideas into practice. I have had the good fortune to be able to do so myself, as a public servant both in the American government and at the World Bank.

We have the good fortune to live in democracies, in which individuals can fight for their perception of what a better world might be like.”

“We as academics have the good fortune to be further protected by our academic freedom. With freedom comes responsibility: the responsibility to use that freedom to do what we can to ensure that the world of the future be one in which there is not only greater economic prosperity, but also more social justice.”

That speech was delivered fourteen years ago and he has stuck to it like a living epitaph ever since. Lately, Mr Stiglitz has been travelling the globe offering counsel. Recently, he even found himself in London where he was able to give an economist’s explanation to the UK Labour Party’s apparent and sudden lurch to the left in search of a new direction, following a catastrophic defeat in the May general election.

“I am not surprised at all that there is a demand for a strong anti-austerity movement around increased concern about inequality,” he said, weighing in to the Labour leadership debate in London. “The promises of New Labour in the UK and of the Clintonites in the US have been a disappointment.”

“Unfortunately the centre-left parties have wimped out. They have joined in saying ‘Oh yes, we have to have a kinder version of austerity, a milder version of austerity.’ But one of the disappointments of the CFI.co | Capital Finance International

Eurozone, and of Europe more broadly, is that you have these elections in which centre-left parties get elected only to promptly cave in to German demands. They then do a rhetoric that is gentler but the outcome is not much gentler.”

As well as his tireless pursuit of social justice, Mr Stiglitz reserves particular venom for one of his pet hates – rating agencies. He often shames them as the co-conspirators of banks during the financial crisis, stating “the banks could not have done what they did without the complicity of the rating agencies.”

Of course, the world is full of people willing to point the finger at rating agencies amid the economic turmoil that has held its tight grip in the past decade. However, respect is due to Mr Stiglitz as the original agitator of the agencies after warning of the dangers back in 2001.

It is this uncanny ability to predict the future that has propelled Mr Stiglitz into the upper echelons of the financial world’s elite figures. A wealth of academic citations have seen him branded the fourth most influential economist in the world, and a 2011 study by Time magazine named him as one of the Top 100 most influential people alive. That’s some achievement for the son of a teacher and insurance salesman from Indiana.

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> PAUL KRUGMAN Economics for Dummies It is not often that a leading light of economics will admit the inspiration behind their chosen path came straight out of a science fiction novel. But for New Yorker Paul Krugman – widely lauded as one of the world’s leading thinkers on international trade – it was the work of fantasy writer Isaac Asminov that placed his career on the launch pad.

To some, he’s an outspoken and often churlish angry bull, thundering his way around America’s financial china shops while snorting disapproval through his famously opinionated column in the New York Times. Yet, to many, he is a breath of fresh air in an otherwise stuffy environment where his admirers regard him as something of a prophet in his field.

The man himself, however, insists he’s a private, quiet individual who shrinks away from as much social interaction as possible in order to concentrate on being one of the United States’ most respected financial commentators. That said, a glittering career as a leader in his field may not have materialised had it not been for a fictional mathematician who was the leading character of Asminov’s seminal 1960s sci-fi blockbuster Foundation Series.

Such was Krugman’s fascination with Asminov’s colourful number-cruncher Hari Seldon and his complicated concept of mathematical sociology, that he graduated from John F Kennedy High School on the south shore of Long Island with nothing but a place at Yale University on his mind and the desire to save civilisation with the use of ‘psychohistory’.

Sadly, the practice of psyhcohistory is as much a fantasy as hover boards and time travel, so he looked to studying the subject he felt was closest to his childhood hero – economics.

Thankfully, his career choice paid off. More people in New York know the name Paul Krugman than do Hari Seldon. Much of that recognition is largely down to his brilliant work with the New York Times in which he manages to set the financial thinking agenda twice weekly.

Often Mr Krugman manages to steer his readers into understanding a subtle but important detail they may have overlooked.

During the televised Republican candidate debate, for instance, the wily Krugman noted that the “men who would be president” mentioned God nineteen times, and yet the US economy warranted a mere ten nods. It was a startling fact that had bypassed all but one witness – the man who was able to bring it to the top of the news list, and share it with anyone prepared to listen – pretty much anyone interested in world economics.

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His writing isn’t just restricted to newspaper columns. Dr Krugman has penned some twenty books revered by scholars throughout the US and Europe. His most recent – End This Depression Now! – offers up thought-provoking challenges to almost everything that has been learned from the financial ups and downs of the last century.

The work was well received and is hailed as being as relevant in 2015 as it was when it was first published in 2012.

Dr Krugman’s greatest achievement, however, stems from his remarkable work on “new trade theory” which offers a contemporary take on the existing trade theory. Original thinking on this allows scholars to understand how countries with diverse productivity and contrasting resources can forge strong economies.

Dr Krugman has dedicated great swathes of his life to bringing modern conjecture to the science and mathematics of trade theory. In doing so, he has earned the respect of his peers who now widely recognise him as the father of the new trade theory.

It was his dedication to delivering the new theory to the financial world which led to the ultimate honour of being handed the Nobel Prize in Economics in 2008. This represented the pinnacle of a long career which has CFI.co | Capital Finance International

illuminated the dark arts of economics and finance, something that was reflected in the awards’ committee statement which read: “By having integrated economies of scale into explicit general equilibrium models, Paul Krugman has deepened our understanding of the determinants of trade and the location of economic activity.”

It was a glorious moment for one of the most respected economists of his generation, and something he proudly reflected during his Nobel Prize Lecture, which he delivered at Princeton University. “Whether the influence of increasing returns on trade and geography is rising or falling, one thing is clear: much was learned from the intellectual revolution that brought increasing returns into the heart of how we think about the world economy,” he told a packed theatre.

“It wasn’t just that economists could make sense of previously puzzling data, we found ourselves able to see things that had previously been in an intellectual blind spot. Many people contributed to this process of enlightenment; I’m proud to have been a part of the journey.”

A Nobel Prize, a column in the New York Times, twenty published books, and an uncanny ability to enable even the simplest among us understand economics – now that’s a hero.

Autumn 2015 Issue

> ROBERT J SHILLER Mastering Data One of the elite Sterling professors at Yale University, he predicted both the dot-com bubble and the collapse of the housing market. Two years ago, he was the joint recipient of a Nobel Prize.

There are few people more on top of their game in the world of economics than Robert J Shiller.

Right now, the 69-year-old son of an engineer from Detroit is hot property. Governments, thinktanks, and financial bodies the world over queue for his counsel. And that’s no surprise, given his startling insight into the patterns of world economics, coupled with an uncanny ability to always be right.

Back in 2005, Mr Shiller started urging caution as house prices on both sides of the Atlantic began to soar, with no real end in sight for how high they might go. On CNBC, Mr Shiller firmly laid down his belief that house values could not surpass long-term inflation because values were likely to be pulled more towards building costs and their attachment to typical economic profit.

Basically, on live television, he had predicted the housing bubble.

Remarkably, people didn’t buy it. Money was still being made during the property boom, and raw greed itself may have caused a mass blindness to the warnings. Sadly, and despite Mr Shiller stating it would hit within a year to eighteen months, many investors had overlooked one particular devil in the detail that would leave them ruing the day they hadn’t bowed to his wisdom. The general price level of nationwide real estate in the US tends not to accurately reveal itself immediately. This is due to a – at the time – little known lag in price prediction of about twelve months. People didn’t believe what Mr Shiller had predicted with frightening accuracy, because they couldn’t see it.

In hindsight, the disbelief was itself unbelievable, considering that Mr Shiller had form for extraordinary predictions. Previously, he had watched cautiously as the NASDAQ Composite Index began to ascend to what he could see was a dramatic spike, and not a whole new level of wealth created by a raft of companies putting “.com” at the end of their name. He immediately hit the alarm button, urging caution and highlighting the financial world’s apparent lack of a Plan B. “People still place too much confidence in the markets,” he said, soon after the dot-com dust had settled. “They have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes.”

Years later, as stock exchanges began to tumble, the words from Mr Shiller’s best-selling book Irrational Exuberance (2005) came back to haunt the markets. As part of his warning of a house price collapse, he stressed: “A long-run consequence could be a decline in consumer and business confidence, and another, possibly, worldwide recession.” Like a modern-day Nostradamus, he’s called all the shots with exceptional veracity.

In recent years, Mr Shiller hasn’t lost any of his ability to make prophecies. He’s been completely engrossed in spotting trends that will allow the stock markets to identify the mid-term moves in asset prices that will allow exchanges to remain stable. Eventually, his work could become like a magical back-up, ever in line with Mr Shiller’s obsession with having a Plan B in place.

But that doesn’t mean his work hasn’t already been spellbinding. Far from it. The Nobel Prize Committee were so impressed with Mr Shiller’s work on trend spotting in asset markets that they awarded him the 2013 Nobel Memorial Prize in Economic Sciences, together with Eugene F Fama and Lars Peter Hansen.

Mr Shiller’s enigmatic appeal isn’t restricted to what he can produce after weeks of pondering over graphs, charts, and assorted historical data.

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In this modern digital age, he possesses some serious clout as a practitioner of social media.

His following on Twitter is a staggering 61,000.

That’s an impressive figure for someone who only follows 23 accounts himself, and has written just 124 tweets in little over three years.

He also keeps the professional world well informed by making all his research and data available online – free of charge. Economists the world over send the Internet into a frenzy the moment he uploads his latest figures.

Day-to-day, he controls two charts which are in themselves financial superstars. Firstly, the CAPE Ratio (cyclically-adjusted price-earnings) offers a reliable prediction of returns over periods of up to ten years. The second is closer to Mr Shiller’s heart – a long-term forecast on house prices, with some intricate adjustments for inflation. They may not sound like the sexiest charts in the world, but the clamour to see the data they provide is almost inconceivable.

Robert J Shiller is a man who has the complete respect of the financial world. And so he should – he is the economist equivalent of a crystal ball. And what a better place the world might be if more people had heeded his advice over the years.

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> THOMAS PIKETTY Courting Controversy If there was one person who could be likened to a rock star in the world of economics, then Thomas Piketty is it. He’s a showman, an artist, and professional ruffler of feathers. Just like any rock star, he also has a huge fan base and an army of followers who hang on his every word. But, just as everyone has their own particular style in music, there are many who find Mr Piketty leaves an uneasy taste on the more sophisticated palate. The way he plays up to the adulation and struts like a cocky lead singer doesn’t always sit well among his peers.

But does that necessarily have to be viewed as a bad thing? In a world that is notoriously grey and often profoundly dull, isn’t the odd colourful character, waving the proverbial microphone stand at the establishment, a welcome crash of the cymbals in an otherwise sombre ensemble?

There are many who think so, and just as many who think not.

One thing for certain with Thomas Piketty, however, remains the fact that he isn’t going away.

He can’t. He gets too many things right. Whether the establishment likes him or not, it can’t be denied that Mr Piketty has a real knack for hitting the right notes in the financial world.

At 44, several peers regard him as a young upstart. Yet, Mr Piketty boasts an impressive list of qualifications betraying a lifetime of resolute study that cannot go ignored. After scientific preparatory classes, he gained a Baccalaureate by the age of 18 before entering mathematics and economics studies at École Normale Supérieure.

By age 22, he had a PhD and the undying praise of the London School of Economics before crossing the Atlantic to become an assistant professor at the Massachusetts Institute of Technology. He currently holds professor status at both the Paris School of Economics and the London School of Economics, as well as being directeur d’études at the École des Hautes Études en Sciences Sociales in France.

As left wing as they come, Mr Piketty penned his anti-capitalist thoughts in the 577-page book Capital in the 21st Century. In the tome, he rails against a world obsessed with wealth accumulation and clarifies this obsession’s effects on global inequality. He clearly has a point – the book sold 1.5 million copies worldwide in five languages, catapulting him to even more international stardom and guaranteeing him top billing as he delivers the Nelson Mandela Lecture in Johannesburg later this year.

With such a colossal number of people buying into Piketty’s views, there must be something in his outspoken theories.

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His protestations against unfettered capitalism are based on impressive research. Mr Piketty has ploughed through a century’s worth of income and wealth data for the United States and Great Britain, as well as about 150 years of French tax returns to arrive at his conclusions.

His work hinges on rates of return and growth.

Mr Piketty charts a pronounced rise in wealth inequality up to the 1929 Great Depression when disparities abruptly lessened only to stabilise during the period of post-war global prosperity.

From the 1970s, the gap has gradually broadened again reaching similar levels to those recorded in 1929.

Mr Piketty argues that a critical point is reached once the rate of return on capital surpasses the clip of overall economic growth as expressed by the productivity of labour. This, says the Parisian, is when inequality begins to rise as capital reaps increasingly higher rewards than labour. His narrative will often cite the US as the classic example to prove this point, reminding his followers that more than a third of US wealth is now owned by just 1% of the population.

In short, Mr Piketty’s life goal is to urge the world to restrain its penchant for prizing the accumulation of capital over and above the value of productive labour, thus recognising that rising inequality is not an accidental by-product of capitalism, but is in fact an essential part of a skewed system which, left to its own devices, tends to self-destruct.

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As well as calling for the state to redress wealth disparity – and thus save capitalism from its internal contradictions (thank you, Karl) – Mr Piketty also proposes a supranational, and very polarising, solution: a global tax on wealth. As popular as his beliefs are, he has plenty of experts queuing up to shoot him down.

Remarkably, liberal economist and Nobel Prize winner Paul Krugman laid down his Piketty flag and tore into the Frenchman’s latest book – an English language release of his 1997 effort The Economics of Inequality – as it climbed the hardback charts. Normally a reliable banner man of Piketty, Mr Krugman took issue with the fact that his counterpart originally wrote the work while in his twenties and was re-releasing it with very few changes, almost going as far as suggesting it was a lazy attempt to rake in some book sales.

“I’m sorry to be so negative about a book by such an important figure in our economic thinking,” slammed Krugman. “Releasing this youthful effort as if it were a new contribution does a disservice to readers and I’d argue that with the author himself.” Mr Krugman, however, utterly failed to find fault with any of Mr Piketty’s findings and conclusions.

Love him or loathe him, you can’t argue that such a controversy-prone figure as Thomas Piketty has a place in the hall of fame of modern economics.

Autumn 2015 Issue

> ZHU MIN IMF’s Good Cop The International Monetary Fund’s (IMF) globetrotting deputy managing director conducts much of his business 36,000ft up in the air. He has to. With about forty trips all over the world every year, his feet rarely touch the ground.

That’s not to say, the man’s head is ever in the clouds. Far from it. Despite constantly bouncing between time zones – and with jet-lag elevated to a lifestyle – Zhu Min is widely respected as possessing one of the sharpest minds in the world of high-stakes economics.

Mr Min was selected to become one of the IMF’s four deputies because of his savvy acumen and unwavering energy – the spritely 63-year-old has always been known for having the zeal not unlike that exhibited by the energizer bunny. And, despite the odd joke that he doesn’t even sleep, Mr Min is a very popular character, known for being the friendly face – or good cop – of one of the world’s most imposing financial institutions.

Wherever he lands in the world, and no matter how far he has travelled, there’s always a warm handshake at the end of his extended arm. Here is a man who can disarm even the coldest of people with a display of genuine charm.

There are times, however, when Mr Min finds it necessary to shroud his famed empathy with a mantle of ice. Recently, the Greek bailout has regularly wandered into his crosshairs. In fact, he was the one holding the fuse for the cannon that fired warning shots across the bows of European leaders earlier this year. With heavy criticism for the terms of the latest agreement over Greece’s colossal debts, Mr Min and the IMF slammed any suggestion that the ailing country’s new deal would work.

Mr Min’s IMF statement read: “Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics.”

“The financing need through end-2018 is now estimated at €85bn and debt is expected to peak at close to 200 per cent of GDP in the next two years, provided that there is an early agreement on a programme. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

Essentially, Mr Min and his colleagues were suggesting Greece’s European counterparts had bottled their bailout in strict terms that allow the

beleaguered nation no chance of standing on its own feet again. Falling just short of actually tapping on Angela Merkel’s kitchen window and accusing her of shirking responsibility, the statement went on: “Greece is expected to maintain primary surpluses for the next several decades of 3.5% of GDP. Few countries have managed to do that. The reversal of key public sector reforms already in place— notably pension and civil service reforms—without yet any specification of alternative reforms raises concerns about Greece’s ability to reach this target.”

The solution, in Mr Min’s eyes, is abundantly clear: give the Greeks at least three decades of grace before extracting payments. This is not an approach that will likely spark a tickertape parade on the streets of Brussels. However, it did get world’s economic powerhouses thinking. And that’s precisely what Mr Min brings to the party – he plants the seeds of brilliant, yet not always popular, ideas that allow nations to find their own solutions. Critics would call it manipulative, fans see it as a sign of genius. Either way, Mr Min gets things done.

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He is exceptionally modest in trumpeting his own success. Having been born into relative privilege in Shanghai, he was forced to drop out of school following the unveiling, in 1966, of Chairman Mao’s Sixteen Points that unleashed an orgy of violence under the banner of the Cultural Revolution.

Mr Min worked in a food processing factory for a decade, before the universities were reopened in 1977, giving him an opportunity to restart his life. Mr Min’s parents urged him to study economics, but they both passed away during his time at Fudan University. Mr Min will often say that the biggest tragedy of his life was how his beloved parents did not get to see their boy graduate, move on to Princeton University, become deputy governor of the Chinese central bank, and then hop on board of one of the world’s most powerful financial institutions.

Despite his sadness, Mr Min has few regrets.

Instead, he carries sincere hope that his life’s tale has, and may continue to, inspire many more Chinese to bring their skills in economics to the world stage.

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> Europe:

A United Europe - The End of the Beginning

By Wim Romeijn

There are only so many ways to run a successful economy. Reinventing the wheel – it has been tried many a time – usually does not provide for a model with improved roundness. A liberal Keynesian model with moderate, but crucial, state intervention seems to work best. Mr Adam Smith’s invisible hand is helped along a bit to provide for a modicum of added social benefits it may otherwise not be inclined to produce. A fair and firm taxation system compensates for the hand’s natural tendency to concentrate wealth while ensuring that those who simply cannot generate an income may subsist in relative comfort, shielded from the vagaries of life in the jungle.

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Autumn 2015 Issue

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ome to, but not the birthplace of, neoliberal thought, the United States in the early 1980s gave up on Keynes and embraced the likes of Friedman and Hayek to find ways of stimulating economic growth. Privatisation and deregulation – previously ignored concepts – were elevated to policy objectives. Government should let go of the hand and let society fend for itself. Each person and business was told to pursue happiness and profit as best they could. The Me Era had arrived. Societal compassion, formerly a sign of common decency, was now frowned upon with those arguing for the maintenance of a safety net to catch those unable to keep afloat, considered quaint and out of touch with reality.

Soon enough, the fad crossed the Atlantic to land via Great Britain on the shores of continental Europe where it was promptly embraced by nearly all but the ever-recalcitrant French. Welfare states that had taken decades to build were demolished in short order as people clamoured for slightly more than their fair share of the pie. Deregulated economies surged ahead as the public rode the real estate market and unlocked the value hidden inside the brick-and-mortar family home to finance fancy cars, yachts, and travel to exotic places. Meanwhile, businesses reached for the sky expanding into new territories, merging into corporate behemoths, and tapping into buoyant capital markets.

The party had to end since everything that goes up must eventually come back down. And so it did, but with one crucial difference: globalisation.

Leveraging the power of deregulation, corporations had by now grown so large that they, quite by accident, became sovereign in their own right – able to circumvent what little regulation was left, punish countries deemed inhospitable, and setting the agenda in those that tolerated their antics in return for a few crumbs off the boardroom table.

In the process, the primacy of politics was lost. In Europe, a common currency added to the hangover. The historically less competitive countries along the southern fringes of the union had feasted hardest and were now made to suffer most. While the euro does indeed represent an ill-conceived project undertaken for the wrong reasons at the wrong time by the wrong people,

“The party had to end since everything that goes up must eventually come back down. And so it did, but with one crucial difference: globalisation.” the currency is here to stay. Greece may not like that – though its voters still seem to think the euro worthwhile – but Spain, Portugal, and Ireland have bravely swallowed the bitter pill and are now slowly crawling out of the pits. In fact, Spain is currently home to the best performing economy in Europe.

It is too easy an option to blame all of Europe’s ills on the much-maligned euro. It is also rather cheap to blame those holding power in Brussels for the continent’s predicament. Those wishing to pull up the national draw bridges in a silly attempt to preserve cultural identities and other non-tangible aspects of life, are fighting a rearguard action destined to failure. The idea that the countries of Europe may proceed to trade freely while clamping down on sovereignty is rather naïve. What is a devaluation of a national currency other than an attempt to gain a competitive advantage otherwise not available?

Currency depreciation shifts the onus of one’s internal shortcomings to outside trading partners.

Take Greece: its industry is not particularly innovative or competitive; its workers labour long hours but are not exceptionally productive; and its government lacks vision and has been known to engage in creative bookkeeping in order to hide its own deficiencies. Master of its own (sorry) currency, Greece managed to scrape by, periodically devaluing the drachma in order to stay (barely) afloat. The same holds true for a few

other Eurozone member states such as Spain and Portugal.

For the first few years inside the Eurozone, these less competitive economies benefited from easy and plentiful credit. In fact, these countries had never before been able to borrow as cheaply.

The party continued and got progressively wilder. When the light came on, and the piper demanded his due, the whole shaky edifice instantly crumbled and fell. It has still not been re-erected.

The euro may have been introduced for political reasons, it also serves a clear economic purpose: to level the playing field so that businesses from all member states may trade freely in a market without distortions. For the currency’s future, please look at Spain. Should that country indeed succeed in turning the corner using the recipes supplied by the European Central Bank, others can follow suit.

The notion that European unity is to be feared bespeaks of the existential angst suffered by smaller countries less sure of their national purpose. A United States of Europe may, in fact, be turned into an opportunity to rediscover the roots of the continent. If the continent is ever to return to its more sensible, albeit less spectacular, Keynesian ways, it can do so only as a united entity. Individually, no European nation is able to weather globalisation and trump the power wielded by big business. However, taken together, the European Union is the world’s largest market – one that can, quite conceivably, set the global agenda.

The EU should not act with wishy-washy idealism, but with a more pragmatic approach to the challenges of modern times. Increased growth and prosperity for all are the only yardsticks for measuring economic success. Voters will not have it any other way. Only a tightly integrated democratically-governed EU, pursuing its own interests, may stand a chance of creating a semblance of order and safety in a world drawing perilously close to the precipice. The European Union may properly be called one of the greatest projects in statehood ever undertaken anywhere in the world. Its failure would herald a return to truly dark ages in which we shall be but the minions of big business. i

“The EU should not act with wishy-washy idealism, but with a more pragmatic approach to the challenges of modern times. Increased growth and prosperity for all are the only yardsticks for measuring economic success. Voters will not have it any other way.”

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CFI.co | Capital Finance International

Autumn 2015 Issue

> CFI.co Meets the CEO of WIR Finanzierer:

Mark H van den Arend

ometimes, all one needs is a break – lucky or otherwise. Mark H van den Arend got his one when Deutsche Bank hired him despite being a teenager with a slightly crooked CV that contained no discernible experience in either finance or administration.

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As it happened, this young man just liked the whole idea of negotiating deals and working the numbers.

Deutsche Bank did not regret its audacious choice and supported Mr Van den Arend to obtain an MBA from Ashridge Management College and The City University of London. With a remarkable knack for identifying – and rectifying – market inefficiencies, Mr Van den Arend soon worked his way up the hierarchical ladder: “After two decades, I ended my career at the bank as a managing director overseeing its operations on Wall Street. Soli Deo Gloria.”

However, the at times glaring and puzzling shortcomings of markets continued to fascinate this South African-born banker who is now the driving force of WIR Finanzierer, a German financial services provider sharply focused on helping small and medium-sized enterprises (SMEs) gain access to capital. “Even though Germany is an overbanked market, plenty of wellrun SMEs simply dislike dealing with banks and

hence are increasingly receptive to other means of financing.”

With WIR Finanzierer, Mr Van den Arend has set out to tackle the problem. His company helps SMEs obtain “indirect” access to capital markets with amounts ranging anywhere from €500,000 to €10m per client. With the refinancing of bundled SME bonds, WIR Finanzierer is conceptually applying a structure similar to a securitisation.

The process is remarkably fast and requires each SME bond issuer to obtain an indicative rating from rating agency Euler Hermes.

Once properly screened, financing may be arranged via WIR Finanzierer. “The process is transparent from end to end so that SMEs and investors alike know precisely what they are buying into. Moreover, WIR Finanzierer always participates with its own funds and refrains from anything which would jeopardise the simplicity, transparency, and comparability of its transactions.”

While SME financing, or the dearth thereof, is near the very top of both the political and economic agenda, so far little has been done to tackle the problem. Although there is more than enough money slushing around the economy, it fails to reach most SMEs. Given the immense significance of the SMECFI.co | Capital Finance International

Sector to overall economic health, it is of paramount importance that SMEs have efficient access to sufficient financing – for modernisation and expansion.

“That is precisely what WIR Finanzierer does.

We act in a swift and decisive manner. The streamlined procedure allows for snap decisions.

Not only SMEs are thus helped, investors also benefit enormously as they receive access to an asset class previously unavailable to them: the vast universe of the German Mittelstand. The portfolio returns – on average about six percent annually – are attractive as well, considering the investment grade profile of this investment.”

Tapping into the multibillion euro German SME market is only the beginning. WIR Finanzierer also eyes expanding into neighbouring countries, deploying the same strategy of splitting larger investments into bite-sized bits for SMEs who are, due to their size, otherwise unable to tap capital markets on their own.

“People who understand what we are doing realise that we are at the forefront of the European Capital Markets Union. The fact that we bring together SMEs and capital markets investors in a unique way is probably the main reason why you find our SME bond factsheet (KMU-Anleihe) on the website of the European Commission.” i 53

> deVere Group:

A Future Focus Based on Clients’ Needs In a rapidly evolving, ever more globalised world, the financial expectations, requirements, and demands of high-net-worth individuals, international investors, and expatriates are, understandably and sensibly, evolving too.

Here to meet those expectations, requirements and demands, wherever in the world they may come from, is deVere Group – one of the world’s largest independent financial advisory organisations.

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eVere was established by founder and CEO Nigel Green in 2002. At that time there was a small but growing number of expat communities establishing themselves in dynamic destinations around the world. Yet what these expats didn’t have was access to specialist, borderless, independent financial advice that would provide them with the mid to long-term financial security that their incomes and personal requirements needed.

The young company had hit a nerve and expansion began. In fact so much so that today, after thirteen years of uninterrupted growth, deVere Group has over 80,000 clients worldwide with more than $10 billion in funds under advice and administration.

With a currently estimated 350 million expats, the group continues to grow, bringing its unique mix of independent financial products, personal service, and top-quality advice to an ever increasing globally-minded client base in an ever expanding portfolio of countries worldwide.

DELIVERING A PROMISE Despite its present day size, and testament to the inherent strength of its founding ethos, deVere is built solely on the demand for its services by its clients. That demand is for a completely personalised approach to future-focused financial planning and the security that brings.

Since its inception, deVere has delivered on its promise of truly independent financial advice and continues to do so whilst continually strengthening its product portfolio and expanding its operations to meet the need for clear, concise, one-to-one independent financial solutions on a global scale.

That may seem like a juxtaposition – being personal and yet global – but to deVere and its clients it’s proven to be one of the most ingenious 54

“A key secret of deVere’s success is not just the range of financial products it offers but the way it tailors them to meet individual client needs.” and innovative formulas for success of any independent consultancy in the international investment industry. And it’s all client-driven.

A UNIQUE FINANCIAL PRODUCT OFFERING deVere Group’s global network of independent financial advisers provide holistic financial advice including, amongst other areas, investment strategies, long term financial savings schemes and tax efficient pension plans, education fee planning, life insurance, regular savings, and retirement planning.

A key secret of deVere’s success is not just the range of financial products it offers but the way it tailors them to meet individual client needs.

Size also brings strength and diversity. Over the years, deVere has established long-standing relationships with some of the world’s largest and most robust and respected financial institutions.

It’s a powerful proposition and one that directly benefits all deVere clients wherever they are in the world.

LEADING INDEPENDENT FINANCIAL ADVISERS The people who deliver deVere’s services are recognised as amongst the best independent financial advisers in the business. This is the result not only of deVere being able to cherry-pick who it employs, but also the product of ongoing graduate and management training, plus personal and professional development initiatives that are recognised as the most advanced – and envied – in the private enterprise sector.

CFI.co | Capital Finance International

Appropriately qualified, knowledgeable, flexible and client-focused, everything that deVere, its IFAs, and back-office staff do, is for the benefit of their clients. It is their overarching aim. This single-minded approach to providing the most individually-tailored financial solutions continues to set deVere apart from the field, and not only ensures each and every client receives the very best personal advice, but that they receive the most innovative and robust planning strategies for long-term financial security and freedom.

There’s no doubt that the key word that drives deVere, and that enables it to provide an allencompassing market leading service to its clients, is “independence.”

From its inception in 2002, deVere has remained fiercely independent, sticking to its guns, championing its clients’ interests, and yielding to no other external pressure. This dogmatic approach has not only benefited clients in terms of the range and scope of the financial solutions it is able to offer, but has seen deVere trail blaze its way, ahead of all others, into new areas of financial planning and into new territories around the world.

TECHNOLOGY DRIVEN As the saying goes, change is the only constant in life, and for deVere, change is exemplified by the group’s strategic use of the very latest information technologies. Examples of this abound and include deVere’s Online Fund Platform, amongst others. The company continues to invest in pioneering, bespoke back-office technologies to not only support their independent financial advisers but streamline their operations to provide its clients with the most cost-effective, time-efficient service.

Technology is recognised as the driver for the way companies do business today but there’s a twist with deVere. Whilst technology has enabled the company to expand around the world it has been

Autumn 2015 Issue

implemented judiciously. Any deviation away from providing a thoroughly personal service through the use of IT – prevalent in other sectors of the financial industry – is not the deVere way.

DEVERE – THE ROAD AHEAD deVere Group is the first professional international financial brokerage to bring a borderless approach to its clients worldwide, and as a result its presence in the international financial services industry is stronger than it has ever been.

Going forward, deVere is committed to developing its business in line with new technologies, products and market opportunities with one aim in mind – to help clients create, grow, maximise, and protect their wealth through sensible planning strategies, whatever the individual need or circumstance.

The company currently has over seventy offices worldwide, a number that is growing exponentially with demand for its services from a continually expanding expat, high-net-worth individuals, and international investor client base.

The group has always striven to “be there” for its clients; so much so that expansion into new countries and frontiers – as well as reinforcing its presence in established markets – is a priority.

Through innovation, technology, the employment and ongoing training and upskilling of the keenestminded independent financial consultants, alliances with world-leading financial institutions, and by adding further offerings and distribution channels, deVere is meeting a growing demand for its services with vigour, integrity, intelligence, and fortitude.

TURNING VISION INTO REALITY For deVere Group CEO Nigel Green, the vision back in 2002 has become reality in 2015 – to provide truly global access to independent, personalised financial planning that not only outwits the competition but that provides the best long term security for its clients and their families.

The CEO says of the organisation receiving this award: “I am absolutely thrilled deVere Group has won the prestigious Best Independent Financial Advisory Team Global 2015 Award.

“It is testament to the consistently hard work undertaken by our independent financial advisers in every office in which we operate globally, to provide a world-class results-driven service to every client.

Winning the Best Independent Financial Advisory Team Global 2015 Award showcases one of our main strengths; our independence. This allows us to wholly focus on helping clients to reach and often exceed their financial ambitions in the most effective way.”

Looking further to the future, Mr Green sees no reason why the first decade and a half of deVere’s remarkable growth cannot continue forward at the same pace, for the benefit of more clients in ever more countries around the world, so that they too can prosper from the company’s multi-award winning mix of financial planning products and personal service. i CFI.co | Capital Finance International

55

> Transatlantic Trade and Investment Partnership:

Pros, Cons, and a Few Ifs

By Darren Parkin

At best, it’s the biggest free trade agreement the world has ever seen, bringing new freedoms and opportunities for businesses on both sides of the Atlantic.

At worst, it’s a dangerous pact that will see huge corporations become so powerful, they will be able to overrule governments.

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f given the green light, and that seems increasingly likely, the Transatlantic Trade and Investment Partnership (TTIP), will be welcomed by many capital-hungry members of the business community. But there’ll be no open-armed greeting in the cautious corners where suspicious eyebrows have been raised for years.

Talks on developing the controversial TTIP began in July 2013 between the European Union and the United States. If a final agreement is reached soon – both parties have set an ambitious target of December 2015 – the deal would envelope almost half of the world’s GDP and cover enormous portions of direct foreign investment and world trade. Trading partnerships between the US and Europe already account for almost £1.5 billion each day.

A similar deal is currently being brokered with Canada. Known as CETA (Comprehensive Economic and Trade Agreement) it is designed to create jobs and economic growth between Canadian and European businesses.

Several campaign groups have already sprung up to voice their concern over the TTIP agreement, citing mainly the perceived dangers of the ISDS (Investor-State Dispute Settlement) which has attracted much criticism for its hard-line rules on regulatory cooperation that fly in the face of the rule of law, and perhaps even democracy itself.

THE CASE AGAINST In the red corner, and leading the fight against the deal, is the Berlin-based group STOP TTIP. They claim that any boost to business or increases in jobs will be negated by the threat posed to democracy from huge corporations who are set to be the sole beneficiaries of TTIP or CETA. Their stated arguments are: • Investor-State-Dispute-Settlement (ISDS): Foreign investors (i.e. Canadian and US companies) receive the right to sue for damages if they believe that they have suffered losses because of laws or measures of the EU or of individual EU member states. This can also affect laws which were enacted in the interest of the common good, such as environmental and consumer protection.

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“UK Prime Minister David Cameron has gone out of his way to offer public assurances that any deal struck between Europe and the USA would need the full backing of the United Kingdom and, for that to happen, certain criteria will have to be met.”

• Groups of companies are intended to be included even during the elaboration of new regulations and laws if their trade interests could be affected. The name for this is: regulatory cooperation. It means that representatives of big business are invited to participate in expert groups to influence new draft laws, even before these are discussed in the elected parliaments.

This would seem to undermine democracy.

• Big business had, and still has, excessive influence on the secret negotiations relating to CETA and TTIP. In the preparatory phase for TTIP, no less than 590 meetings took place between the EU Commission and lobby representatives, according to official statements – 92% of these meetings were with representatives of companies, while only in a few cases there were discussions with consumer and trade union representatives.

And also during the negotiations, representatives of industry are exercising influence. Some formulations in draft texts which have filtered through to the public originate directly from the pens of company lobbyists.

• The negotiations are conducted in secret.

Even our public representatives know little, if anything, about their progress. They receive the results in the form of long agreements (the CETA agreement, for example, has about 1,500 pages) only after conclusion of the negotiations, and are therefore able only to either accept or reject the whole agreement without being able to ask for amendments.

• Employee rights are coming under pressure, and jobs in numerous industries are endangered.

In the USA, only a few basic rights for employees are recognised – only two out of the eight ILO core labour standards. In agriculture and in the CFI.co | Capital Finance International

electrical industry, massive job losses could occur because of the tougher competition from abroad.

• Liberalisation and privatisation are intended to become one-way streets. The return of public utilities, hospitals, or waste collection to the public sector once they have been privatised would be made more difficult or even impossible through CETA and TTIP. • The EU and its member states are falling under pressure to allow risky technologies such as fracking or GM technology.

• Foodstuff standards and consumer protection for cosmetics and medical products threaten to be set at the same levels as (low) US standards.

However, higher rather than lower standards of protection are needed, whether they apply to the use of pesticides, factory farming, or clean sources of energy. Regulatory cooperation and ISDS would make this more difficult or impossible.

THE CASE FOR In the blue corner, and with an immense amount of corporate backing, are plenty of big businesses and opportunists keen to see what a bit more freedom in transatlantic trade can bring them.

Not to mention thousands of skilled workers who anticipate that borders will be a little more relaxed over migratory work, although this has yet to be thrashed out.

Remarkably, the voice shouting loudest in favour of the TTIP agreement is coming out of Berlin, in the shape of the Bundesverband der Deutschen Industrie. The BDI is a think-tank and considered a mouthpiece of German industry.

Designed to communicate its interests to people and organisations with political responsibility, it has been lobbying policy-makers throughout Europe and the USA about the benefits of open international markets.

“The EU and the United States are the largest economies in the world,” it says. “The combined transatlantic economy represents around 46 percent of worldwide gross domestic product and one third of worldwide trade. The United States is Germany’s most important trading partner outside of the EU. Annual bilateral trade volumes amount to €144.7bn. Furthermore, the United States and the EU are each other’s most important destination for foreign direct investment. These

Autumn 2015 Issue

connections across the Atlantic have in turn secured millions of jobs on both sides of the Atlantic.”

From the BDI’s perspective, what it describes as “an ambitious agreement covering trade and investment,” has serious potential for western business in three important areas: • Economically: The removal of trade and investment barriers would increase market access, reduce unnecessary costs, and thus lead to more jobs and growth. In order to reach this outcome, an ambitious agreement which extends beyond the reduction of tariffs is necessary.

• Strategically: As the world’s largest economic regions, the EU and the United States can use the TTIP negotiations to jointly develop standards and regulations that could influence standard setting in the global trading system.

• Geopolitically: The transatlantic partnership functions as an anchor of stability in a world characterised by tectonic changes. TTIP would further strengthen and institutionalize transatlantic political cooperation.

STALEMATE There are many parties round the negotiation table that believe the deadline to reach a solid agreement by the end of 2015 is a little overambitious. After all, the rising tide of criticism has forced a bit of a stalemate between the US and its counterparts in Europe (where most of the criticism seems to be emanating from).

The bulk of the disapproval is aimed at the Investor-State Dispute Settlement (ISDS) which has left many of the European negotiators nervous. The EU has even reserved judgement on whether or not to actually include it in the process until negotiations are into their final phase.

AN ISDS EXPLAINER ISDS is, without doubt, the most controversial item on the TTIP agenda. Provisions like the ISDS

have found their way into several international trade deals over the last thirty years where they have been used to foster overseas investment in less wealthy countries. The provisions are designed to allow private investors to have the ability to ask a tribunal of arbitrators to evaluate whether or not a government has treated them unfairly, and if they are entitled to compensation.

Some large corporations have already made use of ISDS policies in the past to claim compensation where, historically, they would not have had any means of legal recompense. In theory, an ISDS will see private investors having an easy route to suing a government for loss of future potential earnings that may be lessened by the actions of that government. One of the obvious fears, say critics, is that it could easily render the privatisation of specific NHS services extremely difficult to reverse.

The ISDS could, undoubtedly, undermine a government’s powers to act on behalf of the very citizens who cast the vote to put them into power.

And the threat to some aspects of institutions like the NHS is very real indeed. New legislation formed by the TTIP would allow private firms running services within the NHS to sue the British government if MPs chose to bring those services back into the public sector – a notion that has been a mainstay of Labour Party policy for years.

These aren’t empty threats, either. A case in point would be to look at the Australian tobacco giant Altria which used a long-standing trade agreement between Hong Kong and Australia to prevent the Australian government from changing the packaging on its cigarettes.

To temper the argument somewhat, there is plenty of suggestion that institutions like the NHS will be exempt from such agreements, which will lead to even further delays in completing negotiations.

However, the startling and inescapable fact remains that, within months, Europe and the CFI.co | Capital Finance International

USA could easily be putting in place plans that will see huge capital-driven corporations become more powerful than governments.

WHAT ARE THEY SAYING? UK Prime Minister David Cameron has gone out of his way to offer public assurances that any deal struck between Europe and the USA would need the full backing of the United Kingdom and, for that to happen, certain criteria will have to be met. He’s also been very public about his support for such a deal to go ahead. “The opportunities for Britain of trading more with the United States of America are clear... two million extra jobs, more choice and lower prices in our shops,” he said.

“We’re talking about what could be the biggest bilateral trade deal in history, a deal that will have a greater impact than all the other trade deals on the table put together. We’ve signed trade deal after trade deal and it’s never been a problem in the past. Some people argue this could damage the NHS. I think that is nonsense. It’s our National Health Service. It’s in the public sector, it will stay in the public sector. That’s not going to change. It will remain free at the point of use.”

That same public support has also come from another key player in the debate – the European Commission president himself, JeanClaude Juncker, who has stressed that he will not allow compromise on the work the EU has done for open trade. “Under my presidency, the Commission will negotiate a reasonable and balanced trade agreement with the United States of America,” he says. “It is anachronistic that, in the 21st century, Europeans and Americans still impose customs duties on each other’s products.

These should be swiftly and fully abolished. I also believe that we can go a significant step further in recognising each other’s product standards or working towards transatlantic standards.”

“However, I will also be very clear that I will not sacrifice Europe’s safety, health, social, and data 57

protection standards on the altar of free trade.

Notably, the safety of the food we eat and the protection of Europeans’ personal data will be non-negotiable for me as Commission president.

Nor will I accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes. The rule of law and the principle of equality before the law must also apply in this context.”

The CBI (Confederation of British Industry) is also hugely supportive of the deal, with director general John Cridland pointing out that Britain’s SMEs (small and medium-sized enterprises) looking to have interests in the US could benefit significantly. “Europe’s business community has come together and is united in making a loud and clear clarion call to political leaders - this deal is vital for future growth and the prosperity for citizens across the EU,” he stressed.

“It could create thousands of new opportunities for our young people. It would create an integrated market of over 800 million people, bringing more choices for consumers at cheaper prices. With the UK already trading more and investing more with the US than any other country, there are real advantages to drive home particularly for smaller firms. TTIP would be the biggest free trade deal ever negotiated.”

For all the salivating over potentially lucrative trade channels being opened up, there’s also plenty of rhetoric to ponder in terms of opposition to TTIP, especially when it is highlighted that an elected government is well within its rights to change how the country it represents conducts its business on the international stage. No country has illuminated this possibility more than South Africa, where all its agreements have just recently been ripped up.

Unions too have been quick to voice their concern. None more so than Unite, whose general secretary, Len McCluskey, is quick to pick a battle with David Cameron whom he believes is yet to pin his colours to the mast and give proper black and white assurances that the NHS will be ring-fenced from negotiations: “There is massive opposition to the NHS being part of the US trade deal,” he warns.

“The NHS unites this country. It is the single most important local issue for voters, and the prime minister has cut himself adrift from public opinion by refusing to listen to the public. David Cameron has claimed that there is no threat to the NHS from TTIP. If this is true, why doesn’t Cameron just remove the NHS from the trade deal? Other countries have vetoed sectors from the trade deal.

The Government has failed to give one decent reason why the NHS should be in this trade deal.”

Environmentalists have also stepped into the debate, given that standards of consumer protection in the USA are widely regarded as substandard to those governed by strict rules in Europe.

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“Environmental campaigner George Monbiot even went as far as to say the TTIP would basically outlaw left-wing politics, labelling it ‘an assault on democracy.’”

Environmental campaigner George Monbiot even went as far as to say the TTIP would basically outlaw left-wing politics, labelling it “an assault on democracy.” And Green Party leader Natalie Bennett has recently urged people to walk away from the TTIP agreement: “The proposed trade deal is a huge threat to our democracy and our sovereignty. We have seen the UK participating in a disastrous race to the bottom on corporate tax rates and wages. We must not also walk into lowering our workers’ rights, environmental standards and food health standards. Chicken carcasses washed in bleach, hormone-stuffed beef and open season on pollution are not things we want to import from the US.” Despite being accused of peddling American propaganda, the government has listed what it believes will be the main benefits of TTIP agreement: • American goods sold in Europe could become cheaper to buy.

• 300 million US consumers could buy European goods.

• US and EU firms could create thousands of new jobs in Europe.

• Europe’s biggest businesses could become more competitive in the US. • Removing duplicate product tests could help small and medium-sized firms get a foothold in the US. • Prices could fall when unnecessary existing tariffs are cut.

WHAT HAPPENS NEXT? Both parties claim that the deal can be wrapped up by the end of 2015. However, this seems incredibly ambitious, given the lengthy processes involved. Firstly, on the European side of the Atlantic, the covenants need to be presented to both the European Parliament and the European Council. Both houses must agree on the same outcome.

From there, the final details of the deal will be distributed to the 28 parliaments of all EU members who will all need to be in agreement over its contents – keeping in mind that there is plenty of left-wing opposition – particularly towards the ISDS – to the plans.

Meanwhile, in the United States, Congress must first give it the green light. However, the CFI.co | Capital Finance International

Democrats have been lukewarm to the TTIP. The Democrat reception could derail the deal, despite the White House planning to request the little-used “trade promotion authority” – a special clause which allows congress to perform a simplified procedure to approve motions.

So it would seem that, even if both sides of the Atlantic can make it to the final paragraphs of the TTIP deal, there remains the issue of whether or not the mortar between the bricks will be scraped away by national divisions and bring the whole thing crashing down.

It could well end up like the Eurovision Song Contest where everyone silently acknowledges that Sweden has the best song, but, wait, France owes Germany 10 points, Italy deserve a favour from Norway… and if Great Britain thinks it’s getting anything north of “nil poi,” well, they’ve got another thing coming.

This view is supported by Rem Korteweg from the Centre for European Reform: “With the European Parliament, you’re dealing with national sentiments and political families where you see more emotion surfacing when it comes to voting.”

An alarming thought.

The key players to look out for in Europe are France and Germany who are showing themselves to be managing the engine room of the TTIP process. Both governments have laid their cards on the table, and each hand is flush with support for more international trade, although the joker in the pack is still the ISDS. The French were so opposed to facets of the ISDS that the country’s trade minister, Matthias Fekl, lobbied for a series of reforms calling for an international court of law to deal with corporate arbitration. Furthermore, he proposed subtle legal changes that would prevent companies from suing governments over loss of profits. He also argues that matters of sovereign debt should be excluded from any arbitration process.

The French minister’s proposals are proving highly popular, and Berlin is keen to open its sails into the same wind with Social Democrat Sigmar Gabriel, Germany’s economy minister, also submitting proposals to reform the ISDS. As if there weren’t already enough bumps in the road up ahead, America could also shoulder its fair share of responsibility for taking the wheels off the deal. The US is currently in the process of shutting down its partnerships with a dozen Asia-Pacific countries where ISDS agreements exist. That could be enough to make the Obama administration reluctant to commit to any endorsement of a European effort to establish a new court.

Given the complexities and controversies involved in the TTIP, it’s hard to imagine that a deal of any substance can be thrashed out before 2016.

What happens after that is anyone’s guess. i

Autumn 2015 Issue

> CFI.co Meets the CEO of deVere Group:

Nigel Green

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igel Green followed his father into the financial services industry. After fifteen years working in London – cultivating his understanding of the financial sector – he spotted a significant gap in the financial market.

At that time there were a growing number of expat communities establishing themselves in destinations around the world. The problem was, these expats lived in countries whose financial regulations were foreign to them. These expats required a different type of financial planning advice.

What the expats needed was access to the very best specialist cross-border independent financial advice that would, in turn, provide them with the mid to long-term financial security they required.

In fact, it was a double opportunity. On the one hand expat finance was not a very mature offering, and on the other, the companies that were providing it were solely concentrated on British expatriates. It seemed obvious that more and more people were working abroad and that there was a market not just for British expatriates but expats, high-net-worth clients, and international investors in general.

Mr Green’s first step was to establish a Luxembourg-registered company with which he started searching for expatriates to whom he could offer off-shore financial services. It soon became evident that “they” (the expats) were in fact searching for what Nigel Green could provide. It was a huge gap in the financial services market – and the time was ripe to fill it with a world class, world beating independent financial advisory service.

Mr Green opened the first deVere office – based on the principles that have steered deVere to be what it is today – in Hong Kong in 2002. It proved to be a watershed moment. Like any new venture it was not without its risks, but Mr Green was not – and is not – a risk taker. He knew what he was doing, what the market was demanding, and where the two should meet. With a small team around him, working virtually 24/7, that single office soon became a flagship for all that followed.

What started as a unique and insightful perception of the contemporary and developing worlds of expat and high-net-worth individuals rapidly became an expanding network of international offices specifically tailored to meet

CEO: Nigel Green

the financial needs – and secure the long term financial security – of a new and growing breed of investors no matter where they chose to live.

After thirteen years of uninterrupted growth deVere now has more than seventy offices worldwide and, in early 2015, exceeded $10 billion of funds under management. A far cry from a single office in 2002.

What’s even more remarkable is that deVere hasn’t become part of a corporate conglomerate, nor has it sold out to the highest bidder when world finances were at their lowest ebb. deVere remains, as it started, a private company, singularly driven by its founder and mentor to offer the best financial products and services from the highest qualified independent financial advisors in the industry.

Today, deVere Group (as it is now called – no longer “an office”) provides expert financial advice related to international savings, bonds, CFI.co | Capital Finance International

life insurance, pensions, and structured financial products to an 80,000 plus client base.

On top of that, Mr Green has expansion plans that go far beyond the remit of pedestrian financial service providers, bravely taking the company into new frontiers and markets. All based on his guiding principle of “wherever our clients go, we will go with them.”

A personal triumph, a corporate success story, a revolution in personal finance management for a global, and growing client base; deVere is the perfect example of how one idea can change the world for the better. As Mr Green concludes: “We at deVere succeed as a whole because we succeed as individuals who meet individuals and provide an individual, one-to-one world-class financial service. And by maintaining that statusquo, I have brought deVere from a single office to a world-leading financial consultancy that never loses focus on its most important asset – the client.” i 59

> Earthport:

A Better Wheel for Cross-Border Payments

B

randing itself a disruptive company, Earthport squarely aims to break with convention and shake things up. The London-based firm offers a simple, safe, secure, and effective alternative to the current international payment system based on a many-to-many model of correspondent banks.

Earthport’s hub-and-spoke model conveniently bypasses bottlenecks to enable payments in 125 currencies with full predictability. The company’s payments solution allows clients to settle any number of accounts across multiple jurisdictions in a single packaged transaction that offers instant insight into all details.

Some $21tn moves around the globe annually.

This volume of cash travels a web comprised of many thousands of correspondent banks which maintain accounts with each other. In order to reach the intended recipient, payments often need to hop between a number of banks, each of which has to process the order before sending it on to the next stop. This model, set up in the 1970s when the world was a much simpler place, is deemed cumbersome and agonisingly slow with plenty room for error at every stage and each hop taking a bite out of the remittance.

Earthport has changed all that. Rather than improving upon the daisy chain, the firm designed a robust new payment platform with a global footprint from the ground up. Using Earthport, clients now have a single point of entry for the processing of multiple payments which are then distributed around the world as the crow flies, albeit at the speed of light.

Fully operational and infinitely scalable, the Earthport payment processing platform has already attracted an impressive number of bigname corporate clients such as the World Bank, Western Union, Bank of America, amongst others.

The sky is the limit as the cross-border payment

industry is expected to grow exponentially over the coming years with increases in online commerce and remittances from expat workers driving the business. Worldwide revenue from international payments balloons by an annual average of 11% (since 2010) and is now on track to reach well over $77bn by 2020.

With its system now fully deployed, Earthport is now set to claim a significant chunk of this market. Investors are bullish as well, driving the company’s stock – traded on the London Stock Exchange – up by over 110% in barely two years.

The secret to Earthport’s swift success is the company’s insistence to work with banks rather than against them.

Initially, the firm offered banks its system to try out, knowing full well they would soon get hooked on its elegance and ease of use.

Earthport has also drummed up business from large corporations that benefit significantly from the streamlining of their complex foreign exchange transactions.

The company is currently upscaling its systems in order to drive down costs further by attaining economies of scale. Going after large transaction pools, Earthport recently moved into India offering to connect that country’s domestic payment system to the wider world. Earlier this year, the company also signed up the Japan Post Bank to its global gateway payment system.

Earthport has also partnered with Ripple Labs – creators of a proprietary payment protocol – to enhance its own platform with a real-time crossborder payments facility, thus vastly expanding the scope of the services offered to clients.

Already named one of the world’s fifty most innovative financial tech companies, Earthport has its corporate sight firmly set on the future and preserves its leading edge by keeping abreast of technological progress. The nature of its payments gateway is such that it may be continuously upgraded to incorporate the latest advances in forex processing. i

“Rather than improving upon the daisy chain, the firm designed a robust new payment platform with a global footprint from the ground up.”

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CFI.co | Capital Finance International

Autumn 2015 Issue

> CFI.co Meets the CEO and Executive Director of Earthport:

Hank Uberoi

H

ank Uberoi is a man of vision. He also embarked on a singular mission: to reinvent the wheel of cross-border payment processing. In fact, the muchimproved wheel is already a reality, spins smoothly, and allows for international remittances to be bulk processed and sent to beneficiaries by way of a single streamlined procedure that is both faster and cheaper than the antiquated messaging system currently used to shovel cash around the globe. It is also much less prone to failures, spans the globe, and über secure.

Mr Uberoi has no doubt that his company is set to tap into one of the largest business opportunities currently available. “While we have no problem entrusting courier services with hauling valuable parcels all over creation, cash is being moved around in a much less predictable fashion. We can easily track the progress of parcels, following remittances as they wind their way via multiple banks to recipients is all but impossible.”

The American-born businessman and former Goldman Sachs technology executive has changed all that. Earthport, the company he acquired in 2008 and manages since 2010, has rolled out a global payment gateway that is hailed as nothing short of revolutionary. “We needed to create a FedEx for money and did just that,” says Mr Uberoi who emphasises that his firm is not in the business of competing with banks but rather offering them a service that is superior and considerably cheaper than the Swift messaging service they have been using for the past forty or so years.

“Earthport is a hub-and-spoke network that ensures money arrives at its destination in a wholly predictable manner after travelling a direct route. We cut out the middleman and by doing so can offer significant cost savings.” Mr Uberoi is not one to mince words and bluntly states that today’s cross-border payment infrastructure is both “outdated” and “fundamentally broken.”

However, Earthport offers an easy and, more importantly, future-proof solution that fully supports the existing regulatory frameworks and technology: “Our platform is scalable and easily incorporates new technological developments as they mature and become available for primetime.”

Mr Uberoi thinks on a global scale and expects his company to lead the international payments industry as it comes to terms with state-of-the-art technology: “Business-to-business transactions are worth $20 trillion annually. If we can crack even a portion of the potential market we could

CEO and Executive Director: Hank Uberoi

be very, very large.” That cracking is proceeding nicely with Earthport attracting business from well-established multinational corporations, multilateral entities, and large banks looking to simplify their forex operations.

Mr Uberoi is not a little surprised that the current cross-border payment system, erected in the 1970s around thousands of correspondent banks communicating through the centralised Swift messaging service, has been left in place for so long: “The world has changed much over the last forty years, yet its payment infrastructure has not CFI.co | Capital Finance International

kept pace. I still find it amazing that nobody else saw this opportunity and came up with something better.”

Mr Uberoi emphasises that Earthport has designed its system from the ground up in order for it not to inherit the vicissitudes of the current model. “We needed a completely new approach to international payments: one that leverages the latest technology and strikes the perfect balance between speed and security. Earthport managed to do just that and has now shown the way forward.” i 61

> UK Uncut:

The Rise and Fall of a Force for Good?

By Darren Parkin

On October 27, 2010, a group of about seventy people ran into an Oxford Street Vodafone store and simply sat down. Bemused shoppers shuffled uncomfortably out of the door while confused members of staff quizzically looked on, not entirely sure about what was happening.

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week earlier, the recently-appointed Chancellor of the Exchequer, George Osborne, stood up in parliament to declare to MPs: “Today is the day that Britain steps back from the brink.”

These were words that instantly demanded attention, and they heralded the government’s comprehensive spending review – something Westminster had been waiting for since the Conservative Party alliance with the Liberal Democrats had carried Tory leader David Cameron to Number 10 in May that same year.

Mr Osborne then went on to deliver an announcement about a raft of multifaceted welfare reforms amounting to some £7bn of cuts.

With the coalition facing “a decade of debt,” as he put it, George Osborne had laid out some of the deepest cuts to hit public services since the economic darkness of the 1920s.

With a colossal financial void inherited from his predecessors, Osborne promised to balance the books, pitch the national debt into decent, and put the welfare system and public services “on a sustainable, long-term footing” with his “tough but fair” reforms. Gasps of ironic surprise chorused from the opposition benches before Mr Osborne’s counterpart – Alan Johnson – repeatedly shouted the young chancellor down with cries of “the deepest cuts to public spending in living memory!”

Meanwhile, somewhere in London, a small band of people were planning to plonk themselves on the floor of some shops in the capital.

They were the founder members of the protest group UK Uncut. At that moment, they were a small band of like-minded individuals who had been quietly watching as, year after year, the government’s axe would cut a swath through the UK’s public services.

With each swing, they also noted that the people urging the axe man about his unpleasant business were steeped in wealth. In the eyes of this growing band, the poor and unable were being increasingly deprived while the pockets of the rich were expanding. They’d had enough.

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“The actions of UK Uncut didn’t just raise eyebrows among MPs and wealthy business leaders, they also raised some interesting questions of startling hypocrisy in the way Britain as a nation organises its society and economy.”

With a hashtag here and a phone call there, they had quickly organised a micro uprising which sent shockwaves through the boardrooms of some of the high street’s biggest players. Around the country, they had successfully managed to force numerous branches of Topshop and Vodafone to close their doors. Albeit for a couple of hours, but it was enough to grab the attention of a public whose wallets had spent the last few years being repeatedly shoved through the bacon slicer.

The organisers themselves were sat in the Oxford Street branch of Vodafone when news of their nationwide success had started to filter through.

Everything had passed off peacefully, no arrests were necessary, and none of the protesters involved had disgraced themselves or, more importantly, the cause.

This wasn’t some random act of protest from a disaffected group of youths just enjoying their fifteen minutes of anarchistic fame, none of them sure what the protest was about but tagging along anyway for the laugh. These were people of all ages, with varied political persuasions, and all remarkably well behaved. They were clearly representing a general feeling among the public, and someone, somewhere, needed to listen.

The targets had been carefully selected.

Campaigners had chosen one of the busiest shopping days of the year to stage a sit-in at Topshop’s flagship London store. In Brighton, people had managed to superglue themselves to the windows of another Topshop branch. Up and down the country, Barclays and Boots were also feeling the wrath.

CFI.co | Capital Finance International

Scanning the placards and hearing the chants soon gave away the reason why these stores had been picked off. It was all about questionable tax arrangements.

Sir Philip Green, tycoon of the Arcadia retail group – Topshop’s parent company, had borne the brunt of UK Uncut’s anger towards his alleged corporate tax avoidance. In 2002, Sir Philip Green, who was also a government advisor, had used a company called Taveta Investments to acquire Arcadia. Taveta Investments was registered to Sir Philip Green’s wife, Tina, who, as a resident of Monaco, benefited from a massively lower tax liability that would be owed if Taveta Investments had been registered to a UK resident who would have faced a tax bill of some £150m.

Arcadia’s corporation tax was cut further when Sir Philip Green paid £1.2 billion to his family in 2005 – by way of an Arcadia loan which conveniently offset the interest charges against profits.

This, claimed UK Uncut, was the final straw. And they set about targeting the retail properties of wealthy individuals whose tax affairs didn’t quite sit right with them. The campaigners made the argument that, if tax dodging was tackled, the resulting figure being put back into country’s coffers would negate the need for such dramatic cuts to those who needed help. They calculated that some £25 billion could be put back into the system. The uncomfortable truth for the nation’s leaders was, in fact, that the sums of those people warming their backsides on the carpet of the Oxford Street Vodafone were pretty good.

The actions of UK Uncut didn’t just raise eyebrows among MPs and wealthy business leaders, they also raised some interesting questions of startling hypocrisy in the way Britain as a nation organises its society and economy.

Without smashing windows or chucking petrol bombs, the organisation had illuminated some dark corners of the economy which led on to much wider issues being faced by the British people. From the protests rose debate about the disparities and fiscal shortfalls that had sprung from the socialising of corporate losses. One of

Autumn 2015 Issue

the biggest question marks was of the knock-on effects a period of great austerity would have as it echoed its way through the generations. It allowed people to better understand the threat of downward social mobility – the prospect of a whole generation of people ending up less well off than their parents.

Like all arguments that ultimately involve wealth, the banners under which UK Uncut rally are not entirely black and white, but the main thrust of their argument was just to say that a balance needs striking between people and business.

If anything, UK Uncut presented some convincing cases against austerity as well as provoking discussion about the wider issues that orbit cutbacks, and it was this drawing attention to hypocrisy in the system which caught the eye of economists throughout the world.

They also had some serious backing, mainly in the form of public sympathy, but also from academics and commentators who felt they had channelled some overdue debate.

Tax Research UK director Richard Murphy, for instance, gave their actions the thumbs up saying the protests were entirely appropriate. “I do think there’s a problem,” he said. “Large businesses are paying a smaller proportion of their income in tax than many individuals and small businesses in the UK and that’s unacceptable.”

He was supported by the general secretary of the Public and Commercial Services Union, Mark Serwotka, who said: “People are rightly angry that the government is targeting the most vulnerable in our society with massive cuts in spending, and yet it appears to be very relaxed about rich and powerful tax dodgers.”

But what has become of the movement? The shop windows of super rich tax jugglers haven’t been superglued to a protester for quite some time, while Vodafone’s carpets haven’t felt the touch of unwashed jeans for years.

Has the protest merely lost its spark? Has an important player in the drama exited the stage, with the economy in such a delicate position and in need of people to challenge authority? Or have the concerns of the movement been addressed and everyone has gone home to put the kettle on and light up some patchouli-addled incense sticks?

The UK Uncut twitter account - @UKUncut – is still tweeting to 90,000 followers, and the organisation’s Facebook page is going strong.

Sadly, it’s a shadow of an authority-challenging peaceful protest movement it had admirably shown itself to be five years ago. Nowadays, its social media activities are limited largely to promoting Labour’s Jeremy Corbyn, the occasional article about anti-austerity, and the activities of the Occupy Movement. The UK’s Occupy Movement was inspired by the Occupy Wall Street organisation of America which, in CFI.co | Capital Finance International

turn, was inspired by Spain’s peaceful and dignified protests around the 15-M movement.

Occupy Wall Street saw hundreds upon hundreds of protesters encamped in Zucotti Park – right in the heart of New York’s financial district.

The campaign intended to raise concerns over social inequality, corruption, and the claims that large corporations were exerting undue influence on government – a perception that, with the onset of the Transatlantic Trade and Investment Partnership, may not have been too far-fetched.

With their slogan We are the 99% – a reference to income and wealth distribution in the USA which sees an elite 1% of earners benefit from a slewed disparity in taxation compared to the rest of the country’s earners – the group were forced out of Zuccotti Park in November 2011. They then turned their attention to banks, university campuses, board meetings, and repossessed homes. They continue to operate – largely with protests about repossessions.

Arguably, UK Uncut was a force for good in terms of the UK economy, despite plenty of scorn from political and economic sectors. After inspiring more than a thousand protests the length and breadth of Britain, it kind of twisted an arm up the back of an under-fire Starbucks, leading to the company coughing up almost £20m of tax into the UK Treasury.

So is it not a terrible shame that a group of activists who genuinely managed to make a change with peaceful protests, as well as create some deeper political conversations on the economic landscape, appear to have taken their foot off the gas? For a growing number of taxpayers, the answer is yes. Although occasionally inconvenient for shoppers and certainly uncomfortable for corporations and the government, UK Uncut held a mild hero status.

But for an equal number of business analysts, most corporations, and certainly plenty of MPs, UK Uncut and the Occupy Movement are, thankfully, a spent force.

One critic who managed to disarm many of the organisation’s arguments, as well as offering a solution that might benefit all concerned, was Tim Worstall, a fellow at the Adam Smith Institute in London. In March 2011, he compiled a hefty paper entitled UK Uncut Unravelled which delivered a weighty broadside to the protesters, but at the same time drew inspiration from some of the discussion topics they had forced up the political agenda.

Offering the complete counterargument to UK Uncut, Mr Worstall proposed a total rewrite of the taxation system which, even if only for the sake of balance, is worth a few paragraphs here.

He wrote: “In reforming the tax system we would probably want to raise the tax money we need at the least deadweight cost. This would involve reducing corporate taxation and income taxation and increasing property taxation. More 63

specifically, we might well want to abolish corporation tax. Much of the burden is borne by employees. So if we abolished corporation tax and raised property or consumption tax rates, it would still be the same people paying the tax in the end but with a lower deadweight cost. If we do tax returns to the owners of corporations then this is best done by taxing those returns – including capital gains – just like income from any other source is taxed without having specially high rates (above basic income tax rates) for taxing profits and additional taxes on dividends.”

“There are other possibilities that would not tax investment returns at all. Some suggest a progressive consumption tax is another such possibility. Essentially, individuals would only get taxed in any one year on what they spend.

If they add to their savings in that year then that addition to savings is deducted from their income and only what is actually spent is used to calculate income tax.”

“Equally, if money is taken out of savings then this is added to income before the calculation is made. And all of returns from savings (interest, dividends and so on) are free. It is like having all of savings inside a giant ISA or pension fund.

Identifying the changes that we want to make is, at this point, less important than identifying the changes that we do not want to make.”

“Corporations do not pay tax, ever. The corporation tax burden is borne by workers and owners. We should tax those owners in a consistent way and not in an arbitrary way.

Corporation tax reduces growth more than any other form of tax in common use. Far from demonstrating in shops to try to get companies to increase the tax they pay, we should be demonstrating to reduce the burden of taxes on companies – or to abolish it.”

Many critics supported Mr Worstall, whose views on taxation were met with widespread nods of approval. But credit is due to the members of UK Uncut as well, without whom the views of Worstall et al may not have been given the attention they received. As Britain began to rethink its taxation system, UK Uncut started its hushed withdrawal to the shadows.

However, in an exclusive interview for CFI.co, one of the former leading members of UK Uncut helps to shed light on where the organisation is at right now, as well sharing his own expert feelings on the movement’s legacy. He is notorious comedian Jonnie Marbles. Not only was he a founder of UK Uncut, he’s also perhaps best known for famously throwing a foam pie at Rupert Murdoch as the media mogul gave evidence at a Commons hearing on phone hacking.

Also known as Jonathan May-Bowles, the funny man and activist was, somewhat harshly, jailed for the “attack.” Unrepentant over the pie incident – other than the “10-tonne monstering” 64

“As attractive as the movement may have been to despondent and youthful activists, there are also serious questions hanging over the group’s legacy: did their high-profile campaign work?” he received from his shocked family, the 30-yearold continues to speak out against financial injustice.

Here, he tells CFI.co about his involvement with UK Uncut, their apparent demise, and how he thinks Britain and the rest of the world need to revisit the way we conduct ourselves in the financial world.

As a young comedian with a slight leaning towards the anarchistic, Jonathan May-Bowles was drawn to how different UK Uncut’s approach was to raising awareness of the imbalance of financial operations within the UK tax system: “In the early days of the group’s activities there was an unusual mixture of edginess and safety to its actions,” he recalls.

“People tired of walking in a straight line holding placards could go and actually do something with little to no fear of arrest. There was a certain cheekiness to our chosen tactic - walking into ostensibly public spaces up and down the high street and reforming them to our own purposes.

Something UK Uncut offered the disgruntled public was a chance to be civilly disobedient at scant risk to liberty and limb, and many jumped at the chance to go on a ramble across the thin blue line.”

“For me, and I suspect many others, one of the most satisfying parts of the experience was the near total impotence of the Metropolitan Police.

Faced with dozens, sometimes hundreds of largely middle class, often very well educated trouble makers doing nothing more troublesome than sitting down where they shouldn’t.

Britain’s largest police force seemed completely stumped.”

As attractive as the movement may have been to despondent and youthful activists, there are also serious questions hanging over the group’s legacy: did their high-profile campaign work?

Was the cause of randomly disrupting high street businesses worthwhile?

“If UK Uncut set out to put tax avoidance by the mega-rich on the map as an issue, I think there’s no doubt they’ve succeeded. Tackling tax avoidance was one of the major ways parties pretended they would pay for their policies at the last election, and it has provided a major rebuttal to the austerity narrative,” he insists.

“However, if UK Uncut’s aim was to radically change the tax system, end austerity, or bring CFI.co | Capital Finance International

down the Tory government then I think it’s reasonable to say they’ve failed. UK Uncut certainly put tax avoidance on the agenda but, sadly, politicians are far better at reading out agendas than acting on them.”

“As a self-confessed anarchist I would say we need to totally dismantle the arbitrary systems of power which currently rule our lives: the banking system, the police, the justice system, parliament, state and private education, and state and private media conglomerates all need to be ripped down and reinstated as entities which belong to the people whose lives they affect rather than distant, unaccountable elites.”

“However, I’ve found completely destroying and then reorganising the entire infrastructure of modern capitalism to be too big a job for me.

Others may find the same. So a more practical answer might be that we need to start ignoring and resisting these institutions, both individually and en masse.”

Ripping it up and starting again would seem as rash as it is impossible, but does it then invite the further question of reformation of the UK’s taxation system?

“Obviously. I don’t think there is anyone in politics now who would say no to this question – aside from a few on the far ends of the left/ right spectrum who would replace ‘reforming’ with ‘abolishing’. The trickier and more pertinent question is how?” he suggests.

“My personal preference would be: much higher income taxes for the mega-rich – whose persistent threat to go on strike by leaving the country should such a thing happen never seems to receive the same opprobrium from the media as other forms of collective action – and a restructuring of the corporate tax code so that profit is acknowledged at being made at point of sale rather than at a PO Box in Switzerland and taxed accordingly.”

Agree with his principles or not, it’s difficult to dismiss his arguments, but perhaps his feelings about the prospect of the TTIP will resonate with many suspicious economists. “TTIP will, to all intents and purposes, be the end of meaningful democracy in Europe. Whether such a thing exists right now is a bone of contention, but it definitely won’t if this treaty is passed,” he warns.

“The introduction of Investor State Dispute Settlements will allow companies to sue governments for loss of profits – so should people, for example, vote for a higher minimum wage they will likely see any gains made from that decision sucked back into shareholders pockets by a barrage of lawsuits. It is, in short, a massive power-grab by corporations which will crush the independence of states and the democratic right of voters to govern their own countries.” i

To pay here, costs you less.

In Portugal , Payshop enables you to pay

Payshop enables you to pay, in cash, your bills and top-up your mobile phone in an easy and convenient way, as you can do it in one place, while you are shopping.

The Payshop retailer handles everything for you. Just look for the Payshop logo in the nearest shop. There are 4 000 Payshop retailers all over the country; in stationaries, tobacco shops, kiosks, supermarkets‌ www.payshop.pt

> FinecoBank:

A Full-Service and Multichannel Bank

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inecoBank is an Italian multi-channel direct bank providing retail clients with a one-stop-solution that includes integrated banking, brokerage, and investment services. The bank distributes its products and services through multiple channels, such as a network of personal financial advisors, a comprehensive web portal and via custom-developed mobile applications supported by a customer contact centre, branches and ATM network of UniCredit Group.

FinecoBank offers banking products and services – including current accounts, demand and term deposits, payment services and debit, credit, and prepaid cards – and brokerage services for which it executes orders on behalf of clients on major worldwide financial markets and stock exchanges – allowing them the ability to trade stocks, bonds, futures, options, ETFs (exchange traded funds), brokerage certificates, and CFDs (contracts for difference) for foreign currency, indices, stocks, bonds, or commodities.

The bank additionally offers a wide range of investment products and services, encompassing over 5,500 financial products, including insurance and retirement products, investment and mutual funds, and open-ended investment companies (SICAVs) managed by 67 international and Italian investment firms, as well as investment advisory services.

FinecoBank has been a forerunner in introducing independent advisory services. In 2010, the bank launched the fee-only advisory service FinecoAdvice, an advanced model based on a truly open architecture platform and projected exactly on the individual customers’ life objectives. Unique in Italy, FinecoAdvice provides for the payment of an advisory fee and is as such the first independent advisory model projected by an Italian broker. The model erases any conflict of interests between advisors and clients because it promptly returns the rebates coming from asset managers.

Simplicity, transparency, and innovation are at heart of FinecoAdvice’s business model.

The firm’s financial advisory products leverage on one of the most complete platforms on the market, featuring more than 5,500 products from 67 asset managers. The platform has been built with a “guided” open architecture approach, meaning that FinecoAdvice is able to select the best investment solutions for the different types of clients.

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“Simplicity, transparency, and innovation are at heart of FinecoAdvice’s business model.”

Since July 2014, FinecoBank is listed on Milan Stock Exchange. The IPO (initial public offering) has given FinecoBank a clear and distinct advantage in terms of market visibility and credibility, allowing the bank to fully exploit its potential and further accelerate its growth story. Some of the bank’s main features and characteristics are: • Continuous innovation and the simplicity and convenience of its products and services result into extraordinary levels of client satisfaction; • Italy’s largest multimarket and multi-brand investing platform; • One-to-one financial advisory; • All trading services on dedicated platforms; • Innovative marketing and communication strategies, not at all like those employed in conventional banking; • An astonishing 98% level of client satisfaction and awarded recognition as Best Consumer Internet Bank 2014, Best Digital Bank 2015, Best and Most Innovating Banking Brand 2015.

• A multichannel distribution model via approximately 2,600 PFAs (personal financial advisors), about 350 Financial Centers and UCG (UniCredit Group) ATMs in addition to direct banking through mobile apps or the Internet; • Lean organisational structure; • Strong online presence with limited number of physical branch offices, completely dedicated to advisory services; • Modern, customer-friendly, customisable and fully-scalable IT platform, internally managed and free from legacy issues; • End-to-end control of processes from the back office to graphic design and beyond; • Flexibility, time-to-market, reduced costs PIONEERS SINCE 1999 In 1999, the first online trading retail service was launched in Italy. The new service, known as Fineco Online, represented a veritable revolution. Before online trading was introduced, a €10,000 stock exchange order cost around €70 while a €100,000 transaction would have generated around €700 in expenses. With Fineco Online, the cost of all orders was kept at a flat rate of €49, which was reduced to €19 at the beginning of 2000.

Fineco has immediately distinguished itself for CFI.co | Capital Finance International

its innovative advertising. It coined the term The New Economy, which would become the symbol of an era and launched the three laws of the new economy. Here are the most important events in Fineco’s history: 1999 – Fineco becomes a fully licensed bank and launches the first remunerated deposit account in Italy which soon evolved into a full-fledged current account.

2000 – Fineco launches its financial advisory services through a proprietary and dedicated network of advisors and mortgage agents – the first of its kind in Italy.

2001 – In just two years Fineco grows from zero to over 250,000 clients and becomes the Number One online trading bank in Europe.

2008 – On 7 July 2008, the current banking model is introduced as a result of the merger with UniCredit Xelion Banca.

2014 – On July 2 2014, Fineco was listed on the MTA segment of the Italian stock market dedicated to mid and large cap companies that meet the best and most stringent of international standards in corporate governance.

FINECO INVESTMENT SERVICES DEPARTMENT Fineco Investment Service Department, led by Carlo Giausa, Head of Investments and Wealth Management, coordinates and manages all the activities concerning advisory and the development of investment solutions.

Main goals of Investments Department activity consist of delivering the best advisory services to Fineco clients and developing investment solutions, through a constant market monitoring activity.

The aim of this area is to valuate market views and set up model portfolios, analyzing company products with quantitative and statistical methods, and managing the relationship with Investment Partners to provide the best and effective solutions to the bank sales channels.

One of the most important activities of the department is the management and development of the fee-based advisory service Fineco Advice, suitable for private investors. The team also promotes constant distribution network support in terms of co-marketing and training actions, and organises corporate events for Personal Financial Advisors and for customers as well. i

Autumn 2015 Issue

> CFI.co Meets the CEO of FinecoBank:

Alessandro Foti

A

lessandro Foti graduated with honours in Business and Economics from the Bocconi University of Milan in 1984.

He began his professional career in the Financial Management Office of IBM in 1985. After three years of gaining valuable experience at Montedison S.p.A., where he became head of financial coordination of the group’s affiliate companies, in 1989 he joined Fin-Eco Holding S.p.A. assuming overall responsibility for capital market operations.

In 1993, Mr Foti became the head of the operational section for administration, asset management, and trading of FinEco Sim S.p.A. After being appointed a member of the board of directors, general manager, and managing director, in 2002, he became chairman of Fin-Eco Sim. After three years of experience as a member of the management committee of Assosim, he was named in October 1999 a member of the board of directors of FinecoBank. In 2001, Mr Foti became a member of the supervisory board of Entrium Direct Bankers AG. From 2003 to 2005, he was a member of the board of directors of Ducati Motors Holding S.p.A. and general manager of FinecoGroup S.p.A., a company listed on the Midex segment of the Milan Stock Exchange. From October 1999 to December 2000, Mr Foti was a member of the board of directors of FinecoBank.

Since December 2000 to date he has served as the Chief Executive Officer of FinecoBank and from July 2014 he also took over as the bank’s general manager.

From 2008 to date Mr Foti has been head of the asset gathering business line of the UniCredit Group. From May 2010 to January 2015, he was vice-chairman of the Supervisory Board of DAB Bank AG. From April 2012 to April 2014, Mr Foti was a member of the management committee of Assoreti while from 2013 to date he has been a member of the executive management committee of UniCredit Group. Since April 2014 he has been director and vice-chairman of Assoreti. Since July 2014 he has been a member of the board of directors of Borsa Italiana S.p.A. i

CEO: Alessandro Foti

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> Lifestyle

Ray-Ban: Wearable Icon

By John Marinus

O

ctober 20 1944, on the Philippine island of Leyte, Gaetano Faillace, personal photographer to General Douglas MacArthur, waded ashore at Dagupan just ahead of the general’s entourage.

The beach had not been entirely secured and there was still sniper and sporadic mortar fire as the landing craft was forced to stop just off the shore, forcing the party to wade the rest of the way. Mr Faillace then turned and documented the moment the general made good on his promise to return to the Philippines accompanied by the country’s President Sergio Osmena.

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Not only would this photograph become one of the most iconic images of the Pacific Theatre, alongside the flag-raising at Iwo Jima and the mushroom cloud over Nagasaki, but also the figure cut by the general would become emblematic of the archetypal US military officer: authoritative, resolute, unflustered, and – by extension – intimidating. Who’s to say what is really going on behind those shades, those Ray-Ban Aviators.

In the first half of the 20th century spectacles were still strictly used either as a medical or occupational device; the Aviators themselves were designed with CFI.co | Capital Finance International

purely practical considerations in mind. Developed by medical equipment manufacturer Bausch & Lomb, Aviators were made of tinted lenses to protect pilots from glare at high altitude, large and slightly convex so as to cover the entire range of the eye, and held together by a lightweight metal frame making them sturdy enough for the hassles of air combat: eyewear fit for heroes.

However, the psychological effects of hiding one’s eyes – and in doing so denying any observer the benefit of nonverbal communication of either emotion or motivation – quickly became just as

Autumn 2015 Issue

essential to military proceedings as more immediate considerations. To this day, metal framed bug-eyed glasses with mirrored lenses are visual shorthand for authority.

After the war, returning GI’s would continue to sport their army issue spectacles; this along with Hollywood, where actors and actresses had been wearing tinted glasses for decades to protect their eyes from the bright studio lighting, and the rise of beach culture, rehabilitated the public perception of the sunglasses from that of a medical necessity to a fashion statement.

The fifties saw the introduction of Ray-Ban’s Wayfarer model. If the Aviators were the eyewear of heroes, then Wayfarer were the shades of choice for the rebel; its robust plastic moulded frame, with the brow slanted upwards, gave it a character polar opposite to the Aviators, cool rather than authoritative. James Dean wore Wayfarers, as did Marylyn Monroe; while JFK sported a pair of knock-offs – he wouldn’t be the last. Through the decades the Wayfarer’s place in the zeitgeist has been reaffirmed by the patronage of celebrity – from Bob Dylan to Michael Jackson, from Tom Cruise to Bruno Mars.

Today Ray-Ban as a brand is stronger than ever.

Its iconic personality and heritage play well with a generation (be they hipsters or yuccies or whatever the term du jour curmudgeons are using to disparage well-dressed millennials) that almost fetishizes the authentic. Ray-Ban occupies the odd position of being both a market leader and the brand of choice for a generation that prefers its products artisanal and homebrewed. The only brand comparable in this respect that springs immediately to mind is Apple.

2007 saw the launch of Ray-Bans’ latest media campaign created and developed around the concept Never Hide. This campaign, which has been kept alive by a steady stream of print, outdoor, and online content, aims to assert the brand’s maverick identity with a few short, bold, imperative sentences: Never pretend. Never be afraid. Never give up. Never hide. A message reinforced by original artwork while maintaining a vital link to their past by the inclusion or allusion to iconic photography.

Leyte: General MacArthur

“Some brands may be sporty, others might be trendy or edgy, but Ray-Ban is iconic and timeless.”

It would seem that while the good people at TBWA/ CHIAT and Carat International – the agencies responsible for the marketing campaign – are perfectly aware of the irony of using the strapline never hide to sell an accessory which hampers identification.

However, there is a second level of irony they might not have picked up on.

In 1999, Bausch & Lomb sold the Ray-Ban brand for a reported $640 million to the Italian Luxottica Group. Under its founder and chairman Leonardo Del Vecchio, this Milan-based eyewear company has grown into the dominant force in the market, controlling fully 80% of the world’s major eyewear brands. It made Mr Del Vecchio the richest man in Italy. Besides owning Ray-Ban and its chief competitors Persol and Oakley, and a few other house brands, Luxottica also has licences to design and manufacture eyewear for the CFI.co | Capital Finance International

biggest designer labels: Chanel, Dolce & Gabbana, and Versace to name but a few.

Luxottica itself is not a brand, it has no public persona and that’s how Mr Del Vecchio likes it. The company is happy to supply the consumer’s need for variety and choice, perfectly willing to manage all these different brands, each with its particular style and relationship with the public. Two pairs of spectacles each designed by the same team, manufactured from the same materials, and put together on the same assembly line may differ in eventual retail price by hundreds of dollars simply by virtue of what the packaging reads.

The correct price for any commodity – after all – is whatever someone is willing to pay for it.

Paying for the label rather than the actual product is of course nothing new and certainly not in the fashion industry, but Luxottica’s market share is so large they constitute a price setter. The company wields this power not only through its brands, but also through its dominance of the retail side of the business, acting as gatekeeper for competing brands with more than 7,000 locations all over the globe whether the sign outside reads Sunglass Hut, Pearle Vision, or Sears Optical – again to name but a few.

It’s a lucrative feedback loop; competing brands need to be carried by their stores, retail competitors need their brands in stock. This might was unleashed against their then-competitor Oakley through the 2000s, causing its stock to plummet, cutting the brand off on the retail end, and wearing the company down for the eventual merger. Top hat, wheelbarrow, racing car, thimble, shoe.

The second half of last year saw the departure in quick succession of two top executives from Luxottica: CEO Andrea Guerra was the first to withdraw. His replacement, Chief Financial Officer Enrico Cavatorta, did not last long at the top and resigned within weeks, also citing disagreements with Mr Del Vecchio as the reason for his sudden departure. Mr Guerra held his position for over ten years during which the value of the company’s share price almost tripled and sales went from $3.1 billion in 2003 to over $8 billion ten years later. Despite these most embarrassing episodes, the first half of 2015 saw Luxottica report revenues of $5.2 billion, compared to $4.4 billion over the same period last year.

Type Ray-Ban into YouTube and you’ll find page after page of how-to-videos instructing viewers how to tell a fake Ray-Ban from the genuine article. It’s so hard to spot the difference that even while holding a pair one needs a detailed tutorial. But if that fact had mattered at all, there wouldn’t be page after page of people helping each other figure out who has an actual pair of Ray-Bans and who was duped. Luxottica can concern itself solely with being an industry-dominating company precisely because each separate brand in its own unique way is worth buying into.

Some brands may be sporty, others might be trendy or edgy, but Ray-Ban is iconic and timeless. For anyone aspiring to attain timeless status, only a genuine pair will do. Genuine since 1937. i 69

> Oliver Sacks (1933-2015):

The Intuitive Art of Wooing Nature

By John Marinus

T

he human brain is the most complex structure known to us. Somehow, the activity within this myriad of neurons – connected by synapses, and supported by glial cells and blood vessels – the phenomenal gives rise to the noumenal, or – for lack of a better word – the soul.

Neuroscience, together with its medical counterpart neurology, has brought about the exponential growth of our understanding of the brain. As that understanding increases, and technology advances, the mapping of the brain’s structure – how its processes correspond with cognition – becomes ever more precise. And yet the soul, if even only as a metaphor, hasn’t quite left the vocabulary employed to discuss the human condition – a possibly uncomfortable reminder to some neuroscientists of the infancy of their field which hasn’t quite untangled itself from the fuzzier disciplines of philosophy, psychology, and art.

Through his books, neurologist and author Oliver Sacks relayed the stories of those languishing in the more alien, and often less hospitable outposts, of the mental landscape. His patients, invariably persevered – and occasionally even thrived – and did so, not with a narrowed scope centred on their particular malignancy, but with one that encompassed the entirety of their experience: unwilling to sacrifice the narrative for the pathological. While remaining solidly anchored in the sciences, Oliver Sacks was prepared to reach out into the vague spaces between disciplines where much of the understanding of the human condition resides.

British-born and Oxford-educated, Oliver Sacks started his medical career in the US. Coming from a family of doctors – both parents, a brother, an uncle, and three cousins were practising physicians – Mr Sacks concluded that “there were too many Dr Sackses in London” and relocated to San Francisco in 1960, doing his residency at UCSF Medical Centre’s Mount Zion with a fellowship in neurology and psychiatry at UCLA. Mr Sacks later moved to New York where

“Through his books, neurologist and author Oliver Sacks relayed the stories of those languishing in the more alien, and often less hospitable outposts, of the mental landscape.” he remained for the rest of his career serving as professor of neurology and psychiatry at the Albert Einstein College of Medicine, later joining the faculty at Columbia University.

Mr Sacks’ literary career took off in 1973 with Awakenings which attained a wide readership almost instantly. In the book, Mr Sacks recounts the histories of his patients at the Bronx’ Beth Abraham Hospital, mostly those afflicted by encephalitis lethargica – a disease that in severe cases had left them motionless and mute.

Awakenings tells of how experimental treatment with the drug L-DOPA brought about a seemingly miraculous, albeit tragically short-lived, relief with symptoms regressing.

After reading the book, Mr Sacks’ friend and fellow-Brit WH Auden, the poet, encouraged him to adapt his writing style: “Be metaphorical, be mythical, be whatever you need.” Following Mr Auden’s death, in the same year as the book’s first printing was published, all subsequent editions of Awakenings were dedicated to him and opened with an extract from his 1969 poem The Art of Healing:

“Healing” Papa would tell me, “is not a science, but the intuitive art of wooing Nature.”

Most of Mr Sacks’ subsequent books were collected essays, each one a case study of a patient representing a particular abnormality

or disorder: the music professor suffering from visual agnosia, unable to recognise objects beyond general shapes and textures and only making sense of his world through music (The Man Who Mistook His Wife for a Hat); an elderly patient who, unable to make new memories, was perpetually reliving the life of a WWII submarine radio operator; the friend with severe tourette’s who decided to go off his meds every weekend as he found it dulled his gift for drumming; or the man born blind who had to be given the gift of sight in order to become disabled. Mr Sacks’ fifth book tells about the author’s meeting with the autistic professor and livestock industry consultant Temple Grandin. Her characterisation of her interactions with others provided the book’s title – An Anthropologist on Mars.

Mr Sacks had his critics. A few accused him of exploiting his subjects: a doctor mistaking his patients for a book deal. The charge may be dismissed given Mr Sacks’ exceptionally diligent approach to each subject, not only offering a precise description in as far as they exemplify the deleterious implications of their afflictions, but rather the totality of their experience, cautiously sketching the worlds they might inhabit, their limitations, and their triumphs.

Not only did Mr Sacks bring awareness of conditions such as tourette’s, autism, and savantism to a broader public, he also helped nuance public perception, describing not merely the ways in which those affected are “defective,” but also the remarkable ways in which they excel. Maybe most important of all, he offered a rare dissenting voice to the – at the time – near ubiquitously-held notion that those individuals undeniably gifted but mentally, socially, or communicatively challenged somehow lacked an inner experience.

Mr Sacks characterised his narrative as a patient-centred style of case study. His writing may be considered a continuation of the 19th century tradition of case histories, a style of academic writing which by the mid-20th century had fallen out of fashion in favour of a

“Sickness implies a contraction in life, but such contractions do not have to occur. Nearly all of my patients – so it seems to me – whatever their problems reach out to life and not only despite their conditions but often because of them and even with their aid.”

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Autumn 2015 Issue

more reductionist approach. Mr Sacks named the Russian neuropsychologist AR Luria as his main inspiration: “His words made science into poetry.”

Mr Sacks also presented himself as the subject of a case study. In A Leg to Stand On (1984) he tells of his own experience of losing the awareness of his legs following a mountaineering accident. In 2010, Mr Sacks wrote a piece for The New Yorker discussing his own lifelong battle with prosopagnosia (face-blindness). Mr Sacks revisited this topic in his book published that same year – The Mind’s Eye – in which he also revealed his experiences resulting from the radiation therapy he underwent for a uveal melanoma.

In 2008, Mr Sacks was awarded a CBE for services to literature in the Queen’s Birthday Honours. In February of this year Mr Sacks wrote an op-ed piece for the New York Times announcing that his eye tumour had metastasised

and spread to his brain and liver. His remaining time was expressed as a number of months rather than years. He passed away August 30, 2015, at his home in Manhattan. Mr Sack’s final article, Sabbath, was published posthumously in the New York Times; his last book, On the Move: A Life, was published in April.

Notions of mental health have transformed dramatically over the last century. From the defective, to the disturbed, to the challenged: each step recognised as evermore approaching the human. In some cases there are a growing number of those insisting we go one further still: the diverse. The notion of neurodiversity and the anti-cure movement are not without serious controversy or opposition amongst both the medical profession and advocacy groups.

Over the last two decades it has become positively mainstream to recognise the benefits experienced by so-called sufferers, even retroactively diagnosing the great minds of history CFI.co | Capital Finance International

– great not in spite of their disorder, but because of it. Of course, they might have experienced serious difficulties in life, but that’s because they were born in a world designed for people who generally sat still and made sustained eye contact.

This may be one step too far for many, but not it would seem for Oliver Sacks. He wrote an enthusiastic foreword for Steven Silberman’s book Neurotribes which was published, coincidently, only five days prior to his death. Oliver Sacks was part of that shift – not cutting away everything that was familiar, all that was human – to get to the disease. He took us to the point where we can now look into their eyes, if only offered a fleeting peripheral glance in between tics, and wonder how they might pathologise us: the neuro-typical and the world we inhabit.

Oliver Wolf Sacks, neurologist and writer, born July 9, 1933, and died August 30, 2015. He is survived by his partner, writer Bill Hayes. i 71

> Guy Ligier (1930-2015):

From Butcher’s Shop to Racing Track with a Little Help

By Darren Parkin

T

hough Formula One has enjoyed its fair share of colourful characters over the years, few have been as spectacularly gaudy as Guy Ligier, the flamboyant Frenchman who died recently at the age

of 85.

He was a massive success, a colossal failure, and a mysterious rogue all at the same time – everything you want a flash motor racing legend to be.

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Born on July 12, 1930, Guy Camille Ligier spent his childhood in an orphanage before finding work in a butcher’s shop. Furiously frugal, it took him just two years to save enough money to buy a bulldozer and enter the construction industry.

Before the age of 20, he had already amassed a considerable fortune, which he topped up with winnings from motorcycle races. During his time in the building trade, he won contracts on France’s post-war programme of rebuilding the motorway network. He also made friends with two CFI.co | Capital Finance International

local politicians - Pierre Bérégovoy, and future president Francois Mitterrand.

He was a tough, well-built youth with a talent for sport. His great love growing up had been rugby, and his talents with the oval ball in his hometown of Vichy were quickly spotted.

He hit his peak as a player when selected to represent France’s B team in a handful of internationals. A keen competitor – he was also

Autumn 2015 Issue

a champion rower – Guy Ligier struggled to find an outlet for his energy when his legs began to slow on the rugby pitch.

However, he somehow found his way into a Formula One racing car, making his debut as a Cooper-Maserati driver at the 1966 Monaco Grand Prix, lining up alongside eventual race winner Jackie Stewart and third-placed Graham Hill. He finished a respectable sixth (although effectively retired on lap 75 of 100) – ahead of established names like Jim Clark, Mike Spence, Jack Brabham, and John Surtees.

Mr Ligier went on to make another twelve starts, ending his career as a F1 driver following an 11th place finish at the 1967 Mexican Grand Prix. It was a brief, and moderately successful, spell behind the wheel, but it was enough to give him a taste of life in the fast lane. He quickly fell in love with motor racing.

The following year, Mr Ligier joined forces with Jo Schlesser. The pair bought two McLaren Formula Two racing cars and intended to start their own team. Sadly, Mr Schlesser died a year later, crashing in his Formula One debut at the French Grand Prix.

Mr Schlesser’s death affected Guy Ligier profoundly, and he instantly decided to retire from the circuit and focus his life on building racing cars. In honour of his friend, all the cars made by Ligier carried the letters ‘JS’. It was one such car – the JS1-Cosworth – that made its first appearance at the Le Mans 24-hour race in 1970. The JS-3 finished second in the Le Mans Three Hour race the following year.

By 1975, a Ligier JS-2 Cosworth finished second in the World Sportscar Championship, and Guy Ligier was finally recognised as a serious figure in motorsport. It was the spur he needed to throw him back into Formula One. After buying up the assets of Matra Sports, an enthusiastic Guy Ligier set about creating an F1 team.

Photo: FIA

“He was a tough, well-built youth with a talent for sport.

His great love growing up had been rugby, and his talents with the oval ball in his hometown of Vichy were quickly spotted.”

Using Matra’s throaty V12 engine, the name ‘Ligier’ stamped itself onto F1 history as the JS-5, with Jacques Laffite at the wheel, roared to the starting lineup of the Brazilian Grand Prix in 1976.

Affectionately known as The Teapot, it was an eye-catching piece of work. The rear bodywork towered over the back axle to incorporate a huge air intake.

Unfortunately, the crowds didn’t get to see the Ligier cross the finish line as Laffite was forced to retire on lap 14 with transmission failure before sitting on the side lines to watch Ferrari driver Niki Lauda take the chequered flag.

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Mr Ligier would enter a further 326 races over 17 years as an F1 team owner, recording a mere nine wins. In nearly two decades in the sport, the name Ligier became associated with either being a plucky also-ran, or a dismal failure. Guy Ligier’s reputation took a battering too.

His long-term friendship with socialist President Francois Mitterrand opened many financial doors, and he became very adept at wedging them open to acquire funding for his F1 team – a practice which led to much criticism from both peers and a large portion of the French voting public.

To the horror of French economists, President Mitterrand ordered stateowned firms like Loto, Elf, and Gitanes to sponsor Ligier. The government even exerted pressure on vehicle manufacturer Renault to be at the beck and call of Guy Ligier whenever he required their engines or expertise. The seedy undertones of the arrangement made many in financial circles uncomfortable.

Much of the money he obtained was ploughed into either keeping the company ticking over, or designs that were slated as vanity projects. Eventually, the funding dried up as financial backers saw little return on their investments other than bad headlines. From 1987 to 1991, the team was in danger of becoming a laughing stock – a predicament that was highlighted

by Ligier drivers Stefan Johansson and Rene Amoux failing to even qualify for the 1988 San Marino Grand Prix.

When he decided to bow out of F1 in 1992, there were rumours of heavy debts and suggestions of near-bankruptcy. But Guy Ligier had spent a lifetime being a man who was able to make money from nowhere. After turning his back on F1, he opened a new venture selling organic fertilisers. Within a year, he was making millions.

Unable to stay away from the racetrack, he used his new fortune to support his son Philippe’s foray into Formula Three.

The name Ligier hadn’t been absent from racing for long.

However, more financial skeletons were to emerge from Ligier’s financial closet when rumours circulated that he and Mitterrand were involved in dodgy funding programmes for the French socialist movement and the transfer of the French Grand Prix from Marseille to Magny Cours. Nothing was ever proved, but the scandalous hearsay had already damaged Ligier’s reputation, once again. He retired from public life, keen to enjoy his later years merrily spending his fortune. i 73

ANNOUNCING

AWARDS 2015 AUTUMN HIGHLIGHTS Once again CFI.co brings you reports of individuals and organisations that our readers and the judging panel consider worthy of special recognition. We hope you find our short profiles interesting and informative.

All the winners announced below were nominated by CFI.co audiences and then shortlisted for further consideration by the

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panel. Our research team gathered additional information to help reach a final decision.

In many cases, senior members of nominee management teams provided the judges with a personal view of what sets their companies and institutions apart from the competition.

As world economies converge we are coming across many inspirational individuals and

CFI.co | Capital Finance International

organisations from developing as well as developed markets - and everyone can learn something from them. If you have been particularly impressed by an individual or organisation’s performance please visit our award pages at www.cfi.co and nominate.

Autumn 2015 Issue

> CRÉDIT MUTUEL: BEST ESG RISK MANAGEMENT TEAM FRANCE 2015

Partners rather than mere clients. Crédit Mutuel, one of France’s major financial services providers with over seven million accountholders, is a bank that listens. As such, Crédit Mutuel has managed to elevate its interaction with the public to that of a mutually beneficial partnership.

In line with its well-established corporate philosophy, Crédit Mutuel also maintains a solid ESG (environmental, social, and governance) framework and offers a number of products and services tailored to further worthy causes. Crédit Mutuel boasts a range of socially responsible investment products that incorporate ESG values and parameters. The bank’s analysts are trained to identify investment opportunities at companies whose operations do not infringe upon human rights or harm the

environment.

Crédit Mutuel also offers green loans to private individuals, professionals, farmers, and others to finance environmentally sound improvements to homes, offices, and business processes. People who have hit on hard times and struggle with unemployment or subsist on minimal income are welcomed at Crédit Mutuel.

The bank has proactively joined the fight against financial marginalisation and exclusion and sustains a number of initiatives aimed at preventing or remedying precarious situations.

Crédit Mutuel works jointly with over a hundred associations, foundations, and organisations towards helping relieve social pressures on those unable to withstand them.

The bank provides microcredits to people and

small businesses who cannot otherwise access loans. Crédit Mutuel cooperates with other major microcredit providers to help starting entrepreneurs with skills training programmes.

By expanding its reach to all strata of society and offering its services and expertise to the entire nation, Crédit Mutuel has broken new ground. The bank thus offers living proof that financial services may be leveraged to further economic integration and bring a measure of hope in even the most challenging of situations.

As such, the CFI.co judging panel considers that Crédit Mutuel constitutes an example both rare and welcome of an inclusive financial services provider. The judges are pleased to offer Crédit Mutuel the 2015 Best ESG Risk Management Team Award

> THE WALT DISNEY COMPANY: BEST CORPORATE TREASURY MANAGEMENT TEAM USA 2015

As one of the world’s largest entertainment conglomerates, The Walt Disney Company generates an annual revenue just shy of $50bn. Managing all that cash takes a team of seasoned professionals, well-versed in mitigating risk and limiting exposure to the vagaries of foreign exchange markets.

As a global corporation, The Walt Disney Company manages both receipts and expenditures in most of the world’s currencies.

In order to improve operational efficiencies and eliminate settlement risk, the company has applied the Continuous Linked Settlement (CLS) system to its FX hedge contracts. This ensures that transactions are settled on a paymentversus-payment (PVP) model whereby both parties deliver the currencies owed before the offsetting payment is released.

An added bonus is that by leveraging the power of multilateral netting, the company may now combine a vast number of payments

into a single transaction, streamlining the settlement process. As a result, it is no longer necessary to coordinate the settlement of FX hedge contracts across different currencies and banks. Finally, by going the CLS route, The Walt Disney Company is able to continuously track and evaluate – via a single point – its US dollar receipts and payments outlook which allows it to easily determine short-term funding and/or investment needs.

In September, the company appointed Jonathan S Headley its senior vicepresident and treasurer. The announcement was made by Senior Executive Vice-President and Chief Financial Officer Christine M McCarthy.

“During his 11-year tenure as assistant treasurer, Jon has shown himself to be a highly effective financial executive, and his proven expertise, leadership skills and strategic acumen make him the right choice for this role,” said Ms McCarthy.

Under Ms McCarthy’s guidance, Mr CFI.co | Capital Finance International

Headley helped shape the company’s treasury into a relatively small but highly skilled and effective team that has proven instrumental in protecting the bottom line. Mr Headley joined the company in 1996 as a senior analyst in Corporate Finance.

Mr Headley emphasised that The Walt Disney Company is entering an exciting period of unprecedented growth and expects to leverage his, and the treasury team’s, carefully honed skills to help shape the future of the corporation.

The CFI.co judging panel has no doubt that The Walt Disney Company’s treasury department will keep ahead of the game, ferreting out opportunity, and ensuring that the efforts of the company’s more than 180,000 employees are not eroded by the notoriously volatile FX market. The judges feel fully justified in their decision to extend the 2015 Best Corporate Treasury Management Team USA Award to The Walt Disney Company.

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> BANCO DE FOMENTO ANGOLA: BEST BRANCH NETWORK ANGOLA 2015

A steadfast dedication to operational excellence and customer satisfaction has propelled Banco de Fomento Angola (BFA) to the forefront of the country’s financial services industry. The bank’s accountholders, now approaching a million, may conveniently access a full palette of products and services via an extensive network that reaches into all corners of the vast country. The BFA network currently consists of 189 branches in addition to a number of investor services centres and other specialised outlets.

From its earliest days, Banco de Fomento Angola has adhered to a corporate philosophy that puts the bank’s clients centre

stage. It follows that close proximity to customers became one of BFA’s guiding principles. Over the years, the bank has consistently invested in the expansion of its branch network – now the largest of any Angolan financial services provider – both broadening and deepening its corporate footprint. The nation’s capital Luanda, a metropolis with almost three million inhabitants, is served by no less than 86 BFA branches.

Banco de Fomento Angola, voted one of the country’s Superbrands, is not just one of Angola’s most recognisable financial institutions, it is also well known and respected for its excellence in the delivery of retail banking

services. BFA has invested significantly in both staff training and technological infrastructure.

Over 99% of operational processes are now fully automated and the bank consistently claims the Straight-Through Processing Excellence Award – a coveted prize extended to the highest performing financial services providers by Deutsche Bank.

The CFI.co judges feel wholly justified in adding to BFA’s laurels. In 2013, the judges extended the CFI.co Best Community Engagement Programme Angola Award to BFA. This year, the judges wish to offer Banco de Fomento Angola their Best Branch Network Angola 2015 Award.

> CANTOR FITZGERALD: BEST INSTITUTIONAL FIXED INCOME BROKERAGE GLOBAL 2015

Established by Bernie Cantor and John Fitzgerald at the end of World War II as an investment bank and brokerage, Cantor Fitzgerald (CF) is justifiably proud to be one of the few private partnerships left on Wall Street. This was the first firm to offer worldwide screen brokerage services in US government securities (1983) and has maintained an enviable reputation for technological innovation. CF is represented in all major financial centres and serves more than 5,000 clients around the world. This is a highly successful and prestigious global brand.

Tragically, the firm lost more staff members than any other World Trade Centre 76

tenant on September 11, 2001. However, Cantor Fitzgerald was able to restore online trading within a week of the tragedy. Partner response in supporting families of lost colleagues was inspirational – with a full quarter of corporate profits earmarked for their benefit over the following five years. Howard Lutnik succeeded Bernie Cantor and is currently chairman and CEO of the firm that still has its headquarters in New York.

CF is a leader in fixed income with a well-deserved reputation for solid rates strategy.

The firm offers a fully comprehensive range of fixed-income products. Cantor Fitzgerald works CFI.co | Capital Finance International

hard and effectively to develop long-term client relationships. Team members work together in a very productive manner. The skills of CF’s sales and trading professionals compliment the cutting edge trading platform on offer.

This firm is a seasoned top player in global finance and gives every indication of being a business that is here to stay, to grow, and to improve continuously. The CFI.co judging panel agrees that Cantor Fitzgerald is made of the right stuff. CF is obsessed with a desire to exceed its clients expectations at all times. The award Best Institutional Fixed Income Brokerage Global 2015 is hereby offered to Cantor Fitzgerald.

Autumn 2015 Issue

> BANCO INTERACCIONES: BEST GOVERNMENT BANKER & BEST INVESTMENT BANK MEXICO 2015

The largest niche bank in Mexico, Banco Interacciones offers a broad range of financial services tailored to meet the requirements and needs of public entities and governments at local, state, and federal level. The bank also specialises in setting up and serving public-private partnerships. Additionally, Banco Interacciones assists private businesses that provide products and services to public bodies.

The only bank in Mexico focused solely on providing financial solutions to the country’s public administration – and all those dealing with it – Banco Interacciones has accumulated a vast reservoir of knowledge and experience that enables the institution to offer clients results-oriented services carefully conceived to maximise efficiency via a one-stop shop approach either directly and/or through its consultancy services subsidiary company [EF&I].

Exceptionally competitive and

adhering to the highest standards of quality in the delivery of its services, Banco Interacciones plays a major role in the provision of financing for small to medium scale infrastructure projects. Leveraging its experience with the public sector, the bank is peerless in the design of comprehensive solutions that meet – and often exceed – legal requirements, allowing clients an edge that often proves decisive when it comes to being awarded public contracts.

Banco Interacciones has been in business for over twenty years and has established a solid reputation that now extends well beyond Mexico. The bank is now recognised globally as the go-to place for all who have dealings with Mexico’s public administration. As the country’s development accelerates, public procurement processes become increasingly more sophisticated, requiring the expert knowledge only a specialist bank such as Banco Interacciones can readily provide. The bank also

maintains a number of investment funds that are set up and managed to comply fully with the specific requirement of public entities’ deposit and investment decisions.

The CFI.co judges note that Banco Interacciones has put systems in place that allow for the constant monitoring of its performance. Feedback loops enable the bank to promptly respond to changing circumstances and thus maintain its already formidable lead.

Banco Interacciones has attained exceptionally high growth rates by, amongst others, adhering to well-established best governance practices.

The consistency of Banco Interacciones’ performance is again recognised by the CFI. co judging panel with a double award title – Best Government Banker Mexico 2015 and Best Investment Bank Mexico 2015. Banco Interacciones is a repeat winner and the judging panel is delighted in acknowledging the bank’s excellence for a third time.

> FINECOBANK: BEST EUROPEAN FINANCIAL ADVISORY TEAM 2015

The first to launch an online trading platform for retail investors in 1999, Italy’s FinecoBank is accustomed to taking the lead.

Now with over a million accountholders, Fineco Bank is amongst the largest multichannel direct banks in Italy.

In 2007, FinecoBank became part of the UniCredit Group, a Milanbased financial services company with a global network covering over fifty markets.

However, FinecoBank continues to operate independently and maintains its unique brand which stands for quality and sophistication through simplicity and elegance.

Offering its clients a full array of banking services, FinecoBank has consistently outpaced its competitors in customer satisfaction. The bank’s no-nonsense approach

to financial services has hit a chord with the public and is considered a winning strategy that ensures the sustained growth of the company.

True to its roots, FinecoBank shows particular strength in enabling and empowering its clients to manage their investments either actively or passively. The bank’s paperless approach allows for added agility while ensuring full transparency. A dedicated team of over seventy highly experienced professional asset managers, and a veritable army of advisors and analysts, constantly monitors markets, follows trends, and identifies opportunities to provide investors with a stream of premium quality, easily accessible data that allows accurate decisions to be made at precisely the right time.

Over 15,000 accountholders have CFI.co | Capital Finance International

entrusted in excess of €48bn to FinecoBank for management by its team of investment experts.

The bank also serves as a gateway to the Italian market for foreign investors. All FinecoBank clients are assigned an independent financial advisor who is charged with putting together a bespoke mix of investment products tailored to individual risk tolerance and financial goals.

The CFI.co judging panel finds the direct, customer-centric, and streamlined approach pioneered by FinecoBank extremely refreshing. The results show and prove that the formula works: it attracts new customers in droves and adjusts seamlessly to individual needs and requirements. The CFI.co judges are therefore pleased to offer FinecoBank the 2015 Best European Financial Advisory Team Award.

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> UOL GROUP: BEST PROPERTY PORTFOLIO MANAGEMENT TEAM SINGAPORE 2015

UOL (United Overseas Land) Group, founded in Singapore in 1963 and listed on the city state’s stock exchange the following year, operates as a consummate property developer in thirteen countries: the UK, the USA, Canada, Singapore, Malaysia, Thailand, Indonesia, The Philippines, Vietnam, Myanmar, Australia, China, and Bangladesh.

Core business for UOL comprises residential/commercial and hospitality property development (including joint ventures), project management, and investment in securities. The company’s portfolio is well diversified – focusing on high growth regions – and the group has an enviable track record that includes close collaboration with overseas partners.

Total assets of UOL stood at close to

$12bn at mid-year 2015 versus $3.5 billion ten years ago. The group’ story is one of outstanding growth, superb design work, a keen eye on quality, and strong and effective branding. The group’s corporate identity is a symbol of the spirit of enterprise and innovation.

UOL operates innovatively in an exceptionally competitive segment of the market and does so with great aplomb. Team strengths include flexibility and an eagerness to learn just what the market wants and needs.

The management team is strong, talented, and intensely loyal. The company constantly maintains its focus on client needs. There is also a commitment to sustainability which merits recognition.

Pan Pacific Hotels Group Limited, a

wholly-owned subsidiary of UOL Group, operates and/or markets more than thirty facilities in Asia, Oceania, and North America.

UOL Group has an obvious commitment to the very highest standards in architectural design and development.

The company’s determined management concentrates on steadfastly creating value for all stakeholders.

The CFI.co judging panel is very impressed with UOL Group on many levels. The group’s current property development portfolio looks extremely solid and there is ample evidence of promise for the years to come. The panel has no hesitation in awarding the group Best Property Portfolio Management Team Singapore 2015.

> SENTINEL RETIREMENT FUND: BEST FUND MANAGEMENT TEAM SOUTHERN AFRICA 2015

One of South Africa’s largest selfadministered pension funds, Sentinel Retirement Fund currently manages assets in excess of $6.2bn for its members – numbering around 46,000.

The fund was formed in 1946 to handle the mining industry’s retirement schemes. As such, Sentinel Retirement Fund pays exceptionally close attention to serving its members in a fully transparent and cost-effective way.

Asset management benefits from economies of scale. Day-to-day operations – the nuts and bolts of the fund’s money management – are handled by carefully selected third-party investment experts and analysts whose actions are constantly monitored, and decisions narrowly tracked, in order to ensure optimum performance at all times and under any market condition.

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Sentinel Retirement Fund has a staff of experienced financial advisors to help members make the right choices. The Sentinel team offers tailored advice that allows members to maximise the return on their investments by switching between funds, thereby selecting those best suited to their age and income profile. Sentinel Retirement Fund maintains an exceptionally streamlined operation with a cost structure that is amongst the lowest in the world.

In order to safeguard the long-term profitability of its investment portfolio, Sentinel Retirement Fund pursues a strategy hinged on environmental, governance, and social (ESG) standards. Thus, the fund minimises its exposure to risk while ensuring that its members’ contributions help advance the wider society.

CFI.co | Capital Finance International

Members enjoy convenient access to the fund’s up-to-date balance sheets and can easily determine the performance of their personal portfolio. Five client service centres dispense personalised advice and allow the fund to maintain close proximity to its members.

The CFI.co judging panel recognises Sentinel as a premier example of a sensibly-run retirement fund and notes that it operates in a wellregulated, competitive, and sophisticated market that does not tolerate subpar performance. Only world class funds such as Sentinel Retirement Fund are able to prosper and consistently deliver their members stellar results. The CFI.co judges are pleased to name Sentinel Retirement Fund winner of the 2015 Best Fund Management Team Southern Africa Award.

Autumn 2015 Issue

> CLYDE & CO (HONG KONG): BEST AVIATION FINANCE ADVISORY TEAM FOR EMERGING MARKETS 2015

A market leader in aviation regulation and finance, the Hong Kong law office of Clyde & Co helps clients keep abreast of the latest developments in the fast-paced airline industry and consistently delivers world class legal assistance to the sector’s major players and those aiming for the top.

The firm has long been acquainted with the particular needs of the airline industry in emerging markets. It is precisely here that much of the industry’s growth is taking place, with new airlines spreading their wings and existing ones expanding route networks and fleets. Clyde & Co has been serving the aviation sector for over eighty years and boasts a solid track record in assisting airlines from emerging markets in Africa and elsewhere soar high –

safely and securely.

Liability rules, global emissions trading frameworks, and other regulatory trends are carefully monitored and mapped by Clyde & Co’s in-house team of legal professionals and industry experts to help airlines deal with a constantly shifting business environment.

The firm operates on a global scale and is widely recognised as the elite team to call whenever highly complex matters arise.

Clyde & Co’s vast experience in the aviation sector also allows it to offer clients sound advice on finance, insurance and reinsurance matters, fuel contracts, labour disputes, and other nutsand-bolts questions that aviation executives habitually face.

In the aviation industry, Clyde &

Co has become a byword for efficiency. The firm seeks legal solutions through straight-line simplicity , with prompt conflict resolution – whether via litigation, mediation, or arbitration – considered of paramount importance.

The CFI.co judges expressed admiration for Clyde & Co’s proactive approach: clients not just benefit from the firm’s indepth knowledge of a highly complex and heavily regulated industry, they also receive constant updates regarding changes in rules and practices which enables clients to promptly adjust business processes and thus keep a few steps ahead of the competition. The CFI. co judges are pleased to confer on Clyde & Co (Hong Kong) their 2015 Best Aviation Finance Advisory Team for Emerging Markets Award.

> DEVELOPMENT BANK OF RWANDA: OUTSTANDING CONTRIBUTION TO DEVELOPMENT IN RWANDA 2015

Home to a fast growing economy and with an accelerated development drive well underway, Rwanda constitutes one of a growing number of African success stories. While the country has tripled its per capita income since 1994, many individuals and businesses still face a challenge to accessing finance.

The Development Bank of Rwanda (BRD) is a public limited liability company with a share capital of RWF 7.8bn, now grown to over RWF 42bn. It was incorporated on August 5, 1967. As a financing institution, BRD is focused on facilitating the process of achieving sustainable development through financing different sectors of the economy as well as ensuring community benefits by engaging its funds in priority sectors of the economy that

engineer development of other sectors via added value.

Consequently, projects that benefit from these financial services have contributed to the country’s GDP, created thousands of jobs, and paid taxes as well as creating immeasurable value chains. In addition, a major internal reorganisation, concluded last year, greatly improved BRD’s ability to fulfil its mandate.

BRD split off its commercial bank to private investors in order to concentrate on its core business.

The bank currently prioritises investments in agriculture, export, affordable housing, energy, and education. These sectors have been identified as having the largest impact on the economic development of the country.

CFI.co | Capital Finance International

The bank also maintains a number of advisory and capacity-building programmes aimed at helping clients gain additional business and financial management insights and produce viable business plans.

After considering this impressive track record, the CFI.co judges agree that BRD is one of the pillars behind Rwanda’s strong economic performance. By providing both financial and operational expertise, BRD stands ready to help propel the nation into a future that looks more promising by the day.

The CFI.co judging panel is therefore happy to hand the 2015 Outstanding Contribution to Development in Rwanda Award to the Development Bank of Rwanda.

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> WIR FINANZIERER: MOST INNOVATIVE SME FINANCE GERMANY 2015

Just as England is endearingly known as a nation of shopkeepers, Germany enjoys the reputation of being a nation of manufacturers.

Smaller German businesses have often been run by the same family across many generations. As a rule, their owners take great pride in the superior products and services delivered with reputation having an edge over the bottom-line. Germans admire their “Mittelstand” – the demographic of rather dull and conservative, but invariably hard-working and diligent, entrepreneurs who form the indestructible backbone of the nation and its robust economy.

However, a fair part of Germany’s vast SME universe is not too keen on the

nation’s banks which, while well equipped to deal with large corporations, are often at a loss when it comes to serving the needs of smaller businesses. Even though almost everyone agrees that SMEs fulfil a crucial role and are the drivers of job creation and economic prosperity, so far little has been done to help these companies obtain easier access to credit.

That has changed with WIR Finanzierer, a financial services provider specifically set up to allow German SMEs to tap into capital markets. WIR Finanzierer bundles bonds issued by duly rated companies which it then sells to investors. Participating SMEs are checked by rating agency Euler Hermes for their creditworthiness in a wholly transparent

process that ensures investors buy into wellrated companies. The model developed by WIR Finanzierer benefits both sides of the equation: SMEs obtain quick access to the funds they need to drive expansion, and investors gain a unique financial instrument that allows them to become part of the Mittelstand – the quintessentially German success story.

The CFI.co judging panel commends WIR Finanzierer for finding a solution to a longstanding problem – the proper financing of SMEs. The judges are encouraged to see that the firm now mulls expansion into neighbouring countries. The panel wishes to congratulate WIR Finanzierer with its win of the 2015 Most Innovative SME Finance Germany Award.

> COOP MORTGAGE BANK: BEST MORTGAGE BANK NIGERIA 2015

The COOP Mortgage Bank has been providing mortgages in Nigeria for over twenty years. A successful rebranding exercise and the necessary recapitalisation took place in 2009 which now allows the bank to concentrate on serving cooperative societies very effectively.

Much progress has been made in this regard during recent years.

By grouping people with similar needs and purchasing power and dealing directly with housing developers, significant cost savings can be achieved. This translates into very competitive mortgage offerings by COOP. With the high cost of financing elsewhere in Nigeria these days, COOP Mortgage Bank clients are doing very well for themselves.

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Innovation and creativity are the core strengths of the exceptionally talented team at COOP Mortgage Bank. Staff training is exemplary and the CFI.co judging panel commends the bank on its carefully considered and highly efficient management style.

The COOP Mortgage Bank initiative on cooperative society work – which now accounts for a full 70% of their mortgage business – without doubt creates value but also reduces risk for lender as well as client. It is easy for clients to exit their agreement if their situation changes and so default is not a worry.

Headquartered at Ibadan, COOP Mortgage Bank has branches in Lagos and Abuja. The bank is active across six states and CFI.co | Capital Finance International

there are plans in place to expand the network in Nigeria and even venture overseas. It would certainly seem that the business model at COOP would have a very strong chance of success in other countries. COOP Mortgage Bank is a key player in the Nigerian mortgage industry, works to international best practice, and seems poised to take advantage of the groundwork prepared so well at home.

The panel feels that COOP Mortgage Bank is doing much to respond to the needs of the market and admires the approach taken to help in the provision of affordable housing in Nigeria. The 2015 award for Best Mortgage Bank, Nigeria goes to COOP Mortgage Bank.

Autumn 2015 Issue

> DEVERE GROUP: BEST INDEPENDENT FINANCIAL ADVISORY TEAM GLOBAL 2015

Creating lasting value by helping investors find both strategies and vehicles: deVere Group, the world’s largest independent financial advisory firm, knows what it takes to grow affluence into wealth. The company is the first international financial brokerage that maintains a borderless approach, serving around 80,000 clients worldwide with in excess of $10bn in funds under advice and administration.

A network of highly experienced financial advisors stands ready to map out bespoke investment routes that dovetail precisely with individual clients’ risk profiles and personal ambitions and goals. Considering that no two investors are alike, deVere professionals are trained to help clients find suitable solutions that carry the potential to exceed expectations, yet maintain excellent levels of safety.

Conceived to help investors find the best opportunities anywhere in the world, the deVere Group serves clients in over a hundred countries. Emphasising people over numbers, deVere investment advisors are in the business of making dreams come true. Measuring its corporate achievements by the realisation of client wealth, deVere Group has managed to become the world’s premier independent financial advisory firm.

Founded in 2002, deVere Group works closely with leading investment firms to offer clients a vast array of investment vehicles.

The firm also features international pension and tuition fee planning in addition to mortgages and tax planning services.

The CFI.co judges took note of the full suite of consultancy services offered by

deVere Group. The judging panel considers the firm one of only a select few that has both the capacity and the track record to serve investors looking for solid returns on medium to long-term investments while rigorously maintaining risk in check.

The judges also commented on the deVere Group’s particular strength – its independence. With no conflicts of interest lurking in the shadows, deVere Group financial experts are free to dedicate their full attention to growing client wealth in the most effective way.

The CFI.co judges are pleased to recognise the many accomplishments of the deVere Group by handing the firm the 2015 Best Independent Financial Advisory Team Global Award.

> VIRGIN MONEY: BEST YOUNG BANK GLOBAL 2015

Hip, groovy, trendy, cool, and irreverent: these are not the timeless hallmarks of your dad’s bank. Then again, Virgin Money is not into staid or plaid. One of the UK’s youngest banks, Virgin Money is unashamed in its appeal to the up and coming generation of movers, shakers, and barnstormers.

Eschewing small-letter footnotes and legalese, Virgin Money is both upfront and out front. The bank aims for direct lines of communication, transmitting clear talk and straight messages. Investors in Virgin Money’s ready-made investment funds are told that they may get back less money than the amount invested. Devoid of ambiguity but armed with a comprehensive suite of world class products,

Virgin Money may be young and bold; it is also quite mature and sophisticated.

Founded by Britain’s best-loved enfant terrible Richard Branson – investor and serial entrepreneur par excellence – Virgin Money currently operates in the UK and has signed up around three million customers.

Virgin Money got a head start when it managed to acquire Northern Rock which had been nationalised in the wake of the global financial crisis.

Challenging the established order, Virgin Money makes no secret from the fact that its management team is constantly on the lookout for opportunities to improve and innovate. With a strong belief in the beneficial CFI.co | Capital Finance International

cumulative effects of small incremental change, Virgin Money tries to help customers reach personal goals by offering well-conceived products that respond to well-defined needs.

Bells, whistles, and other add-ons are no-no’s.

In a way, Virgin Money is bringing banking back down to earth.

The CFI.co judging panel was both surprised and impressed by Virgin Money’s fresh approach to banking. The company has cleared a path and ventured into a territory largely unexploited by its competitors. Virgin Money is the real thing: not an old bank trying to be hip, but a young bank being serious. The judges are thrilled to confer their 2015 Best Young Bank Global on Virgin Money.

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> KING & WOOD MALLESONS: BEST BANKING & FINANCE TEAM AUSTRALIA 2015

King & Wood Mallesons (K&WM) advises across a good spread of local, regional, and international corporate businesses and are Australia’s industry leaders in banking and finance. The firm was sole adviser to the Australian Security Exchange during the set-up of a national clearing house for OTC (over the counter) derivatives.

This legal firm has also advised a banking syndicate on Original Energy’s refinancing facilities – the largest debt financing initiative in Australia since the onset of the global economic crisis. K&WM has advised Woolworths and is Australian counsel for the China Development Banking Corporation and

for the Bank of China.

This top-tier firm enjoys a solid reputation for working to successful outcomes on the most complex deals. It is abundantly clear that the team’s skills extend across all aspects of banking and finance. Significantly, K&WM is the only Australian law firm to have tier-one ranking in all the disciplines it practises. Also of significance is that the firm credits itself as the first – and so far only – global legal firm to have its headquarters in Asia.

King & Wood Mallesons is one of the Top 25 firms by global revenue, which now exceeds $1bn. The company is well placed to guide clients looking to expand into Asia.

Worldwide, the firm employs more than 2,700 lawyers across thirty offices in Europe (8); Asia (13); North America (2); the Middle East (2); and of course Australia (5) – Sydney, Canberra, Melbourne, Perth, and Brisbane.

The CFI.co judging panel commends King & Wood Mallesons Australia on its remarkable success. K&WM is an extraordinarily strong law firm that is doing exceptionally fine work in many areas of legal expertise. The firm’s Australian offices will be able to open doors to clients looking to expand business in China and other parts of Asia where K&WM offers expertise considered

> MACK INTERNATIONAL: BEST INVESTMENT MANAGER EXECUTIVE SEARCH FIRM UNITED STATES 2015

For most family offices, finding the right professional to manage their wealth is a challenge fraught with danger and lined with uncertainty.

The quest to identify that one professional with the expertise – and the personality – to best serve the interests of the client is not unlike looking for that elusive needle in the proverbial haystack.

In order to find the perfect match, Mack International deploys both rigour and creativity. As a first step, the executive search firm immerses itself in the business and culture of the client. This enables the experts of Mack International to sketch an outline of the ideal candidate and use this as a template from which to extract a clear search pattern; i.e. a strategy to find, vet, and retain the executive who is capable of managing the family office or 82

enterprise in accordance with the client’s wishes and aspirations.

Mack International is a boutique consultancy offering highly personalised and bespoke services to single and multiclient family offices, wealth management and investment management firms in search of retained executives. Each client enjoys the benefit of a dedicated team of seasoned senior professionals led by the firm’s founder.

Mack International maintains a large network of highly-valued contacts and referral sources built-up over time and reflecting the industry’s best practices.

Not constrained by the corporate off-limit areas suffered by generic executive search firms, and wholly dedicated to serving family offices/enterprises, wealth management CFI.co | Capital Finance International

and investment management firms, Mack International is able to tap into resources not available to others, thus deepening and broadening the talent pool.

The CFI.co judges consider Mack International a model niche company. The firm dominates its highly specialised market and serves it to perfection. In this particular business, many companies try to make a mark, but only few actually do. Mack International is one of those few search firms that have the capability to deliver the goods, time and again.

If there is a needle in that haystack, Mack International will find it. The judges are pleased to offer Mack International the 2015 Best Investment Manager Executive Search Firm United States Award.

Autumn 2015 Issue

> JSW ENERGY LIMITED: BEST ESG POWER PRODUCER INDIA 2015

JSW Energy Limited aims high: the company’s stated mission is to provide power to every citizen of India and expand its operational footprint to well outside the subcontinent. One of the first companies to seize the moment when India’s power sector was opened to private investment in the 1990s, JSW Energy Limited generates 3.2GW of power and has another 8.6GW under construction and development.

JSW Energy Limited is an integrated power company that exercises full control over the entire value chain. The firm has integrated backwards, acquiring a 49% stake in the Barmer Lignite Mining Company which operates two adjacent blocks in Rajasthan State. JSW Energy Limited is also the senior majority partner in South African Coal Mining Holdings, listed on the Johannesburg Stock Exchange.

Employing state-of-the-art

technology at its power generating facilities in India, JSW Energy Limited has embarked on a joint-venture with the Toshiba Corporation of Japan for the development and manufacturing of high-efficiency supercritical steam turbines for use in thermal power plants. These ultramodern turbines consume significantly less coal and thus help India reduce its carbon footprint.

JSW Energy Limited is also involved in India’s buoyant power trading market and operates its own transmission and distribution grid. Additionally, the company pioneers the building of new lines to unlock the energy coming online shortly as new projects near completion.

At the forefront of efforts to further corporate social responsibility (CSR) and promote the implementation of ESG (environmental, social, and governance)

standards, JSW Energy Limited consistently strives to maximise corporate transparency.

The company ensures that its operations have a positive impact on its surroundings and remains accessible to all stakeholders.

The CFI.co judging panel displayed much interest in the ways JSW Energy Limited’s shaped its corporate ESG policy and concluded that the fully integrated power company constitutes a prime example of responsible stewardship. The company has elevated both CSR and ESG – and their attendant processes – to the highest level of its corporate structure.

The CFI.co judges applaud this rigorous approach and are convinced that the approach will fast-track JSW Energy Limited’s corporate expansion drive. The judges are pleased to extend the 2015 BEST ESG Power Producer India Award to JSW Energy Limited.

> AK INVESTMENT: BEST INSTITUTIONAL BROKER TURKEY 2015

A boutique brokerage house packing an impressively big punch, Ak Investment helps institutional investors gain exposure to the buoyant Turkish economy. While the Borsa Istanbul may have retreated a bit of late, the economy’s fundamentals remain exceptionally strong with plenty of upside potential for the country’s corporates.

Ak Investment – part of Akbank, Turkey’s largest banking conglomerate – maintains a notably strong research department that has gained a well-deserved reputation for picking out tomorrow’s winners and shielding clients from market pitfalls. The firm’s analysts produce a wealth of information on both macroeconomic trends and specific equities, allowing investors a bird’s eye view of all relevant events and considerations affecting the country’s corporates.

Ak Investment has also amassed a

wealth of experience in preparing IPOs, assisting with mergers and acquisitions, and getting state-owned companies primed for privatisation.

The firm’s expertise is regularly called upon by leading Turkish businesses that seek to leverage the power and resilience of the country’s capital market.

Dedicated to offering its clients the best service delivery experience on the market, backed up by the most up-to-date technological platform, Ak Investment recently succeeded in moving its powerful servers inside the stock exchange where they now reside alongside the Borsa’s own IT hardware. The move greatly reduced the latency of the connection, significantly speeding up the execution of orders while ensuring equity transactions are carried out at the best prices money can buy.

Thanks to its investment in technology, Ak Investment is now especially CFI.co | Capital Finance International

well-positioned to make the most out of the partnership between the Borsa Istanbul and Nasdaq OMX by which the Turkish exchange gained access to the world’s most advanced suite of trading technologies, resources, and advisory services.

The CFI.co judging panel applauds Ak Investment for its keen sense of opportunity and its spot-on corporate vision. Few, if any, of the firm’s competitors have displayed a comparable dedication to the financial well-being of clients.

More than just that, Ak Investment has invested in both people and technology to maintain – and indeed expand – its lead in the market. The judges consider Ak Investment an exemplary brokerage that showcases what may be achieved through expertise and devotion to success.

The judging panel wishes to congratulate Ak Investment on its win of the 2015 Best Institutional Broker Turkey Award.

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> GOLDEN ASSETS: BEST FINANCIAL ADVISORY TEAM PORTUGAL 2015

Catering premier advisory services to investors across the entire risk spectrum, Golden Assets remains true to its name since 2000 when the firm was formed to bridge the gap between Portugal’s uniquely complex investment profile and the global investor community with specialist knowledge and a keen eye for opportunity.

Over the last two or so decades, the company has weathered a number of severe storms that rocked and battered the Portuguese economy. However, the adverse market conditions of times past shaped Golden Assets into a local investment powerhouse of global renown. The firm not only survived; it prospered as well and with it, Golden Asset’s clients, allowing Golden Assets to assume a leadership

position in the Portuguese market.

Customer-centric in its approach and fiercely independent, Golden Assets remains free from the pressures normally associated with investment firms that are part of a larger financial conglomerate. Absent conflicts of interests, Golden Assets is able to dedicate the full attention of its team of professionals to serve the best interests of individuals, companies, and institutional clients. Leveraging their collective knowledge of the global markets, Golden Assets’ analysts and portfolio managers consistently succeed in delivering results well north of established benchmarks, outperforming the overall market as a matter of course.

The CFI.co judging panel notes that

Golden Assets is an idea-driven firm that values long term relations and promotes a global and integrated financial advising service in which the experts enjoy every chance to step outside the box and engage in innovative thinking in order to produce stellar results. The judges commend Golden Assets on its sustainable approach in financial advisement services and congratulate the firm on its prescience – grounded in superior research and intelligence – of market changes.

The firm is unswervingly dedicated to help shape a better future for its clients. The judging panel feels entirely comfortable in extending the 2015 Best Financial Advisory Team Portugal to Golden Assets.

> FAIR-FINANCE: MOST SOCIALLY RESPONSIBLE PENSION FUND CENTRAL EUROPE 2015

The passion, determination, and focus of fair-finance founder Markus Zeilinger is obvious to all. As a young man he was strongly influenced by a family that was split in composition between traders and educators. Mr Zeilinger was soon promoting the sale of fair trade products. Later on, his expertise in providing direct marketing advice to the financial services industry provided a roadmap to a successful career in the Austrian pensions industry.

However, by 2008 it was time for Mr Zeilinger to withdraw with a smile and concentrate on his vision for the development of a rather pleasantly different pension fund that has become known as fair-finance as a social responsible company which is not driven by profit maximisation. In fact, with the help of a stakeholder-oriented model the individual customer value is brought in line with additional social benefits.

The main focus of fair-finance is to 84

invest in sustainable businesses and help further social goals – a full ten percent of the fair-finance budget is allocated to social projects. Fair-finance has implemented sustainability (social, ethical, ecological, and economical) in all business units.

Perhaps unsurprisingly, there is a long list of must-avoid investments fair-finance would never put money in, according to the “regulation of sustainability asset management.”

Client costs are very low – 1.7 % administrative costs on regular payments and 0.6 % asset management cost. Fair-finance reduces the costs on regular payments as of 2016 to 1% after the 10th year of service. The main difference to all other Austrian provident funds is that fair-finance has low fees and offers a minimum guaranteed annual interest rate of 1.75 % for 2014 and 2015.

This is a fast growing company that looks set to succeed with distinction. Fairfinance has received the gold certificate from CFI.co | Capital Finance International

the ÖGUT (Österreichische Gesellschaft für Umwelt und Technik) in 2014 for sustainability and is moreover the only provident fund that has been awarded with the Österreichisches Umweltzeichen (Austrian eco-label) for its whole portfolio.

As of this year, customers also participate in the company’s profit. Fully ten percent of the profit will be credited to their accounts annually.

Although the founder concedes that the model is not yet perfect, the CFI.co judging panel concludes that fair-finance is working in absolutely the right direction. The business approach pioneered by Mr Zeilinger may be regarded as a breath of fresh Austrian Alpine air.

It is with great pleasure that CFI.co confirms the award Most Socially Responsible Pension Fund Central Europe 2015 in the name of fair-finance.

Autumn 2015 Issue

> DE BRAUW BLACKSTONE WESTBROEK: BEST ENERGY LAW TEAM THE NETHERLANDS 2015

Headquartered in Amsterdam, this outstanding Dutch law firm has offices in Belgium, the UK, the USA, China, and Singapore. De Brauw Blackstone Westbroek (DBBW) traces its heritage back to 1871 when Englebert Nicolaas de Brauw was admitted as an attorney.

Twenty five years ago, five firms merged – those mentioned on the name plate plus Helbach and Veegens – to create the modern-day company which is now part of the prestigious Best Friends Network.

DBBW is proud to have retained some of its clients for well over a century. The explanation given by the senior partners for this enviable level of loyalty is that the firm

has always approached its business in a clientcentric manner. At DBBW, the entire firm – and not just one partner – works on behalf of each client. The firm focuses intently on adding value to help clients achieve and surpass their commercial goals.

Each year, the firm provides a total of 1,000 hours of pro bono work spread across ten worthy clients. DBBW provides and promotes a culture that aims to seek out justice and does so at the highest courts of the land and at European level.

This firm stands out from the competition in energy law. It works successfully on major transactions, litigation matters, and

was a pioneer in emissions trading. DBBW boasts an extremely deep market knowledge and considerable experience in handling the most complex cases. There is no doubt whatsoever that this firm is a key player in the energy sector.

DBBW is presently working on a number of important infrastructure and alternative energy projects.

The CFI.co judging panel applauds De Brauw Blackstone Westboek for its services to both clients and the wider community. The judges point to a business philosophy that makes a great deal of sense to the firm and its clients. The panel hereby confirms the award Best Energy Law Team The Netherlands 2015.

> ALLIANCE FINANCIAL SERVICES: BEST FINANCIAL ADVISORY TEAM MAURITIUS 2015

The Mauritius economy has been growing an average rate of around five percent annually over the past twenty years. The government has enacted the appropriate investor-friendly legislation which means that the island now represents a significant off-shore financial services opportunity.

Mauritius has become an attractive destination for global investments and with over forty active Double Taxation Avoidance Agreements (DTAA), the island is well positioned as a financial centre of substance especially when it comes investments into Africa, Asia, and Europe. The legal framework as it relates to companies and trusts is on a par with those of the most efficient jurisdictions in the world.

Membership of the Egmont Group (of financial intelligence units) further enhances the prestige

of well-regulated Mauritius.

Alliance Financial Services (AFS) is headquartered in Luxembourg and licenced and regulated by the Financial Services Commission as an Offshore Management Company in Mauritius. The company has a representative office in the United Arab Emirates. Professionals at the firm serve clients in the formation and administration of off-shore companies, funds (collective investment, close-ended, private equity), trusts, and foundations.

AFS makes available a fully comprehensive range of services and is a topnotch advisory that truly adds value. Client loyalty is very strong with a full 35% of new business coming from companies that have themselves benefited from AFS’s care and meticulous attention to detail. The firm can also CFI.co | Capital Finance International

help expatriates get their administration in order – helping with applications for work permits, residency permits, and duty concessions.

Not surprisingly, the AFS mantra seems to be: “keep those clients happy.” Core values as articulated by the firm are integrity, excellence, credibility, accessibility, efficiency, and confidentiality. AFS certainly scores very highly in each of these key areas of concern.

The CFI.co judging panel confirms that AFS really does go the extra mile to give clients a push just at the time it is most needed.

This is a highly responsible and cost-efficient operation that truly does merit client trust. The judges are delighted to confirm the award Best Financial Advisory Team Mauritius 2015.

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> PAYSHOP (PORTUGAL): BEST PAYMENT SOLUTIONS PORTUGAL 2015

Managing a nationwide network of payment points, PayShop (Portugal) offers unsurpassed convenience to both businesses and their customers for the processing of bills. With some 4,000 outlets, PayShop serves in excess of 2.5 million people who regularly use the system to pay utility and other bills or to top up pay-as-you-go mobile phones.

Most PayShop outlets are open beyond standard business hours and provide customers with instant feedback. Payment processing takes places in real time with customers receiving issuer-approved receipts instantly. Associated businesses enjoy the convenience of giving clients additional

payment facilities that reduce the stress on their own customer service and cashier departments.

PayShop approved outlets – mostly existing neighbourhood shops – benefit from increased footfall and often note a significant increase in sales revenue. PayShop terminals use a system that allows for ultrafast payment processing with most transactions taking mere seconds to complete. PayShop customers may also pay online purchases, obtain public transport tickets, and make donations to worthy causes at any of the company’s outlets.

Offering a simple, fast, and cheap solution to bill settlement, PayShop has positioned itself as the preferred provider of

payment processing in Portugal. The company, set up in 2001 and owned by the Portuguese postal service CTT, now aims to leverage its accumulated knowledge and experience to expand its horizon and broach new markets.

The CFI.co judges applaud PayShop (Portugal) for streamlining the erstwhile cumbersome process of paying domestic bills.

By focusing on convenience and devising a no-frills system that prioritises ease of use, the company offers a win-win-win solution that benefits customers, service providers, and terminal operators alike. As such, PayShop (Portugal) is proclaimed winner of the 2015 Best Payment Solutions Portugal Award.

> COMMONWEALTH BANK: BEST RETAIL BANKING TEAM BAHAMAS 2015

A financial partner to the working Bahamian since its foundation in 1960, Commonwealth Bank has become a cornerstone of the island nation’s economy. Now a household name, Commonwealth Bank dominates the retail market with a broad palette of services geared towards fulfilling the needs of the country’s strong middle class – working people who need no-frills, efficient, and convenient financial services to underpin their upward social mobility and with it the fortunes of the entire nation.

Initially a small consumer finance company and a subsidiary of the Canadian Laurentide Financial Corporation, Commonwealth Bank underwent a number of changes driven by the expansion of its operations. In 1984, a group of Bahamian investors took control of the company 86

and broadened the scope of its products and services, transforming the small savings and loans institution into a full service bank catering to both private individuals and businesses. Sixteen years later, in 2000, Commonwealth Bank obtained a listing on the Bahamas International Securities Exchange with a significantly oversubscribed IPO.

A leader in personal banking services and widely recognised for its excellence, Commonwealth Bank also actively supports and underwrites a growing number of social initiatives aimed at improving the lives of all Bahamians.

Corporate social responsibility (CSR) is ingrained in the bank’s corporate DNA.

Already one of the most prosperous markets of the Caribbean, the Bahamas economy has managed to grow steadily on the twin pillars CFI.co | Capital Finance International

of tourism and banking. Commonwealth Bank has benefitted from the sustained growth of the local economy and has now embarked on a carefully traced trajectory towards further diversification.

Investing in both people and high-end systems, Commonwealth Bank has kept its place at the forefront of the Bahamian financial services industry by constantly upgrading and optimising its performance.

The CFI.co judging panel appreciates the success a smaller bank may attain by sticking to its founding principles while embracing modern technology and canvassing the market with the right product mix. The judges have no doubt in proclaiming Commonwealth Bank the winner of the 2015 Best Retail Banking Team Bahamas 2015 Award.

Autumn 2015 Issue

> GENERAL ELECTRIC AFRICA: OUTSTANDING CONTRIBUTION TO NATIONAL DEVELOPMENT NIGERIA 2015

One of the largest companies in the world, General Electric (GE) is used to thinking big and conducting business on a grand scale.

As such, the company’s presence in Nigeria constitutes a string of superlatives derived from a unique country-to-company (C2C) agreement signed in 2009. The deal commits General Electric to assisting Nigeria with the upgrading of the country’s infrastructure and capacity in a number of key sectors such as transportation, power generation, and healthcare.

Since then, GE’s clout, expertise, and wherewithal have been rallied to provide for the design, financing, and building of large projects.

With the Ministry of Power, General Electric is helping install generating capacity that will inject an additional 10GW into the national

grid within the next ten years. The company is also putting into place a vast network of health diagnostic centres spanning the country and has undertaken the building of large machine shops to maintain, upgrade, and build locomotives and other rolling stock.

General Electric has also committed close to a billion dollars to construct an industrial hub for its oil and natural gas business. This centre will offer work to 2,300 people. A substantial sum has been allocated to training programmes, knowledge transfer schemes, and initiatives that help local suppliers meet the grade.

With additional interests in the aviation and other diverse sectors of the buoyant local economy, GE leverages its four

decades’ worth of experience in Nigeria to help underwrite the bold Vision 2020 policy framework that aims to propel the country upwards. General Electric’s African subsidiary is providing concrete evidence that partnerships between governments and private enterprise can, and do, provide a strong boost to economic development.

The CFI.co judging panel applauds General Electric’s proactive large-scale approach to business and the company’s dedication to the well-being of the host country.

The judges have no reservations in extending the 2015 Outstanding Contribution to National Development Nigeria Award to General Electric Africa.

> YATIRIM FINANSMAN: BEST SECURITIES BROKER TURKEY 2015

Yatırım Finansman (YF), established in 1976 by thirteen major banks, was Turkey’s first brokerage house and played a key role in the development of the country’s capital markets in the period prior to the enactment of the 1981 legislation and the opening of the Istanbul Stock Exchange five years later. The firm has grown steadily since those early days and last year the trading volumes of YF branches on the Istanbul Bourse grew by 36%.

Turkey’s first corporate bond was underwritten by YF and this strong brand has done much to educate and facilitate the investment community in the country. YF is the market leader, benefits from state-of-the-art

technologies, boasts a wide range of product offerings and provides superb and intelligently focused services. Distribution channels are good and YF is pleasingly customer-centric.

YF is certainly a very efficient and highly nimble brokerage that houses a strong, talented team of professionals. This brokerage was CFI’s 2014 winner and a most worthy one at that.

Investor relations activity is an obvious strength at YF and the firm’s dedication to corporate social responsibility is obvious to all. The firm supports a prominent children’s festival which was set up by the Istanbul Bourse, the Turkish Capital Markets Association, and the CFI.co | Capital Finance International

Financial Access and Literacy Association. YF is strongly committed to a zero carbon target and in 2013 was Turkey’s only zero carbon intermediary institution.

It is important to point out that YF holds all capital markets authorisation certificates and products and services available at this broker meet or even exceed global standards. The firm serves both individual and corporate customers in Turkey and well beyond her borders.

The CFI.co judging panel points to the integrity, strength and potential of this fine firm and is delighted to confirm a second consecutive year award for YF as Best Securities Broker Turkey.

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> ABC BANKING CORPORATION: BEST INTERNATIONAL BANK INDIAN OCEAN 2015

The financial services division of one of Mauritius’ largest, oldest, and best-known conglomerates, ABC Banking Corporation has built a solid and stellar reputation for the outstanding quality of its services, unfailingly delivered with integrity and care for the customer. The bank’s broad client-base includes both individuals and businesses who enjoy access to an exceptionally comprehensive array of products.

ABC Banking Corporation is also a fully-featured international bank with an expanding geographic footprint centred on the Indian Ocean – home to strong economies undergoing accelerated development. The bank is particularly focused on solidifying its international operations and boasts a highly experienced staff comprised of professionals well-versed in cross-border transactions.

ABC Banking Corporation is the newest division of the ABC Group of companies,

founded in 1931 by Sir Moi Lin Jean Ah-Chuen whose contributions to the development of Mauritius were awarded with a knighthood by HM the Queen. He was also awarded a papal order of knighthood.

The Mauritius bank owes its success to a unique blend of tradition and innovation which is applied to all its operations.

While carefully adhering to well-established international best practices, ABC Banking Corporation also aims to adapt its products and services to the fast-changing world around it. As such, the bank has assembled a comprehensive suite of innovative integrated financial amenities that offer both retail and corporate clients a seamless banking experience.

ABC Banking Corporation actively promotes Mauritius as an exceptionally convenient and welcoming hub for corporations looking to expand their presence in the nations

bordering the Indian Ocean. The Mauritius Advantage includes solid protection for investors, a bilingual and highly educated workforce, a predictable and stable political climate, and a well-regulated and businessfriendly environment.

The CFI.co judging panel finds that ABC Banking Corporation has convincingly shown that a company dedicated to excellence can create and shape its own market. This bank has done so by getting things right from the get-go and remaining true to the original brief of consistently providing superior services to all clients.

As ABC Banking Corporation now eyes international markets, it deploys the exact same approach and may expect similarly strong results. The judges are therefore happy to extend the 2015 Best International Bank Indian Ocean Award to ABC Banking Corporation of Mauritius.

> BINDER GROSSWANG: BEST DISPUTE RESOLUTION TEAM AUSTRIA 2015

Binder Grosswang, in business for more than fifty years, fields a wonderfully talented group of lawyers working in dispute resolution. In fact, Binder Grosswang is a leading firm for such work and has a good spread of business which is handled by a close-knit team of four partners and sixteen lawyers.

At Binder Grosswang, litigation work is often outstandingly successful. The firm also enjoys a high profile for its efforts in arbitration. The team is said to be made up of hugely practical people who adopt an intelligent no-nonsense approach to client business. Operating out of offices in Vienna and Innsbruck, this profoundly experienced team works on a diverse range of domestic and 88

international corporate cases.

Binder Grosswang is noted for having obtained considerable success in defending cases involving the financial services industry. Apart from the financial sector, Binder Grosswang also has a prominent place in the engineering and construction, automotive, energy, and telecom sectors. The firm’s present client roster offers strong representation in each of these segments.

Binder Grosswang was named Austrian Law Firm of the Year (2014) by Chambers and the International Financial Law Review (IFLR). The majority of assignments handled span multiple jurisdictions. Binder Grosswang is a member of a global network of CFI.co | Capital Finance International

partner firms to better serve client interests.

The firm claims to have “the right mixture of clout and flair” – and the CFI judging panel agrees with this self-assessment.

No doubt the name Binder Grosswang will be prominent in the minds of companies that need to resolve disputes in Austria and elsewhere, either aggressively or amicably. Whatever the case may be, Binder Grosswang has the track record to be considered seriously for even the most complex and vexatious dispute resolution work. The panel confirms Binder Grosswang as Best Dispute Resolution Team Austria 2015.

Autumn 2015 Issue

> EDGARS STORES: BEST CUSTOMER SATISFACTION RETAILER SOUTHERN AFRICA 2015

The customer is always right. This old adage holds as true today as it did when the phrase was originally coined in the early 18th century by English retailers seeking an edge over the competition. At Zimbabwe’s Edgars Stores, the timeless pursuit of full customer satisfaction forms the cornerstone of a corporate philosophy that has raised the bar for the entire retail sector.

Pioneering the concept – simple to explain, yet surprisingly hard to properly implement – Edgars Stores has endeared itself to the shopping public. Even before setting foot in one of the retailer’s 28 outlets, customers know that any and all of their concerns will be promptly addressed. Edgars Stores is not merely in the business of selling competitivelypriced merchandise, but aims to offer an overall superior shopping experience.

The company has been in business for close to seventy years. The first Edgars Store opened in Bulawayo in 1946. Since then, Edgars Stores has expanded both the range of its merchandise and its geographical footprint.

The company obtained a listing on the nation’s stock exchange in 1974. That same year, Edgars Stores acquired the Carousel Clothing factory to hedge against possibly erratic supplies from overseas.

In line with its policy of keeping all activities under a single corporate roof, Edgars Stores operates its own financial services company in order to offer clients preferential deferred payment plans with no or low interest.

The ready availability of in-house credit facilities has significantly boosted Edgars Stores’ expansion drive and sets the brand apart from

the competition.

The CFI.co judging panel noted that Edgars Stores has successfully leveraged its indepth knowledge of Zimbabwe’s retail scene to craft a set of services that dovetails to perfection with the requirements of the market.

Successful retailers need to move beyond stocking the right product mix, and offering convenient premises, to embrace all aspects of the shopping experience as an integrated package that sets consumers at ease, caters to all their needs, and offers a smooth nohassle ride from walk-in to check-out and after sales. Edgars Stores has mastered this routine to perfection and is the undisputed winner of the 2015 Best Customer Satisfaction Retailer Southern Africa Award.

> CLEARY, GOTTLIEB STEEN & HAMILTON LLP: BEST CORPORATE & COMMERCIAL TEAM BELGIUM 2015

Cleary Gottlieb is a major international law firm with sixteen offices around the world, staffed by around 1,200 lawyers. The firm’s European credentials are most impressive. Their first office on the continent opened in 1949 – just three years after the establishment of the firm in New York and Washington.

The Brussels office, which now fields 85 lawyers, opened its doors in 1960. It was the result of the strong relationship between Jean Monnet – often considered the founding father of the EU – and the firm’s founding partner George Bull who had provided professional services to Mr Monnet for the implementation of the Marshall Plan.

The law firm was born out a desire to bring together some of the best minds in the legal industry. The diversity policy adopted by modern-day Cleary Gottlieb clearly reflects this. The company continues to seek out superior intellectual capacity regardless of race, nationality, or gender. Cleary Gottlieb states that it stands for openness, diversity, individuality, and collegiality.

Cleary Gottlieb in Belgium are rightly considered prominent members of the very first rank in European competition law. Their corporate and commercial law experience is exceptionally broad. This excellent group of lawyers has a deep understanding of all aspects CFI.co | Capital Finance International

of Belgian business law. Their expertise in regulatory matters concerning client business activity is outstanding and the firm is well thought of in terms of both national and international corporate law.

The CFI judging panel consider the wonderfully talented team at Cleary, Gottlieb Steen & Hamilton LLP as eminently capable of offering corporate and commercial advice of the very highest standard. And the level of client satisfaction reported suggests this has been the case for a long time. Without hesitation the panel confirms the award Best Corporate & Commercial Team Belgium 2015.

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> FIRST REGISTRAR & INVESTOR SERVICES: BEST SHARE REGISTRAR NIGERIA 2015

A registrar is responsible for keeping the records of shareholders and bondholders – who owns what and how much of it. The registrar ensures that the amount of shares outstanding in the market precisely matches the number of shares authorised by the issuing company.

First Registrar & Investor Services (FRIS) Nigeria offers a far wider range of services as suggested by the company style.

FRIS expresses its core values as fidelity, integrity, respect, service, and tenacity. This translates into a consistently high standard of work and exemplary client services delivered by a committed team of consummate professionals led by managing director / CEO Bayo Olugbemi.

Mr Olugbemi is a successful pioneer of registration companies in Nigeria. He has strong experience in investment banking and portfolio management, and heads a team at FRIS that also claimed a CFI.co award win in the same award category in 2014.

This firm manages register accounts for some three million shareholders throughout the country. First Registrars has regional expansion plans which appear fully justified considering their stellar progress at home.

Having recently completed a successful re-branding exercise, FRIS reports strong performance in 2015 with business booked by the end of Q3 exceeding that of

full -year 2014. The firm is clearly passionate about getting to know its customer and his/ her requirements and takes pride in being in a position to assist in all ways possible. This attitude offers a bedrock upon which continuing success and business growth may be erected.

The CFI.co judging panel is always pleased to see a second consecutive year award win as this indicates that the progress and success noticed earlier has continued unabated.

In the case of FRIS, much has been achieved over the past year and the panel is happy to confirm the 2015 Best Share Registrar Nigeria Award.

solutions carefully tailored to fit individual risk and reward profiles.

With a mission to create lasting value for its clients through their entrepreneurial spirit and investment expertise, they strive to bring significant added value and longterm performance to their clients’ wealth management strategies. Present in over twenty-five jurisdictions around the world, UBP employs more than 1,300 professionals carefully selected for their experience and knowledge. UBP puts every effort into creating lasting value added for its clients by providing them tailor-made and highly attractive solutions and services.

Each of the bank’s investment

advisors serves a limited number of clients with their expertise. UBP ensures that its professionals offer not only world class financial advice but also stay in tune with local culture in order to devise comprehensive solutions that take into account the full scope of investor considerations.

The CFI.co judging panel commends UBP on its exquisitely crafted approach to private banking. By ensuring proximity with clients, the bank ensures that its services are readily available and delivered in a personalised way. The judges have no doubts in naming UBP Best Private Bank UAE 2015.

> UBP: BEST PRIVATE BANK UAE 2015

Performance and preservation of capital: Union Bancaire Privée (UBP), founded in 1969 and with over CHF98.7bn ($101bn) in assets under management, is one of the premier private banks in Switzerland. The UBP Dubai branch excels in serving private individuals, family offices, and institutional investors with the bank’s hallmark professionalism.

The Dubai office, duly regulated by the country’s Financial Services Authority, serves clients from the Middle East, Africa, and the Indian subcontinent. The branch employs 25 highly experienced relationship managers and investment advisors who help clients navigate the full range of UBP products and services, acting as a conduit for bespoke 90

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Autumn 2015 Issue

> UMEME: BEST ESG POWER PRODUCER UGANDA 2015

UMEME is Uganda’s largest electricity distributor and listed on the Uganda and Nairobi Security Exchanges. This company pays the utmost attention to the needs and aspirations of all stakeholders as was brought to the attention of the CFI.co judging panel by voters in the 2015 Energy Awards programme.

This winner lives up its stated purpose of providing an exceptional customer service in a safe, reliable, and cost effective manner, with a highly skilled and well-motivated workforce, generating sufficient profits to sustain and build the business while providing value to the shareholders.

Environmental, social, and governance (ESG) policies, initiatives, and

procedures are fundamental to the smooth running of this highly successful operation.

The ESG committee, which includes chairman Stuart David Michael Grylis, is one of five key committees at the very heart of UMEME’s corporate organisation.

The committee concerns itself with ensuring that business activities impact as favourably as possible on the lives of staff, visitors, contractors, and the wider community. UMEME is a transparent organisation that says: If you see something, say something.

UMEME serves the community with consideration and kindness. The miseries and hazards of low grade alternative sources of lighting and heating no longer blight the lives

of around 600 village residents in Eastern Uganda. The inhabitants of Akarkwar received solar lanterns as a gift from UMEME so that they should not need to rely on candles, kerosene, and grass and wood burning – which can result in fire hazards as well as health issues.

The company supports Rotary Clubs of Uganda in the fight against cancer and helps the Association of Surgeons of Uganda so that they may operate on needy patients without fee.

UMEME support of the Children’s Foundation helps give abandoned kids the chance of a better life. The company supports a number of other worthy charitable organisations in Uganda as well.

> ANJARWALLA & KHANNA: BEST CORPORATE & COMMERCIAL TEAM KENYA 2015

As Sub-Saharan markets boom and regional economies surge ahead, demand for world class legal teams with local knowledge and experience has skyrocketed as well. East Africa in particular has benefitted from an influx of foreign investors looking to underpin the region’s growth and capture a share of this promising market.

Corporate lawyers with in-depth knowledge of both East Africa’s legal systems and established practices are currently in high demand. Standing at the very top of the legal profession is Anjarwalla & Khanna (A&K) – a well-established law firm with offices in Nairobi and Mombasa – whose team of close to eighty

seasoned and battle-hardened lawyers stands ready to help businesses plot their way to success.

Fielding a pragmatic and resultsoriented approach, the A&K legal team is wellknown for applying out-of-the-box thinking grounded in solid jurisprudence. The firm helps businesses break into new markets, establish a solid foothold in the region, minimise regulatory risk and impact, and resolve complex disputes.

A&K has facilitated a number of high-profile mergers and acquisitions and other complex transactions for large corporations.

One of the biggest and most respected law firms in Kenya, A&K has gained a stellar reputation CFI.co | Capital Finance International

across the region and internationally.

The CFI.co judging panel noted that Anjarwalla & Khanna is the founding member of ALN (formerly known as the Africa Legal Network), an alliance of premier independent law firms that pool their resources to offer clients bespoke solutions that span multiple jurisdictions. A&K is the exclusive ALN member for Kenya. The judges feel that the firm’s formidable legal team literally sets the bar for law practice in Kenya and beyond, establishing a benchmark for the entire legal profession.

As such, Anjarwalla & Khanna fully merits the 2015 Best Corporate & Commercial Team Kenya Award.

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> Africa:

Tanzania - At the Starting Block

By Wim Romeijn

Home to the second largest economy of the East African Community, Tanzania struggles to find its way ahead notwithstanding a robustly expanding economy and a much-improved business climate. A nation of two minds, Tanzania has experimented with different development models. The darling of progressive donor nations such as The Netherlands, Denmark, and Sweden in the 1970s and 1980s, the country’s persistently lacklustre growth and its failure to eradicate poverty resulted in a re-evaluation of its policy matrix.

That ultimately led Tanzania to abandon the progressive course inspired by Julius Nyerere – the country’s first post-independent president – who longed for an African development model based on an indigenous for of socialism.

While the policies flowing from the Arusha Declaration of 1967, in which President Nyerere traced the way forward, did deliver significant social progress – with increased life expectancy and literacy rates – economic growth remained anaemic with bloated state-owned corporations and farming collectives unable to keep pace, and production levels declining in most sectors.

Tanzania: Dar Es Salaam

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H

owever, thanks to its purpose-driven government, the country was spared the savagery of the extractive resources based model that destroyed a great many African states through a nefarious conspiracy between big business and corrupt officials. As a result, Tanzania to this day has most of its resources still in place. So much so, that the country may yet become a petro-state. With help from Norway, a five-year Programme for Research, Capacity-Building, and Policy Dialogue has been launched to prepare the nation for a resourcefuelled future.

Surprisingly modest in its set up, the initiative aims to explore thought rather than hydrocarbons.

The programme brings together academic experts, researchers, public officials, private sector representatives, and a host of other stakeholders to explore the best way of dealing with the windfall expected if and when the offshore oil fields become productive. Meanwhile Norwegian’s Statoil is busy prospecting for oil and natural gas in Tanzania.

While some have raised questions about a possible conflict of interest, since the Norwegian government dispenses governance wisdom but also owns the company standing to benefit most from any finds, the consensus is that Tanzania may learn from one of the very few countries that has successfully managed to leverage the proceeds its mineral wealth to further national development, avoiding falling victim to the resource curse.

Interestingly, and perhaps ironically, the national debate about the imminent arrival of the petrostate has emboldened those who argue for a return of state interventionism. After all, the Norwegian model of resource extraction requires a high degree of state intervention. One of the Ten Commandments Norway adopted – and now readily exports – clearly says: “The state must become involved at all appropriate levels and contribute to a coordination of national interests in the domestic petroleum industry as well as the creation of an integrated oil community which sets its sights both nationally and internationally.”

As Chambi Chacha, co-moderator of the Wanazuoni network of Tanzanian intellectuals, notes in a recently published op-ed article on Pambazula News, the country needs to further strengthen its civil society in order to ensure that any future revenue from oil and other resources benefits the entire nation. Deputy Permanent Secretary at the Tanzanian Ministry of Finance Adolf Mkenda agrees and points out that petrostates comes in all shapes and sizes with some experiencing a boom without proper management of public affairs and monies, and others failing to maximise public revenue: “Maximising revenue and managing this income properly go hand in hand. To do so in Tanzania, requires a strong and strategic corporate-state-civic setup that mimics the Norwegian experience.”

Tanzania just happens to be exceptionally wellpoised for such an experiment. While since 94

“With a buoyant economy that over the past decade has grown at an annual average of around seven percent or more, Tanzania is now in a good place.”

1985 successive governments have pursued a liberalisation programme that saw most stateowned companies privatised and introduced a slew a market-friendly policies, the state remains an important economic agent pursuing a set of well-defined development initiatives. Being of two minds does bring a number of advantages.

With a buoyant economy that over the past decade has grown at an annual average of around seven percent or more, Tanzania is now in a good place. State expenditure has been brought down to approximately 25% of GDP while inflation has reached a historical low of barely 6%. While agriculture remains central to the country’s economy due to the large share of the workforce employed working the land, recent growth has mostly been driven by an uptake in manufacturing and the robust expansion of the services sector – clear signs that the economy is maturing.

Regional integration is progressing steadily with the East African Community developing into a single stable market and streamlining legislation amongst member states to create an attractive destination for investments. The Dar es Salaam Stock Exchange (DSE) already cooperates closely with sister exchanges in Nairobi (Kenya) and Kampala (Uganda) with plans in the work to create a single regional bourse. Two companies – East African Brewers and Kenya Airways – are already cross listed on the three exchanges.

The launch, in 2013, of a second-tier market – Enterprise Growth Market – seeks to enable smaller companies to access the capital market and currently list three financial services providers.

Meanwhile, the UK’s Department for International Development (DFID) signed a memorandum of understanding with the London Stock Exchange Group to further the development of capital markets not just in Tanzania but across the continent. To that effect, the DSE and other exchanges may tap into the vast reservoir of expertise available at London Stock Exchange Group Academy.

The academy will shortly welcome up to fifty Tanzanian professionals who may help accelerated capital market development. Alexander Justham, CEO of the LSE, said that the year-long skills development programme aims to help build a pool of professionals in both the government and the private sector spheres: “This way, we can fast-track the development of a long term, sustainable equity capital market.”

CFI.co | Capital Finance International

Mr Justham went on to say that “both London Stock Exchange and DFID understand the importance of economic growth in improving people’s lives. By combining our expertise and experience in this innovative partnership, we hope to enhance capital markets across sub-Saharan Africa, so that they in turn can help companies to grow and create vital jobs.”

On Tanzanian company is already ahead of the game: UTT (Unit Trust Tanzania), set up to allow ordinary Tanzanians to benefit from the privatisation drive, is actively promoting share ownership amongst all the nation’s demographics.

UTT investment funds allow people to easily buy in with just a few shillings (dollars) at a time. The streamlined process aims to democratise share ownership and has already roused the interest of close to a 150,000 small investors of whom most not normally have considered buying stock.

What has investors, both small and large, bullish on Tanzania is that the country’s mining sector so far contributes less than four percent to GDP. Offering plenty room for expansion, the country is now ready to embark on a sustained boom, adding to an already fast-growing economy. Later this year, exploitation starts at the nickel deposits discovered in 2012 by the Australian mining company IMX Resources. Chinese companies have pledged $3bn in investments to work the coal and iron ore deposits in Tanzania’s southern regions.

Add to these the likely income boost from the country’s formidable oil and natural gas reserves and an African powerhouse may be in the making.

The country’s foreign debt, reduced by $6bn under the relief programme for heavily indebted poor countries sponsored by the World Bank and the International Monetary Fund (IMF), now stand at slightly over 40% of GDP and has remained stable. The IMF recently reiterated that the country’s debt outlook remains stable with no distress expected.

Of late, the government’s attention has turned to improving the business climate. According to the Doing Business 2015 Report published by the World Bank, Tanzania ranks an unimpressive 131st out of 189 countries when it comes to the ease of conducting business. Though the red tape involved in setting up a business has already been cut significantly, much work remains to be done. The implementation of a Roadmap for Improvement of the Business Environment promises to eliminate more restrictions on private enterprise with the government actively promoting its Big Results Now Initiative that aims to speed up the reform necessary to fully exploit the country’s vast, but yet largely untapped, potential.

Tired of waiting in vain for a better future to arrive on the coattails of wishful thinking, Tanzania has set to work. The country occupies a unique niche in Africa: it boasts a relatively well-functioning state, a stable political environment, and now has a policy framework to match. Thus, at long last, Tanzania has arrived at the starting block. i

Autumn 2015 Issue

> Anjarwalla & Khanna:

Pioneer of the Africa Legal Network

T

en years ago, the Africa Legal Network (ALN) was born. Initially, it boasted just three members, all in East Africa. However, the essence of ALN was already clearly embedded in the founders’ vision of what it could become. “How can you call yourselves an ‘Africa’ legal network?” observers commented at the time. ALN could because its members already sensed its natural potential.

Others soon spotted it too. Current Managing Partner of Anjarwalla & Khanna (A&K) Karim S Anjarwalla engaged a firm that had just opened up in Mauritius, and that was a member of an international network at the time, in order to set up a legal structure for ALN that would allow for PanAfrican reach. Nine months later, this same firm, BLC Law Chambers, had left Dentons to join ALN, having liked what it saw – a truly African alliance of top-tier firms with shared values of cooperation and friendship that would complement each other across the continent. And then there were four.

A&K was at the centre of this growing organism which was meant to provide a common platform for bright, savvy, highly-qualified African lawyers to provide joint services at the highest level across the continent. This is exactly what it became, providing member firms with a way to magnify their potential. Now, a decade later, A&K is the largest and leading full-service corporate law firm in Kenya and ALN is present in twelve jurisdictions, having become the African legal network with the widest coverage and fullest integration.

ALN was built on the strength of the relationships between its members, and this continues to be the driving force of the alliance. A&K is a firm believer in this model and credits ALN as having played a big role in its success.

But A&K – named African Law Firm of the Year by Legal Week’s African Legal Awards in 2013 and a finalist for the same award for the last two years – also owes much of its status as a first-tier firm in the region to the vision of the leadership, the collaborative approach of its partnership, the quality of talent that it has been able to attract, and its ability to retain such talent.

The firm has experienced a remarkable annual growth rate of around 25% for the last seven years. A&K staff has grown from around 150 to 180 in the last year alone.

A&K works on over half of the significant transactions in Kenya. Additionally, the firm’s location in Nairobi – one of Africa’s most vibrant business hubs – and its regional reputation have driven A&K’s entry into a clear space in the international legal market which has resulted in increasing engagements as lead counsel on complex and cross-border transactions.

A&K is busy and will remain so for the foreseeable future as Africa’s attractiveness to investors continues on the rise and as A&K’s lawyers continue to strive to remain at the forefront of the business landscape in the region and to push standards in the African legal service offering to worldclass level. i CFI.co | Capital Finance International

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> Banco de Fomento de Angola:

Serving a Buoyant Economy The origins of the Banco de Fomento de Angola (Angolan Development Bank) reach back to the early 1990s and the establishment of a local representative office of the Portuguese Banco de Fomento Exterior (BFE).

In 1993, this office gained the status of BFE branch and was granted a full banking license. Another three years pass by when in 1996 BFE was acquired by the BPI Group, a Portuguese banking and financial services entity. In July of 2002, the branch was turned over to the Banco de Fomento de Angola and incorporated under Angola Law.

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oday, BFA is a full-service bank that works towards the betterment of Angola and strives to reinforce its already leading position on the domestic market. BFA accomplishes this through its unrelenting commitment and dedication to the best interests of customers and employees alike. The bank has policies in place that facilitate both the personal and professional development of its employees.

BFA management also keeps a close eye on generating good returns – and hence value – for the bank’s shareholders. This way, BFA aims to contribute significantly to fostering the sustainable growth and development of the Angolan economy.

The corporate identity of the BFA brand is very much a reflection of the company’s financial and business heritage. The main characteristics of this culture are administrative autonomy, organizational flexibility, teamwork, rewarding excellence, forward thinking and a thorough management of risk as well as the safe and secure generation of value for the various stakeholders.

BFA’s corporate philosophy is to gain the market’s trust through consistency and credibility in its relationship with both customers and the wider society. BFA is particularly keen on celebrating two of its key values: Experience

“BFA’s corporate philosophy is to gain the market’s trust through consistency and credibility in its relationship with both customers and the wider society.” and Harmony. Experience is gained through continued attention paid to the permanent skill development of the bank’s employees and to maintaining and nurturing the significant professional assets BFA accumulated over its history of operating on the domestic market.

Harmony is of essential importance as BFA cherished its ambition to contribute significantly to the well-being not just of its clients, but to that over the whole society. The bank aims to do this through the rigorous application of high standards of both quality and ethics. BFA bets on the future and is convinced that quality of service will prevail.

PRODUCTS AND SERVICES Banco de Fomento de Angola serves a wide and diverse universe of customers: retail clients and small, medium and large businesses. We take a segmented approach and offer specialized products, carefully tailored to the needs of each customer. These products are delivered

via our network of branches and agents. The goal is always to offer the highest attainable level of service quality and the deepening of our relationship with customers.

BFA has succeeded in strengthening its segmented approach to the market with the creation of two new Business Units: Oil & Gas Operators and Oil & Gas Vendors. Both these business units boast a range of services and products specifically designed to meet the needs and wants of the oil and gas industry emphasizing operational efficiency and security in all financial transactions.

In its unrelenting quest to improve the quality of its services – and thereby safeguard its position – BFA constantly aims to expand and modernise its channels of contact, namely its branch network, the transactional site (www.bfanet.ao) which has been improved with new features, including a version in English and payment of taxes and services which modernizes BFA´s offer. The launch of its customer support line at the end of 2014, and the new BFA App are examples which demonstrates BFA´s commitment to innovation.

DISTRIBUTION NETWORK The BFA corporate strategy calls for continued organic growth which translates into commercial expansion all across the country through a

“BFA has succeeded in strengthening its segmented approach to the market with the creation of two new Business Units: Oil & Gas Operators and Oil & Gas Vendors.”

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Autumn 2015 Issue

Headquarters. Photographer: Kostadin Luchansky

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Chairman of the Executive Committee of the Board of Directors: Emídio Pinheiro

network consisting of 189 branches covering each of Angola’s 18 provinces. The wide network ensures BFA’s position as market leader in retail banking.

The digital channels are also a key element in reaching out new segments namely unbanked individuals and improving BFA’s ability to deliver a higher level of service to all the segments that it serves.

COMPETITIVE ADVANTAGES All the numbers on its balance sheet, reinforce BFA’s corporate strength, solvency and solidity.

BFA is the only Angolan bank integrated with the World Trade Program set up by the International Finance Corporation, part of the World Bank Group.

While introducing new products and services, BFA doesn’t lose sight of the need to continued improvement of the security, functionality and quality of its online processes and systems in order to guarantee and enable increased automation, simplification and speed of its clients’ operations.

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As a result of this dedication, the performance of the bank has received over the years a number of awards, stamps of approval and recognitions.

These were accorded based on the evaluations of different independent entities both domestic and foreign. Some of the awards that BFA received merit special mention: • Best Bank in Angola – Euromoney Awards for Excellence 2015 • STP Excellence Award – Deutsche Bank • Best Corporate Management - World Finance • Brand of Excellence – Superbrands SOCIAL FUND The BFA Social Fund was created in 2005 for the purpose of providing support to initiatives in the fields of healthcare, education and social solidarity. The fund was financed out of BFA’s profits from which it received a 5% over the five year period between 2004 and 2009.

For BFA, this fund and the initiatives it supports reflects the bank’s commitment and eagerness to share its success with the wider society by actively contributing to its development in areas where needs are highest.

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The BFA Social Fund has currently $17.7 million to further its goals.

EMIDIO PINHEIRO Emídio Pinheiro has served as Chairman of BFA’s Executive Committee since 2005. He has held various positions since joining the BPI Group in 1990, first as Executive Director of BPI Pensões, BPI Vida and BPI Fundos de Investimento. He later joined BPI’s commercial area as Central Manager, with responsibilities in the following business areas: Emigration Department; General Manager of the French branch; Investment Centres Department; and Commercial Department for Individuals and Small Businesses in the Lisbon region.

He received a degree in Economics from Universidade Católica Portuguesa and an MBA from Universidade Nova de Lisboa.

He is Deputy-Chair of the Angolan Banks Association (ABANC) and a member of the Board of the Angolan Corporate Governance Centre. i

> Edgars Stores:

Exceptional Service at All Times Edgars Stores Limited is a public company incorporated and operating in Zimbabwe. Its shares are publicly traded on the local bourse. The company’s core business is the retailing of clothing, footwear, textiles, and accessories, which are sold in over 53 branches nationwide under the Edgars and Jet clothing retail chains with 28 and 25 stores respectively.

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hrough credit and cash stores, Edgars Stores aims to give its customers value for money by providing quality merchandise for the family at competitive prices. The company offers customers exceptional service in world-class shopping environments and is the market leader of the retail sector in Zimbabwe and aims to keep it that way. With a wide geographical footprint that brings products closer to the customer, Edgars Stores offers flexibility in trading hours to cater for customers with different shopping preferences, and allow for late night and weekend shopping in selected branches.

THE PRODUCTS Edgars Stores offers convenience to its customers who may choose from a wide variety of assortments both locally produced and imported – clothing, footwear, accessories, and bed linen lines of both in-house and global brands to satisfy the needs of the entire family.

All sizes, ranges, and styles are available to give the customer as wide a choice and as much variety as may possibly be brought together under one roof.

Edgars Stores’ product quality standards and specifications are high and meet international best practice (in its market segment); from pre-production sample appraisal, through the

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“Edgars Stores guarantees the quality of its products with a generous returns policy in the event of faulty or unwanted merchandise.

This assures customers that the stores stand for quality.”

means of extending value to the customer, increase in-store footfall, and encourage payment discipline, Edgars Financial Services offers overlay products. These include a hospital cash plan and funeral insurance which allow customers to pay monthly premiums jointly with their monthly merchandise instalments.

production process, to final inspection at the plant and in-house checks after the receipt of goods – plus ongoing vendor appraisal and instore checks.

In response to economic dictates, Edgars Stores offers informal businesses and small and medium-sized enterprises (SMEs) ready access to credit. Edgars Stores is the only clothing retailer in the country that has seen and seized business opportunity from this growing sector and invested in added capabilities to expand its credit facilities – also allowing individuals an opportunity to build up solid credit records.

Edgars Stores guarantees the quality of its products with a generous returns policy in the event of faulty or unwanted merchandise. This assures customers that the stores stand for quality.

The products Edgars Stores sells are a continued test of the customer service ability of the retailer’s staff, from back office personnel to sales floor staff who interact with the customer on a day-to-day basis.

To top it all, the company has integrated into the business a range of financial services aimed at increasing footfall and encouraging easilyarranged instalment payment plans. The stores offer various credit schemes with flexi-tenure, giving customers a range of options depending on their ability to pay. In addition, and as a

Edgars Stores promotes its products through a magazine – The Club. Edgars Stores distributes the magazine to over 90,000 subscribers. In each edition, customer testimonials are captured that show the authenticity of the products and how many lives have been changed in a positive way through the available offerings.

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Edgars Stores customer base is diverse and expands from government employees, private company employees, self-employed individuals, companies, churches, and various ministries such as Home Affairs and Defence.

CUSTOMER SERVICE CONTINUUM Edgars Stores strives to meet customer needs through various initiatives that give the retailer a distinct comparative advantage over the competition and allows customer service to stand out. To support its resolve in ensuring exceptional customer service, the Edgars Group Managing Director Linda Masterson and all senior executives personally receive and respond to customer complaints, compliments, and queries that reach the company through various channels. This assures customers that they are taken seriously and reinforces the brand’s already solid reputation.

Operating in the tough Zimbabwean economy has brought out an edge in Edgars’ ability to come up with value adding products that allow the retailer to remain relevant to its customers.

The company has introduced value for money product packages that allow for the “stretching” of scarce and hard-earned dollars, thus delivering immense benefits to customers. These products are hinged on the service paradigm and allow the company to do what it knows best – serve customers well. Over the years, Edgars has had to respond to the economic climate by offering

credit and, as the environment toughened, credit lines were extended to allow every Zimbabwean an opportunity to access the merchandise provided in by Edgars Stores.

assistance, fund for the purchase of textbooks and sport equipment to anything that can improve the lives of the pupils and enhance the learning environment.

BACKWARD INTEGRATION Edgars Stores leverages on its manufacturing plant established in 1974 to allow for seamless distribution to the stores. Carousel is the manufacturing unit that produces ladies wear, men’s casual wear, and a few kiddies wear lines for Edgars. The retailer has developed a number of in-house brands such as Quote for men’s casualwear. The stores also sell the in-house produced apparel to other clothing retailers in Zimbabwe and have broached export markets as well. This allows the business to retain control over the end product the customers receive.

Edgars Stores also tries its level best to align products to the customers’ needs and wants with regards to garment styling, fabrication, and aesthetics.

The retailer also conducts quarterly streetcleaning exercises and participates in various environmental awareness programmes in line with the Ministry of Environment, Water, and Climate guidelines. The Club magazine is used to disseminate information about activities that take place. Edgars Stores believes in people and invests in making a difference in their lives.

THE COMMUNITIES Edgars maintains an intensive CSR (corporate social responsibility) programme that is mainly targeted at environmental and education issues.

The company supports various organisations and individuals in the surrounding communities as a way of giving back to the communities it serves.

Every month, Edgars Stores donates through its customers thousands of dollars towards rural schools. These donations vary from building CFI.co | Capital Finance International

THE FUTURE As technologies evolve, Edgars has invested in a multi-million dollar customer-centric IT system that integrates various business processes to allow for faster and smoother customer transactions.

This system is a step forward in ensuring seamless customer service delivery at both shop floor and back office, including business support services.

The company aims to go live with this stateof-the-art platform in mid-2016 and expects significant costs savings which will be passed on to customers, further cementing the resolve to offer exceptional services.

The customer is central to all Edgars Stores’ business operations. The corporate mandate entails offering customers not only a comparatively superior service, but one that extends beyond their expectations. i 101

> CFI.co Meets the CEO of Edgars Stores:

Linda Masterson

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inda started working for Edgars as Group Financial Director and, after executing various roles in the business, became CEO on the 1st of April 2010.

After a difficult decade during which the group’s working capital was decimated by hyperinflation, Edgars Stores began the process in 2010 of re-positioning its brands and reaching out to potential customers with compelling ranges, value and credit products in a bid to re-capture its position as market leader in the clothing retail sector. Customer retention and appreciation were key focus areas from that re-start.

The first Zimbabwean Edgars store was opened in 1946 in Bulawayo. In 1974, the company was listed on the Zimbabwean Stock Exchange and was extremely well received, with shares continuing to be tightly held even in present day. By 1992, 87 stores were established in Zimbabwe, with a trading space of 54,800sqm.

During the period following April 2007, amid the challenges associated with hyperinflation, Edgars consolidated the business and relinquished its poorer-performing stores. By the end of 2010, the number of retail outlets had fallen to 33. Despite closing 43 percent of its stores, Edgars did manage to retain 62 percent of its trading space. There are currently 53 Stores (40,282 sqm) under the Edgars and Jet umbrellas, while our manufacturing unit has been re-energised to its current, profitable position.

Between 2010 and 2014, Edgars recaptured its position as market leader, through a measured but bullish risk appetite and the re-establishment of credit to customers. “We aim to supply our customers with value for money by providing quality fashion merchandise for the family at competitive prices and superior customer service in convenient shopping environments.

We believe that we are Zimbabwe’s market leaders in the credit retailing of clothing and it is our resolve to remain so” Masterson says.

EMPLOYMENT STRATEGIES According to Linda, the Edgars Group is an employer of choice in the Zimbabwean job market. She attributes this status to a number of factors, the dominant reasons being that Edgars Stores is a high-profile company which has earned a reputable status, offering employees competitive remuneration packages and excellent training programs. Most importantly, it recognises employees for their contribution.

“We strive to promote an environment where 102

CEO: Linda Masterson

a lot is expected of employees but they are recognised for their efforts and treated with respect” emphasised Linda.

CUSTOMER SERVICE CONTINUUM “We regard customer service as encompassing the whole supply chain; delivering the right product to the right stores at the right time, at the right price and in the right sizes and colours” says Masterson. The Group has well-established internal structures and procedures that support the business including planning, buying, distribution and IT. Edgars is focused on developing strong partnerships with its suppliers to ensure the highest level of quality and customer service. As Linda explains, “Developing and maintaining key strategic ‘win-win’ partnerships with our suppliers is a key factor in successfully maintaining the customer service continuum, by providing the focused assortments expected of each chain.

We try to foster long-term relationships in order to develop synergies between ourselves and our suppliers.” Quality control is rigorous and to international standard.

CUSTOMER FOCUS “We believe in what I call our ‘customer service continuum’ where the customer is the focus at every stage in the pipeline. We invite customers to talk to us and we listen. Every few months, around 20,000 customers are contacted and invited to give us their views. Viewpoints received are considered by executive management and CFI.co | Capital Finance International

LINDA MASTERSON: NO DITHERING, EVER Greatest Achievement: Raising a remarkable son of excellent character who is a wildlife veterinarian involved in community development. Happy husband of a talented artist and proud father of two boys.

Favourite Things: Edgars; its people and its customers, family, scuba diving, nature.

Pet Hates: Dishonesty and dithering.

Special Talents: Motivating strategising, execution.

people,

we learn and adjust accordingly. We regard a customer complaint as an opportunity – that a complaint, handled well, often results in a more loyal customer than if the complaint had never arisen in the first place. Every customer complaint reaches the desk of the Executive team, including mine, and we ensure that quality responses are given to our customers.”

“We believe that we are Zimbabwe’s market leaders as credit retailers and it is our resolve to remain so thanks to a loyal customer base.

We value integrity, professionalism, productivity and, above all, people. Times are tough again in Zimbabwe and the economy is likely to continue to deteriorate through 2016 but we are a highly committed, highly focused team who look forward to the future with optimism” says Masterson. i

> IFC:

Capital Markets Key to Development

By Ethiopis Tafara

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nding extreme poverty for good and building shared prosperity across the developing world takes money – a lot of money. Take infrastructure: for the foreseeable future, an estimated $50 billion per year is needed in Africa alone to deliver basic services such as clean running water and electricity, and to build roads connecting communities to markets.

America amount to over $300 billion between now and 2020; and in populous Asia the price tag is $8 trillion over 2010-2020 period. These numbers are equivalent to seven percent of these region’s GDP. This is double the percentage of GDP the developed countries spend on their infrastructure and it highlights the magnitude of the challenge the emerging economies face in advancing their development.

Annual infrastructure financing needs in Latin

This is only part of the story. Small and medium-

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sized enterprises in emerging economies – and counting only the minority in the formal sector – are also starved for finance. Their needs are over $250 billion in Latin America, $200 billion in Asia, and at least half that in Africa.

It is clear that developing country governments cannot provide financing on this scale, neither can donor governments, nor local financial institutions. For the answer, one must turn to the capital markets.

Autumn 2015 Issue

rapidly growing domestic savings rates across emerging economies. In Africa, there are now nearly $400 billion dollars in pension fund assets, and in Latin America the pension funds of the five largest economies alone controlled over $720 billion in 2013. In Asia’s growing economies the figures are even more impressive.

There is enough capital in the world. The question is how to channel these funds to meet development needs more effectively in a way that works for investors. Capital markets are a big part of the solution.

Time and time again capital markets have proven to be effective intermediaries in channelling savings and other funds to countries’ national development priorities that fuel economic growth and create jobs. As such, capital markets serve as an alternative to the banking sector. In this role, they not only mobilise additional financing that drives economic growth, but by virtue of providing an alternative, capital markets also introduce financial stability into economies. They do this by taking a different approach to risk allocation, making economies more resilient in the face of capital outflows and banking crises.

Capital markets in developing countries – many of which are still in their infancy – hold tremendous potential. Local bond markets in some regions, for example, have been growing at a robust rate in the last decade. The Asian bond market has expanded more than fourfold since 2008 to $3tn, representing almost a quarter of GDP. In SubSaharan Africa, only South Africa had issued a sovereign bond before 2006, but now over $25bn dollars have been raised across the continent with $7bn issued in 2014 alone.

While these numbers fall short of the financing needs, they do point to the trajectory of growth that has gained considerable momentum in a short time. Similarly, the size of domestic bond markets in the largest Latin American countries has more than doubled since 1995. However, apart from Brazil and Mexico, the pool of capital is still relatively small.

What would it take for the emerging economies to develop robust capital markets to finance the growth of private enterprise, economy, jobs, and improve the lives of millions?

“It is clear that developing country governments cannot provide financing on this scale, neither can donor governments, nor local financial institutions.”

Consider the supply side of the equation – the amount of money available for investment around the world. In 2013, assets controlled by institutional investors in OECD countries grew to over $92 trillion dollars – a number that keeps rising. The world’s largest 300 pension funds control almost $15 trillion, while sovereign wealth funds have amassed about $6.5 trillion.

Imagine if the emerging economies could capture just a fraction of these funds. Then consider the CFI.co | Capital Finance International

Today, when we think about global capital markets, we focus on the great financial centres – New York, London, Tokyo, and Hong Kong.

But this focus on the largest and most modern markets misses an important point: every market is both similar and unique – similar in that they all respond positively to certain fundamentals, but unique in the environment and tradition in which they develop and prosper.

For example, the US capital market stands at approximately $60tn dollars. This is a huge number connected to a complex market. But its size and complexity obscure the simple fact 105

that the US capital market is still just a market.

Markets, in one form or another, have existed in every society since the dawn of recorded history. And, despite the size and complexity of modern trading places, market fundamentals today are similar to those that permitted markets to function thousands of years ago in ancient Sumer, Egypt, and China, or in the Bantu and Swahili cities of Africa.

These fundamentals are simple and include a place where buyers and sellers can meet.

This place can be a simple bench under a buttonwood tree, which is where the New York Stock Exchange got its start, or an old-fashioned trading floor or, increasingly, the virtual space of the Internet.

Second, there must be property rights. Buyers and sellers must have some legal right to control and transfer the items traded. In ancient times, these rights were recognized by custom or possession. Today, they usually involve laws.

Either way, without these rights, markets cannot exist.

Third, and most importantly, markets require trust. Trust is the lubricant that keeps the wheels of a market from grinding to a halt. It is the faith that a buyer is buying what he expects, and the faith that the seller will receive the payment promised at the agreed-upon time. Without this basic trust, no market in the world, no matter how technologically sophisticated, will succeed.

In Africa’s informal markets trust is based on your family, reputation, and the relationships you have built within a small community. In the diamond markets of New York and Amsterdam, trust is based on ethnicity, religion, and the personal interaction of a handful of traders. These markets work because of the value and reputation prevalent in their tight knit communities. With the anonymous trading that characterises modern capital markets, this personal trust has been replaced by a surrogate — best practices, securities laws, regulations, and their vigorous enforcement.

So how do we go about building trust in these new capital market? The answer lies not so much in the number of laws or regulations, but rather in the principles and behaviours they seek to establish. These need to reflect a thorough understanding of the investors’ perspectives and needs – it’s their capital at stake, after all.

One of the underlying principles governing trust is transparency. To earn trust, participants in the market need to be completely transparent to their investors, clients, and regulators about their practices, their conflicts of interest, and their risk profile.

Author: Ethiopis Tafara

that they have a sound basis to judge the value of what they are buying. So accountants and auditors serve a critical role in enabling the transparent and accurate financial reporting that underpins investor confidence and trust.

Credit rating agencies are also key actors in rebalancing information asymmetries by providing information about the creditworthiness of companies to lenders and investors alike.

And, finally, trust is built on knowing that there is a public or private cop on the beat. Clear rules are necessary but their credible enforcement is equally crucial.

Without a doubt, governments have to play a central role in creating and enforcing the regulatory framework that fosters trust. But that takes time. Different market players – private companies, accountants, auditors, and rating agencies – a can do a lot on their own. Today, we benefit from the enormous body of knowledge

Reliability and credibility are also essential.

Investors need to have assurances that the information disclosed to them is accurate, complete, and verified. It gives them confidence 106

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and experience that stems from market successes and failures and has been translated into global principles and standards.

There are partners like the International Finance Corporation (IFC) to help make these principles and standards work across different environments in the emerging markets in order to build investor confidence as a foundation of capital markets.

The development of domestic capital markets across the developing world has the potential to provide the funds necessary to drive economic growth, bring an end to extreme poverty, build shared prosperity, and bring robust returns for investors. i

ABOUT THE AUTHOR Ethiopis Tafara is vice-president of Corporate Risk and Sustainability and General Counsel at the International Finance Corporation.

Autumn 2015 Issue

> COOP Mortgage Bank:

Addressing the Housing Deficit in Nigeria COOP Savings & Loans Limited (Mortgage Bank), a financial institution licensed and regulated by the Central Bank of Nigeria, was established as a subsidiary of the former Cooperative Bank (now Skye Bank Plc) in 1992, commenced business in Ibadan with two branches in Lagos and Abuja. The bank currently has eight business offices in seven states, plans to open more branches in other parts of the country and will set up agent offices in the UK and USA (to meet the needs of the Nigerian diaspora).

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he bank suffered heavy losses up until 2009 when it was acquired by new investors with a brand-new management team which recapitalised, rebranded and repositioned the bank to function effectively as a specialised and vibrant mortgage bank with cooperative societies as their core market. By 2013 the bank was further recapitalised in line with the Regulatory Authorities, increasing its shareholders funds from negative N453 million in 2009 to N3.2 billion with plans to increase further to N5 billion.

The bank’s twin objectives are to significantly bridge the gap in the supply of affordable and durable houses in Nigeria and to provide appropriately structured collateralised mortgages for ease of home ownership. COOP was the first private mortgage bank to access the National Housing Fund (NHF) and continues accessing this facility to date.

The bank provides mortgage services for affordable and quality home ownership to identified target markets with a special focus on the lower and middle classes through their cooperatives. By serving customers well, the bank’s mission is to be the premier provider of home ownership financial services to this target market.

Nigeria has a deficit of around 17 million houses, 70% of which is within the lower and middle class ownership sector. This presents a huge opportunity for COOP’s business model - which is to promote real estate development through structured transactions, by direct sale pitches to end-users through their group representatives (cooperatives) in line with the origins of the bank.

The Mortgage industry in Nigeria is a key sector

“The bank’s core competence is in the provision of home ownership services through the tripod of synergy between itself, the home developers and the home buyers - thus banking the home developers and buyers.” of the nation’s economy and is grossly undertapped. Because of this the bank has created unique products, in particular the Employee Home Savings Scheme which triggers owner occupier home ownership (demand), and the Coop High Yield Deposit Account (direct investment in real estate development) which triggers supply.

The bank’s core competence is in the provision of home ownership services through the tripod of synergy between itself, the home developers and the home buyers - thus banking the home developers and buyers. This synergy gives the bank control over securities through effective documentation processes and engenders lower transaction costs for all stakeholders. The cluster orientation in housing development enhances cost leadership through economies of scale.

The bank focuses on sound corporate governance and supporting infrastructure, continuous training and the orientation of staff towards goals achievement and provides a work environment with tools to ensure support is responsive and pro-active. The board of directors of the bank is peopled by seasoned professionals and the CFI.co | Capital Finance International

managing director and two directors are alumni of Harvard Business School. Some senior staff are currently undergoing the Mortgage Bankers’ Association of America’s certification course and another is a graduate of Lagos Business School.

The bank differentiates itself from the general competition through its concentration on the target markets of lower and middle class workers in public and private organisations.

COOP’s strategy is to finance structured real estate development transactions (for corporate/cooperative clusters) which are then rolled into mortgages. This strategy is achieved by signing up group buyers with predevelopment commitments (real and effective demand), providing estate development loans to developers (guaranteed supply) and also providing mortgages to the buyers (easy and secure payment).

The bank is currently participating in strategic relationships with the Nigerian Customs Service, the Society for Family Health Cooperative and Trustfund Pension Ltd. The initiative for the latter organisation is to provide over 5,000 housing units for staff all over Nigeria under staff welfare owner-occupier housing schemes - essentially this is set out to motivate officers and staff. This fits in with the new government’s effort on anti corruption.

The bank recently signed an MOU with the Nigerian Customs Service and Shelter Afrique (a pan-African housing finance institution) for home development funding.

The bank’s set objective for the next five years is to fund home ownership of at least 20,000 homes spread across the country thus increasing its balance sheet from N7 Billion to N100 Billion by the year 2020. i 107

> Sentinel Retirement Fund:

Facing South Africa’s Retirement Industry Challenges Head On Sentinel was founded back in 1946 as a mining industry-only retirement fund, but in recent years has evolved far beyond that original identity to position itself as a highly competitive fund available to all employers in South Africa. The board of the fund had long ago understood that mining in South Africa was a mature industry based on dwindling resources with limited expansion opportunities.

O

ver the vigorous decades when South African mining led the world, Sentinel built up the institutional expertise to provide a compelling value proposition to its participants, delivering consistently excellent investment returns, benefits and services at a structurally lower cost than commercial funds can offer. Unlike our listed competitors, Sentinel has always been a non-profit organisation, whilst its business model resembles that of a mutual society.

South Africa’s retirement industry, and the country in general, face many challenges in getting individuals to retirement with enough savings to enable financial self-sufficiency. Many of these challenges have been with us for years, some are new, some unique to South Africa but many are present globally.

EAT TODAY OR ONLY WHEN YOU TURN 65?

High levels of unemployment, currently around 25%, have plagued South Africa for many years.

The 2014 Statistics South Africa Quarterly Employment figures reflect that, of the 35.6m citizens of working age, 4.9m are unemployed and 15.4m are either unavailable to work or are not seeking employment.

Maybe even more significant, are periods of unemployment during the working life of many individuals. Whilst employed, provision is made for retirement through compulsory participation in mainly defined contribution type retirement schemes. Employment interruptions result in accumulated retirement savings being accessed to maintain household living expenses and, more often than not, an extended family.

For the unemployed, and those who have been retrenched and find themselves without employment for a period of time, saving – be it for retirement or any other of the many right reasons – is far from the top of life’s priorities.

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“The 2014 Statistics South Africa Quarterly Employment figures reflect that, of the 35.6m citizens of working age, 4.9m are unemployed and 15.4m are either unavailable to work or are not seeking employment.”

Without significant job creation, any objective to increase household savings, be this through retirement provision or other savings, is bound to disappoint.

It is, however, not only unemployment that is to blame for low levels of savings. Since the turn of the century, net household savings in South Africa, as a percentage of disposable income, have declined and on average have been negative, according to the South African Reserve Bank Quarterly Bulletin of December 2013.

Most South African’s do not save and those who do, save too little, including the economically active.

Many reasons exist for the low household savings rate such as the high levels of unemployment, low levels of household income, and easy access to credit which has become the “bail-out” norm for many South Africans. Coupled with poor financial discipline, low levels of saving further leads to high levels of indebtedness with more than half of South Africa’s 19 million credit active consumers being regarded as debt stressed.

This results in economically active households that have not saved enough being vulnerable to CFI.co | Capital Finance International

short term financial disruptions and accessing retirement capital prematurely to finance consumption.

RETIREMENT SAVINGS – PRESERVATION OF CAPITAL IS PARAMOUNT At 31 December 2013, the South African retirement industry was worth an estimated ZAR 3,211bn ($231.9bn) with 5,144 registered retirement funds. Yet, a great deal of the potential market of economically active individuals remains untapped as many individuals do not have access to a retirement fund.

For those who reach retirement with little to no capital invested, the government’s Social Security System provides a State Old Age Grant from the age of sixty onwards; at ZAR1,410 ($102) per month, the grant hardly covers basic cost of living for the more than three million South Africans that rely solely on this income source.

During the 1980s and 1990s, the majority of South African retirement funds converted from defined benefit (DB) type schemes to defined contribution (DC) arrangements. Many valid reasons supported this whilst employment trends in the country have gradually changed from long stable careers at the same employer to more frequent employment changes. The DB structures were seen as old fashioned and punitive to the new generation of employees as they did not sufficiently promote portability of accumulated retirement savings.

The majority of retirement fund members belong to either pension funds or provident funds.

Pension fund membership in essence provides tax relief on contributions made with benefits being taxed and forced annuitisation of a minimum of two thirds of capital at retirement whereas provident fund membership does not provide tax relief on contributions, benefits are

Autumn 2015 Issue

largely not taxed, and no forced annuitisation at retirement is in place.

The irresponsible financial behaviour of individuals – such as making premature withdrawals from their retirement savings and largely ignoring the preservation of capital even at retirement where cash withdrawals are made and either squandered or inappropriately invested, rather than being annuitised to provide a life-long sustainable post retirement income – creates leakage from the retirement fund system. This leakage significantly impacts the ability of economically active individuals to reach retirement with sufficient capital to maintain a reasonable standard of living.

Sentinel has created a financial advisory service for its membership, at no cost, that aims to educate individuals on financial discipline and the importance of saving and preserving from a young age. Additionally, advising members on important life changes and decision-making around the Sentinel product range, to ensure effective long term saving, has resulted in a rise in members retiring from Sentinel rather than withdrawing retirement savings.

By providing flexible and dynamic fund products, Sentinel allows its members to choose the most suited product to meet their individual post-retirement income needs, while also providing default options that are designed for those who prefer not to manage their own affairs. This concept is further supported by Sentinel’s seamless and costless transition of a retiree from contributing member to pensioner status.

To allow contributory individuals to save sufficiently for their golden years, Sentinel aims at an investment strategy that can generate a post-retirement income replacement of at least 75 percent of final salary (assuming contributions made at 15% over a 40 year working life). The fund’s Asset Liability Modelling shows that members can actually achieve in excess of 100% replacement. For pensioners, the strategy is geared to maintain the purchasing power of pensions on a level of at least 80 percent of the Consumer Price Index (CPI). The fund has actually managed to achieve a level in excess of 100 percent of CPI. In addition, annual bonuses of around 10 percent of annual pension have been awarded over the past ten years to pensioners.

RETIREMENT INDUSTRY REFORM – NO SHORTTERM SOLUTIONS Although the South African retirement industry is well structured, regulated, and operates effectively, many individuals who have the opportunity to save for retirement still do not do so sufficiently. Citizens impoverish themselves and place themselves CFI.co | Capital Finance International

in a position where they erode security in old age, undermine the alleviation of chronic poverty, and increase reliability on others including the state.

The South African retirement industry is ahead of its neighbours, who face even greater obstacles, such as underdeveloped financial markets, poor literacy levels, ineffective administration, and low per capita income. Furthermore, the growing trend of young Africans migrating in search of better living conditions has weakened traditional family social security structures, thereby impacting the socio-economic conditions of the elderly – particularly those residing in the rural areas.

South Africa’s National Treasury (NT) initiated a retirement reform programme in 2012 in order to address such shortfalls in the current system. The process started well, with a number of proposals being legislated in 2014, but has since hit an obstacle as actual implementation of certain proposals has been postponed from 1 March 2015 to 1 March 2016 or later.

In order to combat the many obstacles faced by the retirement industry in South Africa, the NT has proposed schemes aimed at improving the country’s culture of low savings, the compulsory preservation of retirement savings, and improved incentives for saving and compulsory annuitisation of retirement capital. Furthermore, the proposals also address issues such as improving postretirement income products and the fees charged in the industry. A Social Security System is also part of the broader reform initiative, and to this end a compulsory contributory system is envisaged that will produce core benefits for all citizens.

Sentinel already complies with most of the NT initiatives and proposals and in 2013, broadened its focus on corporate employers to include participation by all industries. It introduced a “Total Cost” fee methodology in 2014 that reflects total cost levied with monthly communicated gross and net investment returns. The difference being the total cost of participation in the fund. Further plans for expanding its reach and product offerings are also on the horizon. The fund is aiming to create a provident fund that it envisages to run alongside the pension fund, with the view of attracting further new participating employers. This extended platform will open the fund for participation to a far broader membership base, allowing more individuals the opportunity to maximise their retirement savings.

Given the potential for South Africa’s retirement sector and the knowledge that the various obstacles will be overcome, further growth can be expected in the coming years. i 109

> Banco Millennium Angola:

Winner in a Dynamic Environment September, 2015

Founded in April, 2006, Banco Millennium Angola reflects the vitality of the country’s buoyant financial market, seizing development opportunities through strategic partnerships, investments, and the use of new technologies.

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he bank’s mission is to contribute to the modernisation and development of the financial system and, more broadly, the Angolan economy through the commercialisation of innovative and customised products and services, designed to meet the needs and expectations of different market segments while maintaining standards of high quality and specialisation.

Banco Millennium Angola belongs to the Millennium Group, the leading privately-owned Portuguese bank which operates in several countries. The experience of belonging to an international group the size of Millennium BCP enables the Millennium brand to be adopted as a single corporate identity – contributing to strong international brand recognition – operating within a common communication framework that fosters ideal conditions for sharing creative ideas and motivating concepts based on a sense of belonging and the perception of the brand.

Regardless its connection with BCP, Banco Millennium Angola is called upon to partake in a highly dynamic and competitive business environment. The bank is singularly wellequipped to assume and maintain its leadership position: it has the brand, organisation,

“The bank serves thousands of companies and private clients through its branch network and dedicated service channels scattered in different parts of the country.” knowhow, technology, and team to ensure enduring success. Although there is a strong partnership between the group’s members, the business model of Millennium Angola is built on an independent banking model that comprises an intense focus on customer needs and is supported by innovation in banking technology and services.

A nation of around sixteen million people, Angola is a fast-growing market with an increasingly upbeat macroeconomic outlook.

The bank serves thousands of companies and private clients through its branch network and dedicated service channels scattered in different parts of the country. Additionally, each of the bank’s branches is equipped with automated tellers that are accessible 24/7 for the customers’ convenience.

BMA has been growing since its implementation in Angola in 2006.

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Banco Millennium Angola serves more than 500,000 clients through its 109 branches – 88 retail branches, 13 Prestige Centres, and 8 Corporate Centres of which two are wholly dedicated to the oil industry. At 56 of the bank’s offices, customers are welcome on Saturday mornings from 8am to noon for added convenience.

Over the years, Banco Millennium Angola has been increasingly consolidating the relationship with its customers, offering a number of savings and investment opportunities carefully adjusted to individual needs. The bank also actively supports entrepreneurship with its underwriting of business ventures being considered one of the corporate hallmarks that set Banco Millennium Angola apart from the competition. The bank continually aims to embody the enterprising spirit that has taken hold of Angola with innovation, dynamism, excellence, and quality ensuring optimal operational efficiencies.

Banco Millennium Angola is currently the leader of the Angola Investe Programme, an initiative launched in 2012 by the Angolan executive.

The bank currently holds a 30% share in the programme and fully intends to consolidate its position in the medium term, thereby

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HQ: Banco Millennium Angola, located in Talatona, the new Financial City (Cidade Financeira) area of Luanda.

contributing to the development of the Angolan economy. Recent data show that, to date, Banco Millennium Angola has supported no less than 149 the projects initiated under the programme.

Banco Millennium Angola is solely responsible for over a third of the nearly $400 million (46 billion kwanzas) of approved investments which created in excess of 5,000 new jobs.

Manufacturing, geology, and mining absorbed 51% of the total investment volume while 30%

went to livestock and fisheries, 10% to services in support of the oil industry, and 9% to building materials.

number of innovative targeted products such as enhanced current accounts, term investments, and credit solutions.

The products and services portfolio of Banco Millennium Angola is structured according to the real needs of various market segments. In the private and business sectors, the bank invests in maximising efficiencies while reducing costs, thus offering customers an unequalled experience. The retail banking segment boasts a

In the business and corporate segments, the bank boosts growth by supporting investment projects, providing an attractive financial package that covers forex operations, finance solutions, and payment processing to both suppliers and employees. The bank also offers leasing, factoring, and confirming facilities.

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“With only nine years of operations in the Angolan market, Banco Millennium Angola has already gained wide international recognition.” enables the bank to transact securities issued by the state in a now newly organised capital market.

With only nine years of operations in the Angolan market, Banco Millennium Angola has already gained wide international recognition. Earlier this year, the bank was recognised by Capital Finance International as Best Commercial Bank Angola 2015. Also in 2015, the bank received a new Certificate of Software Quality based on ISO/IEC 25010, awarded by the prestigious technological institute ISQapave and SQS Portugal.

In 2014, Banco Millennium Angola received the Bank of the Year Angola 2014 Award extended

by The Banker Magazine and was recognised as a Brand of Excellence by Superbrands – a recognition also awarded in 2013. Also in 2013, the bank developed the capabilities of straight through processing – a system of national and international electronic payments. The Banco Millennium Angola website has been awarded with a certificate of software quality based on the standard ISO/EIC 25010 enterprises ISQapave and Portugal-SQS Software Quality Systems.

ANTÓNIO GAIOSO HENRIQUES António Gaioso Henriques is chairman of the executive committee of Banco Millennium Angola (BMA) since April 2012. Before assuming his present position, Mr Gaioso Henriques was the bank’s chief financial officer (CFO).

Mr Gaioso Henriques obtained a degree in management from the Catholic University of Louvain in Belgium. His professional career has been wholly spent in the banking and financial services industry. He worked and gained valuable experience at a number of prestigious companies such as MDM Financial Services (with participation of Morgan Guaranty Trust, Deutsche Bank, and Mello), the Chase Manhattan Bank in London and Lisbon, and the Cisf investment bank.

Chairman of the Executive Committee: António Gaioso Henriques

Moreover, Banco Millennium Angola also operates various alternative service delivery channels as Internet banking, SMS banking, and mobile banking. The bank also maintains a readily accessible contact centre for both corporate and private clients. This centre allows customers to perform account operations and obtain information about products and services.

Banco Millennium Angola was the first bank to 112

offer the Paga Fácil service – a digital platform where all kinds of transactions may be conducted in a safe, efficient, and innovative way. This multichannel platform bundles Internet banking, SMS banking, mobile banking, and contact centre services through a single phone number.

In May 2015, Banco Millennium Angola became a member of the Debt Securities and Exchange of Angola (BODIVA) after signing a contract that CFI.co | Capital Finance International

He joined the staff of the Portuguese Commercial Bank in 1991 and became a member of its senior management three years later. Over the course of his career, Mr Gaioso Henriques gained experience in various management positions in areas such as investment banking, credit evaluation, business banking, and corporate and international banking. He also served as director of companies such as Vanguard Management Company Pension Fund and Cisf Risk Venture Capital Society. i

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> Book Review:

Squeezing Cash Out of Milliseconds

By Wim Romeijn

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ime is money. To high-frequency traders, it means big money. HFTs make cash by being milliseconds faster than the other guy – or system. These are not mom-and-pop investors: high-frequency traders employ ultra-fast Internet connections and powerful computers to catch buy and sell orders just moments before they hit the trading floor and affect equity prices. By unleashing sophisticated algorithms on the captured data, HFTs can trade on marginal price differences. A position is often assumed and liquidated within a fraction of a second. In this curious segment of the market, there is no place for basic research, buy-and-hold, or any consideration other than raw computing power.

Whilst not illegal, high-frequency traders have been receiving plenty of attention from regulators, prosecutors, and from Michael Lewis – the American financial journalist who has been at the forefront of uncovering the many exotic ways in which the real wolves make their billions. A graduate from the London School of Economics and trained by Salomon Brothers as a bond salesman, Michael Lewis exited the trading floor to write Liar’s Poker, an exposé of life on 1980s Wall Street.

Now considered mandatory reading for future traders – alongside Tom Wolfe’s (fictional) The Bonfire of the Vanities and Barbarians at the Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar – Liar’s Pokers tell the story of how the Salomon Brothers investment bank, since absorbed by Citigroup, almost single-handedly invented the mortgage bond and scooped up untold billions as a result. If anything, Liar’s Poker, published in 1989, reads like a work of prescient knowledge, announcing a crisis thus foretold.

With his first book, Mr Lewis set the tone for many others to come. He has since authored no less than fourteen books, mostly about the inner working of the usually opaque financial world. Mr Lewis displays a knack for explaining in clear layman’s terms even the most complex and esoteric of stratagems deployed by the financial wizards of Wall Street and London’s City to extract maximum profit from equity trading.

His latest work Flashboys: A Wall Street Revolt reveals how vast amounts of human ingenuity, intelligence, and resourcefulness are employed to empower the HFT groups set up by most large trading firms and investment banks to claim profit from arbitrage. Mr Lewis profusely laments the vast amounts of human talent wasted on a wholly unproductive pursuit. While doing so, he also provides fascinating insights such as details on

“Time is money.

To high-frequency traders, it means big money.” the 830-mile long dark fibre cable put in between Chicago and New York at a cost of $300m to decrease line latency from 17 to 13 milliseconds.

The cable allows HFTs that use it a tiny, but hugely lucrative, edge over the competition. However, just as the secretive cable became operational, an even faster microwave link between the two financial centres was established, reducing latency to barely nine milliseconds. Because microwave transmission only covers small distances and requires repeaters, a new transatlantic cable is now being laid to connect New York and London fully five milliseconds faster than the current infrastructure allows.

In Flashboys, Mr Lewis concludes that the market is “rigged” and argues that HFTs cost regular brokers and fund managers anywhere between $5bn and $15bn annually in profits lost to the jacking up of equity prices in the split second it takes for a buy or sell order to travel from broker via exchange servers to trading floor. The allegations contained in Mr Lewis’ book prompted an investigation by the Securities and Exchange Commission (SEC) which earlier this year imposed a $4.5m fine on the New York Stock Exchange and two of its affiliated exchanges. Pointedly, the NYSE has refused to admit to any wrongdoing.

Just how profitable high-frequency trading can be was gleaned from the corporate filings and disclosures of Virtu Financial – one of the world’s leading HFT firms – as it prepared to obtain a NASDAQ listing. Using proprietary trading software, Virtue Financial managed to beat the markets and rake in a profit on 1277 out of 1278 days of trading over the past five years. The company had to postpone its IPO on a number of occasions due to the firestorm that erupted after Flashboys was first published. Virtue Financial operates on over 250 exchanges and maintains dark pools – private trading spheres – in 34 countries.

Whereas high-frequency trading is not unlawful per se, front-running most certainly is. This is when less savoury brokers profit from the advance knowledge of large orders placed by their clients.

A front-running broker trades on his own account before putting through the client’s order and so CFI.co | Capital Finance International

easily rides the tailcoats of the market as it moves in either direction. The distinction between highfrequency trading and front-running is rather blurred and comes down to semantics.

Coincidence or not, Flashboy’s publication – and its taking the best-seller charts by storm – occurred just moments before regulators snapped into pursuit-mode to flush out market wrongdoers and other miscreants harvesting profits on the margins of the permissible. HFTs have now been heaped together with ordinary fraudsters as threats to the proper, fair, and transparent functioning of markets.

If it exposes anything, the HFT pseudo-scandal merely emphasises that insiders have always enjoyed an advantage on equity markets. However, it does dispel the equal access myth that keeps smaller investors locked in by perpetuating the notion of a level playing field. As Mr Lewis shows in Flashboys, equal access is just a myth kept alive in order for the party to continue ad infinitum.

Interestingly, high-frequency traders prey on brokers and hedge fund managers who are the high-frequency traders’ true chumps. From the much ado surrounding Mr Lewis’ book, one may be forgiven the impression that wider society actually pities the HFTs’ victims. As such, the book does a disservice, for while regular brokers and flashboys battle over disputed milliseconds, the banksters of old go about their sorry business with renewed vigour, inflating and deflating bubbles, sacrificing private individuals, corporations, and entire nations on the altar of financial propriety.

For anyone interested in getting a real good peek behind the scenes of the sordid finance perpetrated by fraudsters in three-piece suits, there is The Divide: American Injustice in the Age of the Wealth Gap – the much less touted work

by Rolling Stone Magazine’s reporter Matt Taibbi who paints a scary picture of an exclusive club hell-bent on destroying whatever stands between its members and other people’s money. That whatever happens to be you. i

Flashboys: A Wall Street Revolt by Michael Lewis (isbn 978-0-3932-4466-3) The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi (isbn 978-0-8129-9342-4)

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> Development Bank of Rwanda:

Powering Accelerated Economic Growth The Development Bank of Rwanda (BRD) is a public limited liability company limited with a share capital of RWF 7,808,931,000. The bank was incorporated on August 5, 1967, and has its headquarters in Kigali, Rwanda.

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RD provides short, medium, and long-term financing that significantly facilitates the emergence of different productive enterprises in the private sector.

BRD OBJECTIVES • Provide development finance for priority economic sectors as defined by the government, which are: agriculture and livestock, exportation, tourism, ICT, energy and water, and health and education; • Provide equity investments to stimulate the development of new firms able to participate in Rwanda’s economic development; • Promote exports to reverse the trade deficit, increase Rwanda’s stability, and invest in its development; • Refinance microfinance institutions and professional associations; and • Facilitate technical assistance to financed companies, microfinance associations, and other stakeholders to enhance sustainability.

“The Development Bank of Rwanda operates in all sectors of productive investment which generate added value and create employment.”

BRD GUIDING PRINCIPLES • To maximise development impact • To maintain sound banking principles • To be additional to other funding sources • To leverage strategic alliances • To focus on socio-economic development

The bank’s priority fields of intervention cover the following: • Agriculture & livestock • Industries & services • Hotels & tourism • Housing (real estate and markets) • Social infrastructures (health & education) • Microfinance institutions • Water and energy • ICT • Transport and related facilities

BRD BANK PLAYS A TRIPLE ROLE • Lender • Advisor • Partner

BRD PRODUCTS AND SERVICES • Loans (long, medium, and short-term) • Housing • Equity

Success story: East African Granite Industries (EAGI) Ltd.

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BRD PRIORITIES The Development Bank of Rwanda operates in all sectors of productive investment which generate added value and create employment.

In its credit policy, priority is given to the new technologies and export oriented projects.

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Autumn 2015 Issue

Success story: Trust Industries Ltd.

Success story: Trust Industries Ltd.

• MFI Refinancing • Advisory, technical assistance, and capacity building • Guarantee Funds (SME, AGF, FSA) • Syndications • Policy research, analysis, and support • Public / Private sector facilitation MANUFACTURING IN RWANDA • The manufacturing sector in Rwanda is critical in pursuit of key government policies and strategies that are aimed at increasing export revenues and decreasing trade deficits, generating off-farm employment, and pursuing the growth of GDP. • To ensure economic transformation, the EDPRS II targets the industrial (manufacturing, construction, and mining) sector to contribute 20% to GDP by 2018. It requires growing at an annual rate of 14%. Currently, the manufacturing

sector, including agro-processing, constitutes 43% of the industrial sector and contributes 7% to GDP. • The Rwanda industrial policy aims at increasing domestic production, improving export competitiveness, and creating an enabling environment for industrialisation.

• Pillar two of the Rwanda Private Sector Development Strategy (PSDS) aim to build a more competitive manufacturing sector capable of competing in the EAC, Great Lakes Region using new technologies, improved quality, and deepening supply and value chains.

BRD SUPPORT FOR MANUFACTURING IN RWANDA • In the framework of contributing to the decrease of importations and the creation of more job opportunities, the Development Bank of Rwanda (BRD) continuously intervenes to promote the manufacturing sector which plays a CFI.co | Capital Finance International

big role in the development of the country.

• In 2014, the bank injected Rwf60 billion in authorised investment loans into the priority sectors of the Rwandan economy (in which16 projects in the manufacturing sector were financed to a tune of Rwf10.2 Billion).

• This year, the bank increased its authorised loan portfolio to Rwf65 billion to finance private and public projects that will see the country attain its aspirations as indicated in the Vision 2020 and in EDPRS phase two.

BRD STRATEGIC PLAN 2015-2018 • Rwanda’s revised Vision2020 and EDPRS II sets ambitious targets for Rwanda’s development including sustained economic growth of 11.5% and accelerated reduction of poverty to less than 30% of the population.

• BRD will play a critical role in Rwanda’s transformation based on its refocused new 115

Success story: Soft Packaging Ltd.

Success story: Rwanda Mountain Tea Ltd.

mandate with a mission: to be a trusted and strategic partner for Rwanda’s development by availing financing and advisory services to impactful entrepreneurs in key priority sectors.

• As defined in the next five year strategic operating plan, the bank will focus on financing development activities, cutting across five sectors including agriculture, exports, energy, education, and housing.

• The bank will focus on development targets throughout these sectors (including exports, jobs, energy generation, amongst others) that are aligned to Economic Development and Poverty Reduction Strategy II (EDPRS II), a subset of the Vision 2020.

BRD GENERAL LENDING CONDITIONS • A feasibility study for the project (technical and financial).

• Adequate technical capacity in the field of the project for which finance is being sought • Interest rates are negotiable between the bank and the customer (current average is 16%) • The reimbursement period varies and can be up to ten years depending on the cash-flow projected for the project (current average is between five and eight years) • Commissions on credit include a 0.75% 116

service and a 0.5% management fee levied on the total amount of the given loan • Promoter’s complete identifications, company registration certificate • Adequate market share to ensure a good turnover level and project profitability • A minimum participation by the promoter varying between 30% and 50% of the cost of investment according to the size of the project • Adequate loan securities (such as mortgages with title deeds / a pledge of receivables / joint guaranty of a spouse or associates / accident and fire insurance etc.)

ALEX KANYANKOLE Alex Kanyankole has been at the helm of the Development Bank of Rwanda (BRD) since July, 2013, maintaining the bank’s profitability and its compliance with international best practices and standards. Mr Kanyankole also oversaw the successful transition and split of the bank into two entities with the formation of the new BRD Commercial Bank (wholly owned by Atlas Mara).

Prior to joining BRD, Mr Kanyankole served as the director general of the National Agricultural Export Board (NAEB), and prior to holding that position, he was the director general of OCIRCAFE and OCIRTHE respectively.

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CEO: Alex Kanyankole

Mr Kanyankole offers a wealth of experience and knowledge gained in corporate governance for over ten years. He earned a Masters of Business Administration (Projects Management) from the Maastricht School of Management, Netherlands. i

> AfroCentric Health:

Driving Sustainability within the Healthcare Sector

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froCentric Health (Pty) Ltd is a subsidiary of the publically listed AfroCentric Investment Corporation Limited. The AfroCentric Health comprises the healthcare interest of the AfroCentric Group. The group consists of a number of companies: • Medscheme • Aid for AIDS 118

• DBC • AfroCentric Health Solutions (which focusses on health businesses on the African continent outside of South Africa) • Helios IT Solutions • Allegra • Bonitas Marketing Company AfroCentric Health’s corporate vision – Creating CFI.co | Capital Finance International

a World of Sustainable Healthcare – is shared by all the companies operating under its umbrella.

This shared vision ensures that each company focuses on leveraging its core competencies to deliver sustainable healthcare solutions, concentrated on best-of-breed products and services in healthcare administration, health risk management, HIV/Aids disease management, and health-centric ICT-based solutions.

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This approach is not only reflected in how operations are structured, but also in the nature of the brands represented within the group.

Within the healthcare sector, the primary challenge is delivering affordable, quality healthcare solutions in a sustainable manner so that more South Africans have access to medical aid coverage. This is a major challenge given the considerable pressures that our end-users – the medical scheme member – face in the context of medical cost inflation which is almost double the current pace of the consumer price index.

Since medical aid is often considered as a “grudge payment,” customers tend to seek less expensive alternatives when affordability suffers pressures from increases in the cost of food, electricity, and petrol. The challenge is to demonstrate value for money not only to client schemes, but also to their members.

SECTORIAL CHALLENGES At a macro level AfroCentric Health is concerned about the socioeconomic position of South Africa.

The impact of low GDP growth on the country’s society and on the job market constitutes a major concerns as do the implications of this low rate of growth on the social pyramid.

The third challenge faced would probably be the stability and reliability of power supply in South Africa – or rather the lack thereof – which adversely affects the ability to conduct and expand business.

A LEADERSHIP APPROACH One of the key elements of success lies in having good leadership. The key to the corporate leadership of the future is the ability to have a clear vision for the direction of the company within the prevailing economic environment as characterised by its pace of change and level of complexity. Leaders must able to communicate their vision to the employees and create a culture in which innovation and an entrepreneurial spirit thrive within a non-hierarchical, flexible, and agile structure.

AfroCentric Health has an exceptionally dynamic human resources strategy that rest on the ability to constantly improve the skills levels of corporate leadership and staff. The company is also constantly seeking to recruit talented individuals from different background and with diverse experience.

“AfroCentric Health’s corporate vision – Creating a World of Sustainable Healthcare – is shared by all the companies operating under its umbrella.”

ETHICS AND INTEGRITY At AfroCentric Health, integrity is one of the core values. As a healthcare company which has a direct impact on the quality of people’s lives, AfroCentric Health must operate in an ethical manner at all times. This has been the foundation of the group’s success for over four decades.

In terms of entrenching ethics in its business, AfroCentric Health continuously implements an overarching strategy that encourages ethical CFI.co | Capital Finance International

conduct via social ethics committees, internal communication, sophisticated fraud detection practices, and the creation of a culture of trust and mutual respect through which employees are able to find help and support for any personal challenges they may be dealing with.

SUSTAINABLE HEALTHCARE SOLUTIONS The drive for finding sustainable healthcare solutions is enshrined in AfroCentric’s corporate vision and as such directly affects all business processes. Affordability is a major issue within the healthcare industry and therefore one of the company’s key objectives is to develop innovative healthcare solutions at affordable prices.

Initiatives include state-of-the-art information and communication technology, the streamlining of processes in order to improve efficiency, and continually enhancing customer experience while simultaneously removing the any and all remaining inefficiencies in the healthcare delivery chain through interventions such as the coordination of care, the setting up of healthcare provider networks, introducing performancebased incentives for healthcare providers, and information sharing.

ASPIRATIONS AfroCentric Health strives to claim a greater market share within the South African healthcare landscape. The company is especially keen to partner with the government in order to help to develop sustainable long-term solutions to the healthcare challenges faced by the country. The company also like to increase its geographical footprint both domestically and internationally.

The group will continue to expand and acquire complementary businesses. Its objective is to build an innovative and relevant portfolio of products and services within the healthcare industry and to diversify beyond the sector by offering complementary products. AfroCentric Health is proud of its world class IT capability and believes there exists plenty potential to apply its considerable IT expertise to provide solutions to other sectors both in South Africa and internationally.

THE IMPORTANCE OF TRANSFORMATION Not only is transformation key to addressing the imbalances created by South Africa’s historical legacy, it is crucial for ensuring sustained national success in terms of growing the economy and thus making sure that more South Africans may fully partake in the economic life of the nation.

AfroCentric Health is constantly on the lookout for talent both from within the group and from outside. The company offers a number of personal development programmes that significantly improve the retention rate of talented employees.

AfroCentric Health also actively creates a working environment and brand identity that aims to attract the best and brightest people to join the company and thus ensure its corporate success for many years, if not decades, to come. i 119

> Middle East:

Qatar - Improbably Rich, Contrarian, and Getting Even More So

By Wim Romeijn

The richest country in the world has developed a habit of getting in the news for all the wrong reasons. Try as it might, the Qatari government just cannot transmit the right message even though the country’s ruling House of Thani seems eager to further the cause of independent reporting and helps fund the Al Jazeera television network which, for all its faults, at times does try to deviate slightly from the official line.

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hen again, Qatar really shouldn’t have been. A singularly insignificant outpost on a dusty peninsula of the Ottoman Empire, Qatar was the end of the line in more ways than one for most of its history. In 1950, only 65 years ago, the entire country boasted only 25,000 or so inhabitants.

Its capital Doha, founded in 1820, was until quite recently a small and rather impoverished village whose inhabitants eked out a living fishing for pearl. Nearby Al Bidda, a trading port and pirate hideout, did not display any signs of great wealth either.

Fast forward to the present and behold a metamorphosis that has no equal in the world.

From a sleepy settlement, Doha has become a world class metropolis with state-of-the-art services that rival any major city. Superlatives barely suffice in describing both Qatar and its capital city that is now home to close to one million people.

“For starters, it is the richest place in the world with a per capita income that exceeds $100,000 annually or – to put it more bluntly – about twice as much as the United States.”

While the Qatari authorities initially admitted that there was room for improvement, they soon grew annoyed at the insistence of western media outlets to highlight the deficiencies. This, and the curious case of airhostesses at Qatar Airways getting summarily fired upon becoming pregnant (as per contractual agreement), shows that for all its outward glitz, Qatar has not yet dared to fully embrace modernity.

For starters, it is the richest place in the world with a per capita income that exceeds $100,000 annually or – to put it more bluntly – about twice as much as the United States. Qatar is flush with petrodollars. A fair chunk of the cash generated by the oil and natural gas found in the waters surrounding the peninsula founds its way back into the society – not always a given. In fact, the country now has too much money slushing about which led the government to set up the Qatar Investment Authority (QIA) in 2005.

Lest the above should galvanise the country’s lavishly paid PR agency – the London-based purveyor of spin Portland Communications – into action, honesty commands to mention that Qatar does display a rather endearing contrarian streak. The country’s rulers seem to derive modest pleasure from plotting an independent course that – coincidently or not – often runs counter to the policies espoused by its big neighbour Saudi Arabia. The House of Thani likes to assert its sovereignty by gently poking and prodding – and by trying to do things simply better.

This sovereign wealth fund is charged with investing the excess wealth in whatever lucrative proposition it can find outside the country. QIA has currently more than $170bn in assets under management which include 17% of Volkswagen/ Porsche, 7% in Royal Dutch Shell, amongst a host of other large corporations. The fund owns the Paris Saint-Germain football club outright and is also the sole proprietor of the Harrods Group of upmarket British retailers – to name but a few.

However, the Qatar government is also rather inexperienced. How else could it invite and welcome a BBC television crew to document the country’s newfound adherence to international labour standards, only to arrest the team as it was filming in downtown Doha? A German team of reporters was also detained, interrogated at length by rather unfriendly officials, and subsequently thrown in a jail that distinctly missed the outward sophistication of Doha.

All this cash benefits only slightly more than 200,000 people out of Qatar’s 2.1 million inhabitants. Needing plenty of outside help with building and managing all the stuff that money can buy, Qatar has welcomed around 1.9 million guest workers. The labour shortage is so acute that even reclusive and cash-starved North Korea got in on the act, exporting cohorts of regimented workers whose hard currency wages provide Pyongyang a measure of financial relief.

Caught between tradition and modernity, Qatar sends mixed messages. Still, it is the place to be for anyone interested in conducting brisk business, becoming very rich, or attaining any other form of entrepreneurial success. When it comes to solidifying its economy and securing a still more prosperous future, Qatari authorities usually are right on the message. “It is an astonishing country that is determined to be the best in whatever it undertakes,” says Nick Wilson of the Qatar Investment Fund, listed on the London Stock Exchange and one of a number of investment vehicles that have benefited from the country’s ascendancy.

An economy ballooning as exponentially as Qatar’s is bound to experience a few growing pains. The less than elegant treatment meted out to those guest workers who actually build the country’s grandiose projects has been making headlines.

Mr Wilson is understandably bullish about Qatar’s

near and medium-term prospects: “Real GDP growth rates have averaged over 14% annually from 2005 to 2013. Though the pace has slowed slightly, the country’s economy is still expected to expand by over 5% per annum over the coming few years. The end of the boom is not in sight.”

Mr Wilson emphasises that Qatari authorities are already now well aware that economic diversity is needed for when the country’s vast hydrocarbons reserves run out. “Sitting atop the third largest reserves of natural gas in the world, that day will not come anytime soon which makes the foresight of the government so much more remarkable.”

In order to gauge the magnitude of the investment drive into economic diversification and modernisation, suffice to note that in the quinquennium ending next year Qatar invested $225bn. This pile of cash does not include the roughly $200bn earmarked for the organisation of the 2022 World Cup event – or about $100,000 per capita when including the guest workers and a full $1 million when counting only the indigenous Qatari population.

Staggering numbers released by Deloitte Qatar.

By comparison, Brazil spent about $14bn on its hosting of the football tournament, or $73 per inhabitant.

“As usual, Qatar is sparing no expense to ensure its success. Herein lies the attractiveness of the country for investors: everything is put in place to guarantee positive outcomes,” says Mr Wilson.

The Qatar Investment Fund he manages is keen to take positions in local companies that stand to benefit from the economic diversification drive currently underway and part of the country’s ambitious development agenda Vision 2030.

This masterplan offers a clear roadmap for the economic, social, human, and environmental development of the country and pointedly includes the well-being of both citizens and residents.

While the Qatari government fully understands and recognises that the country, due to its limited geographic footprint, is not likely to ever become a superpower, the masterplan does offer an equally attractive alternative. Qatar seems aware of its limitations. These are, however, not financial in nature. The country just wants a seat at the table, even if only as an observer. In fact, it is noteworthy that Qatari investors are usually quite happy to take a backseat and let others work their managerial magic. That is a formula almost guaranteed to work out nicely with the diminutive petro state assuming an outsized role without causing offense or ruffling anyone’s feathers. Smart move. If the country’s rulers could now only apply that same pragmatism across the board and allow the healthy contrarian streak to infect a few more sectors of society. i

“While the Qatari government fully understands and recognises that the country, due to its limited geographic footprint, is not likely to ever become a superpower, the masterplan does offer an equally attractive alternative.”

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CFI.co | Capital Finance International

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o ad I.c Re CF ng Lo e Th Autumn 2015 Issue

> Low Carbon Energy for All:

The Power of Renewables

By Penny Hitchin

One of the basic building blocks of economic prosperity is a reliable supply of energy. While the developed world grapples with the energy “trilemma” – ensuring secure, affordable, low carbon energy – over one billion people worldwide, mainly in Africa and Asia, live without access to electricity.

T

he United Nations’ Sustainable Energy for All Initiative, co-led by the World Bank, has set three goals for 2030: universal access to electricity and clean cooking fuels; doubling the share of renewable energy in the global energy mix from the current figure of eighteen percent; and doubling the energy efficiency improvement rate.

Access to affordable, reliable, and sustainable energy is deemed vital to ending extreme poverty and promoting shared prosperity.

“A dependable supply of affordable energy helps improve the quality of life and drives economic growth.”

The vast area of Sub-Saharan Africa (SSA), containing over forty diverse countries with a combined population of about 830 million people, is the region with the lowest access rate to electricity. Here, power supply is plagued by a lack of generating capacity, poor reliability, and high cost. Population growth is outpacing the speed of electrification. By contrast, investment in telecommunications infrastructure is racing ahead. However, small-scale solar energy plants in off-grid rural communities is enabling entrepreneurs to develop new sustainable businesses.

This development has the potential to make a more efficient and sustainable power system for generators and consumers alike. However, much development work is still required, as well as hefty investments, before smart grids become ubiquitous.

A dependable supply of affordable energy helps improve the quality of life and drives economic growth. Electricity can be generated from a range of energy sources but storing it is tricky.

In order to meet peak demand, oversized power generation capacity is required. However, looking forward, the integration of sophisticated two-way communications into local power delivery systems offers the prospect of smart grids which will be able to balance supply and demand in a more efficient way.

In the UK, the network needs to undergo major changes in order to handle the future facilities using renewable resources. An efficient low carbon electricity supply needs intelligent transmission and distribution networks. At the transmission level, new capacity is needed to transport offshore wind and marine energy to the major population centres.

MOVING TO AN INTELLIGENT GRID SYSTEM An idealised vision of the future energy system would see heat from the sun and energy from wind, waves, and tides power the grid with the surplus being stored in efficient large-capacity batteries and storage systems. Advances in technology will transform the way power is supplied from generator to consumer. Smart grids are essentially digitised energy networks which optimise the delivery of electricity.

By integrating data into the power distribution network, smart grids make more efficient use of resources. Information and control are key.

A recent report from Navigant Research in the US concludes that power generators are set to commit serious cash to smart grids, predicting global investment in these digital systems will exceed $140bn over the next decade. Additional sums are needed in the following decades.

An Ernst & Young report for SmartGrid GB estimates the cost of deploying a UK smart grid by 2050 at some £27bn. It concludes that smart grid solutions will be cheaper in the long run than conventional network upgrades and that there is much to gain with comparatively little risk from their timely deployment.

Moving to smart grids will enable electricity distribution service operators to monitor the electricity flowing within their grids. This data will allow them to adjust to changing conditions by automatically reconfiguring their network.

Smart grids offer: • Automated fault detection and self-healing without the intervention of technicians CFI.co | Capital Finance International

• Bi-directional energy flows that allow for distributed generation such as solar voltaic panels charging to/from the batteries of electric cars, wind turbines, pumped hydroelectric power, etc.

• Demand-side management that encourages smart consumer use • Load adjustment and load balancing that reduces the amount of “spinning reserve” standby generation required • Peak curtailment or levelling and the use of differentiated tariff structures • Greater penetration of variable renewable energy sources Spin-off benefits of smart grids include allowing efficient off-peak charging of electric vehicles (EVs) at a substantially lower cost than would be possible with a conventional grid. Vehicle-to-Grid (V2G) techniques could allow EV owners to take advantage of varying energy demand and price differentials to put power from their vehicles’ batteries back into the system at time of peak demand. Smart grid solutions allow differential tariffs to be deployed – thus some devices can be programmed to use cheaper electricity at off-peak times. Smart grids will also allow for the intelligent control of devices by power management services that pay consumers a portion of the peak power saved by turning their device off.

The first comprehensive and large scale smart grid was set up by Florida Power & Light two years ago. The $800 million project incorporates an array of devices for monitoring and controlling the grid. Four and a half million smart meters in homes, shops, and offices are networked with over 10,000 other devices. These include sensors at key points in the grid, substations, transformers, local distribution lines, and high voltage transmission lines.

Data jumps between devices until it reaches a router that sends the information back to the utility. This makes it possible to sense problems before they cause an outage and, if this doesn’t work, limit the extent and duration of outages.

Customers can track their energy usage online while smart meters facilitate the remote diagnosis of problems. As remote monitoring becomes more sophisticated, devices will be able to transmit status reports which leads to improved maintenance schedules and efficiency.

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Smart meters combined with the interconnected devices of the Internet of Things enable consumers to remotely control apparatus such as heating systems and air conditioning from their smartphones or tablets. The downside is that utilities will inevitably collect detailed information about people’s energy consumption and lifestyle.

Data security and privacy must be addressed at an early stage as IT protocols are being developed.

In some parts of the world where there is no likelihood of connection to the transmission grid, the development of small-scale solar or windpowered off-grid networks will include smart grid elements to ensure best use of the power.

STORAGE SYSTEMS OVERCOME INTERMITTENCY OF RENEWABLES Worldwide, transmission lines and interconnectors are being developed to move green power over long distances from remote regions to powerhungry cities and nations. On a smaller scale, new energy storage systems are helping grid operators manage wind and solar intermittency. Energy storage is a natural partner to renewable energy since it evens the peaks and troughs inherent to wind and solar power generation.

Pumped storage facilities allow for this load balancing. At times of low demand, excess electrical power is used to pump water into lakes or reservoirs at higher elevations where it is available for peak load generation.

Work on development of other large-scale storage systems is underway. Compressed Air Energy Storage (CAES) systems store energy in the form of compressed air in underground salt deposits.

Two working plants – one in Germany built in 1978 and another one in Alabama commissioned in 1991 – have successfully operated for years and the technology is now well-understood.

However, their business case is shaky. The arrival of intermittent renewable energy on the grid may yet change the economics. A new demonstrator CAES project is being launched in Northern Ireland which will use electricity from offshore wind turbines to compress air at times of low electricity demand. At times of peak demand, the energy thus stored is released into the grid.

Although a number of storage technologies already exist, the “invisible hand” guiding the electricity market is unlikely to steer investment to the facilities that are required for a low carbon power supply. Mechanisms that provide incentives to investment in new technologies will have to be erected by governments. Industry is pleading for medium to long-term certainty, effectively begging governments to take the politics out of its policies so that investment decisions can be taken in a timely fashion. If this is not forthcoming the “dash to gas” – where investment is channelled into familiar and relatively risk-free gas power – is likely to continue.

COMPLEX INTERPLAY BETWEEN FINANCE, TECHNOLOGY, AND GOVERNMENT Technological advances, political imperatives, and 126

economic drivers are all at play in the evolution of energy generation. National parameters vary, but it is clear that electricity systems of the mid21st century will be very different from the ones currently in use.

The political imperative is to decarbonise energy production in order to limit anthropogenic impacts on climate change. The 2014 reports of the Working Groups of the Intergovernmental Panel on Climate Change (IPCC) states: “Continued emission of greenhouse gases will cause further warming and long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive, and irreversible impacts for people and ecosystems. Limiting climate change would require substantial and sustained reductions in greenhouse gas emissions which, together with adaptation, can limit climate change risks.”

Whereas the IPCC is very specific in its doomsday warnings, it lacks the clout to impose solutions and has no alternative but to rely on individual governments to act. It also falls rather short on offering viable alternatives.

The financial imperative is to produce an affordable and reliable supply of energy that offers an adequate commercial return to investors. The technological challenge is to find ways of driving down costs through both innovation and evolution while simultaneously increasing the flexibility and reliability of supply.

The energy market is a complex web of interaction between government, investors, and industry.

Politics, finance, and technology all play a role in the decision making process. Concerns about greenhouse gas emissions from the burning of hydrocarbons has a huge impact on energy policy.

Governments introduce legislation, regulation, and incentives in an attempt to steer investment flows into a more sustainable direction. Both carrots and sticks are vigorously deployed.

The World Bank’s engagement in the energy sector is aimed at supporting developing countries secure the affordable, reliable, and sustainable energy supply needed to end poverty and promote shared prosperity. That is going to take innovation and significant investments as well.

The United Nations recently declared 20142024 as the Decade for Sustainable Energy for All. A 2015 report, Progress towards Sustainable Energy: Global Tracking Framework 2015, finds that while the world is heading in the right direction to achieve universal access to sustainable energy by 2030, it must move faster. It says that over one billion people in the world live without electricity and almost three billion still cook using polluting fuels like kerosene, wood, charcoal, and dung.

“We are heading in the right direction to end energy poverty,” says Anita Marangoly George, senior director of the World Bank’s Energy and Extractives Global Practice, “but we are still far from the finish line. We will need to work a lot CFI.co | Capital Finance International

Autumn 2015 Issue

harder in order to mobilise larger investments in renewable energy and energy efficiency.

Leveraging public finance to mobilise private capital is imperative in achieving these goals.”

SOME REGIONAL HIGHLIGHTS In Europe, Germany has been one of the leaders in the push towards green energy. The root of this exercise in pioneering can be traced back several decades to the shock of the oil crisis and the reactor meltdown in Chernobyl. Germany was the first to introduce feed-in tariffs to encourage the uptake of small-scale renewable energy generation. The country also led on energy efficiency.

The government’s “Energiewende” (energy transition) aims to provide Germany with clean renewable energy for up to sixty percent of its requirements by 2035. Currently, nearly a quarter of Germany’s electricity is sustainably sourced with feed-in tariffs and other subsidies supporting development. The switchover does not come cheap and is estimated to cost Germany’s businesses and private consumers €24bn annually.

In order to curb escalating costs, Minister of Economic Affairs and Energy Sigmar Gabriel earlier this year unfolded a plan to scale back subsidies and concentrate on solar energy and onshore windfarms – the two cheapest alternatives.

He also announced that the programme will be shifted into lower gear with support for new installed capacity limited to 2,500MW per year.

Meanwhile, consumers are facing still higher bills with the Energiewende surcharge rising significantly, resulting in an average €220 per year levy on German households.

The practicalities of the Energiewende result in a few uncomfortable trade-offs. Germany’s decision to decommission its nuclear power plants has led to a reliance on lignite (brown coal) to meet the shortfall. This has proved a boon to utility companies since brown coal is cheaper to burn than natural gas, but is also much dirtier.

Ironically Germany now imports vast amounts of electricity from France and the Netherlands, the former using nuclear power and the latter busily building new coal-fired plants to meet demand.

Germany is a paradox: Europe’s largest economy has rejected nuclear power and disdains coal.

The nation fears the geopolitical implications of reliance on natural gas from Russia and refuses to entertain fracking as an alternative. However, demand will continue to rise and there is no easy way to square the circle. Germany has ruled out various primary energy sources but in figuring out how to keep the lights on, the will have to bite some bullet and take positive decisions. One estimate is that its wavering has already cost the German economy €52bn in lost export revenue between 2008 and 2013.

Elsewhere in Europe, the economic crisis has led to drop in energy demand and a collapse of the price of carbon. It also diverted attention away from climate change towards economic recovery.

Europe’s binding climate change plan comprises, CFI.co | Capital Finance International

amongst others, the Emissions Trading Scheme (ETS) which placed a price on carbon emissions.

The low hanging fruit in the energy debate is energy efficiency and EU members, notably Germany, all have commitments in this area.

However, economic logic dictates that growth demands energy.

In the United States a lack of economic growth has reduced the demand for electricity, likewise reducing the need for new generating capacity.

Current US Environmental Protection Agency carbon dioxide emissions regulations apply to new coal plants but not to new power stations fired by natural gas. The abundance of shale gas has brought down the price of natural gas with the result that new coal plants are not being built because natural gas is now cheaper. Unlike new coal-fired facilities, plants burning natural gas do not have to be fitted with carbon capture systems.

The exploitation of shale gas has created a strong differential in the price of natural gas between North America and the rest of the world.

In the Middle East, booming population growth, residential demand, and rapid industrialisation have made the region into one of the world’s most dynamic power markets. Electricity consumption has been growing continuously. This trend is set to accelerate over the next decade. Urban life in the region is energy-intensive with abundant electrical power needed for air conditioning, to provide fresh water from the sea, and for industrial development.

Around a trillion dollars of investment will be needed for additional capacity over the next ten years. An abundant local supply of oil and natural gas means that fossil fuel is currently used to generate most of the region’s electricity. However, there is an increasing awareness that national energy policies have to improve energy efficiency and diversify the domestic energy mix in order to maximise export of hydrocarbons.

Across the MENA region, interest in developing low carbon alternatives is increasing as demand for electricity grows. The affluent governments of UAE, Qatar, and Saudi Arabia have unveiled multibillion dollar plans to kick-start alternative energy developments. UAE’s ground-breaking zero-carbon, zero-waste purpose-built Masdar City is a world leader in implementing sustainable energy technologies. The UEA also has an ambitious new nuclear programme. Construction is underway on a project that will see four Koreandesigned commercial nuclear power reactors with a total capacity of 5.6 GW operating in Western Abu Dhabi by 2020.

The world’s biggest oil-producer, the Kingdom of Saudi Arabia, wants to develop both nuclear and alternative energy to increase the production of desalinated water and to reduce consumption of its fossil fuel reserves. It’s new city for low carbon energy, The King Abdullah City for Atomic and Renewable Energy, spearheads these developments.

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The gas–rich desert state of Qatar has the highest usage of electricity in the world. It also boasts the highest GDP per capita in the world. Set to host football’s World Cup Championship in summer 2022 – which it has pledged to make carbon neutral – the tiny state is embarking on a transformation as the nation sets out to generate ten per cent of its electricity from renewable sources by 2018.

EVOLUTION OF GENERATING TECHNOLOGIES The ability to harness energy from the environment has been vital in human development. Humans have been using water and fire to perform work for thousands of years. Windmills and water turbines have been used to grind grain and pump water for centuries.

Although people have known about electricity since ancient times, it is only in the last 250 or so years that it has been possible to find ways of harnessing its power. The evolution of technology for producing and conveying electricity is ongoing.

The fundamental principles of electricity generation, unchanged to this day, were discovered during the 1820s and early 1830s

by British scientist Michael Faraday. Electricity is generated from other sources of primary energy – traditionally by burning hydrocarbons such as coal, oil, and natural gas – to produce heat that drives electromechanical generators.

Other methods include using energy from flowing water, wind, or geothermal heat from the earth’s crust. The primary energy sources of power, and the economic viability for electricity production, vary depending on topography, availability of resources, and demand.

KING COAL HITS THE BUFFERS? Coal has been the fuel of choice for two centuries.

Plentiful, cheap, and easily transported, it is burned in huge furnaces that heat water which in turn power steam generators. The fuel is delivered in bulk to large central power stations situated near centres of demand.

Coal fuelled the engines of the industrial revolution and sustained the development of railways and shipping across the world. In recent years, the rapid economic growth in China and India has seen a surge in new coal power generation. Global coal use has grown by more than fifty percent since the turn of the century and has met more than half the total increase in world energy demand.

Unfortunately, burning coal releases oxides of carbon, sulphur, and nitrogen. Other damaging emissions produced include hydrides and nitrides of carbon and sulphur. Coal and coal waste products contain a suite of toxic chemicals – including arsenic, lead, mercury, nickel, vanadium, beryllium, cadmium, barium, chromium, copper, molybdenum, zinc, selenium, and radium.

London used to be known for its pea-soup air – 128

dense dark fogs containing noxious particulates.

The Great Smog of 1952 was caused by period of cold weather and windless conditions which allowed airborne pollutants, mostly from the use of coal in homes and factories, to form a thick layer of deadly smog over the city.

This smog was responsible for approximately 12,000 deaths and led to the 1956 and 1968 Clean Air Acts which began the process of eliminating coal as a source of energy. London air is now noticeably cleaner. In the twenty-first century, air pollution in China is a major concern to its government, affecting both the nation’s CFI.co | Capital Finance International

health and economy. Scientists warn that the phenomenon is so severe that it is slowing photosynthesis in plants, potentially affecting the country’s food supply.

As disquiet about air pollution, acid rain, climate change, and environmental hazards increased, various techniques for mitigating hazards have been developed. A collective term used to describe the suite of technologies is clean coal.

Sulphur oxides (known as SOx) may be abated by flue gas desulphurisation technology which can reduce sulphur emissions by over ninety percent.

Autumn 2015 Issue

Global Mean Solar Irradiance. Photo: Copyright 3TIER by Vaisala.

Low NOx burners reduce NOx (mono-nitrogen oxides) levels by around half and have been retrofitted to many power stations throughout the world. Other combustion modifications have been developed. Selective catalytic reduction (SCR) is a post combustion NOx control technology capable of reducing NOx emissions by over ninety percent.

Retrofitting technology that allows existing plants to operate in low emission mode is complex and expensive. Reducing emissions on a thermal plant makes its window of operation smaller and emission reduction technology may cause problems with efficiency.

In Europe, the 2001 Large Plant Combustion Directive led to wholesale closures and the modernisation of the EU’s stock of coal-fired power plants. Following this, the Brussels Industrial Emission Directive (IED), which became law in 2013, forced EU fossil fuel generators to take further tough decisions about the future of their coal, oil, and gas-fired plants.

From 2016 operators must either bring each plant into line by fitting emissions reduction technology or cut production via a limited-hours or peak hour derogation. The IED is part of evolving EU pollution regulations intended to cut down on emissions (notably of SOx and NOx) and to clean up the environment. It provides binding standards for the prevention and control of emissions into air, water, and soil, and for waste management, energy efficiency, and accident prevention. This is in addition to national targets for reduction of carbon dioxide emissions.

The imposition of the directive across Europe sets a range of challenges for different countries.

France generates the bulk of its electricity from nuclear power and thus it meeting the IED will be less problematic than for countries such as Poland, Bulgaria, Estonia, and Romania which rely more heavily on coal. Central European states, notably Germany, have nearly thirty years of experience in manufacturing and fitting emissions reductions technology, so are well placed to comply.

Some operators are exploring emerging technology to convert coal-fired plants to biomass. Subsidies under the UK government’s Renewable Obligation Certificate banding provided the incentive for the owners the coal-fired station at Drax in Yorkshire, the second largest power plant in Europe, to convert three of its six boilers from coal to biomass firing. Drax provides around eight percent of the UK’s electricity. The conversion to burning sustainable biomass cost nearly £700 million, split between equipment installation and site modifications, including fuel delivery and storage facilities, and the required for upstream supply chain infrastructure and IED compliance.

In theory, the low-emission future for coal could lie in integrated gasification combined cycle (IGCC) technology which converts coal to yield a clean-burning, synthetic gas, which is stripped of pollutants and impurities and then burnt to produce power, with heat recovery providing steam to produce yet more electricity, and hence greater efficiency. In practice, this will not happen without government support or other incentives.

In the USA, Southern Company subsidiary Mississippi Power is building a large IGCC facility in Kemper County. The pioneering plant has high capital costs: the original investment was projected to be just under $2.5 billion, but has since been CFI.co | Capital Finance International

increased to $4bn. The project received funding from the US Department of Energy’s Clean Coal Power Initiative as well as generous investment tax credits. The plant will convert local lignite (low grade coal) into syngas which will be used to generate electricity. Capturing an estimated sixty-five percent of the carbon dioxide will make its emissions comparable to that of a natural gas combined cycle plant.

Even with a slowing growth rate, the developing economies of Asia continue to build new coal power plants. China is adding the equivalent of one new coal power plant every week to its stock, although capacity usage at thermal power plants is now below fifty percent.

ENTER THE JET AGE Natural gas and oil-fired plants power gas turbines by burning natural gas, heavy oil, or an alternative gas. Natural gas plants emit a fraction of the smog-causing gases and slightly more than half of the greenhouse gases emitted by their coalburning counterparts. Gas turbines are now one of the most widely-used and fastest growing power generating technologies.

The earliest commercial gas turbine engines were used to power aircraft during the 1940s.

It was another twenty years before gas turbines became established in electricity generating plants. In the early 1960s, grid disturbances led to electricity black-outs across the south east of England. The UK’s Central Electricity Generating Board responded by trialling a fast start aero engine. A successful demonstration engine was deployed in 1964 and followed by a major installation programme of fast-start turbines to serve the grid.

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120 100 80 60 40 20 0

Countries with greatest proportion of electricity production from hydroelectric sources (per cent of national total).

The US electricity industry followed suit in 1965 after a cascading voltage collapse blacked out nearly one third of the population of the northeastern United States, tasking aircraft engine manufacturers to provide small, rapid start generators that could be deployed across the grid.

In the years that followed, turbines have become larger and more sophisticated. New plants can be constructed relatively quickly, but high operating costs and lack of operational flexibility are areas where operators seek improvements.

Research and development into gas turbine technology, finding ways of improving efficiency, and flexibility is ongoing.

The world’s biggest gas-fired plant is the Surgutskaya gas-fired power station located in the Russian city of Surgut. The 6GW station is made up of six units commissioned between 1985 and 1988, and two advanced combined cycle units added four years ago.

THE ROLE OF CARBON CAPTURE AND STORAGE IN THE MIX Carbon capture sounds straight forward: collect carbon dioxide emissions and bury them in the depths of the earth. Although the component pieces of the technology exist, investment and political will are lacking. Full-scale deployment has not yet been achieved at any fossil fuel power plant.

The use of carbon capture and storage (CCS) on an industrial scale is essential if global climate change targets are to be met. The International Energy Agency’s roadmap projects that thousands of CCS projects will be needed by 2050. Capital investment required in equipment for capture, transport, and storage will be nearly $100bn by 2020, increasing fivefold by 2050. Currently, this looks like wishful thinking.

In the shorter term, if the technology is to be effective, experience and expertise must be built up by installing large pilot projects. Adding integrated carbon capture equipment to a generating plant could cause a loss of twenty-five per cent in efficiency (power is needed to operate the carbon capture hardware). As the economics do not yet stack up, incentives and policies are needed to encourage private investment into a technology which requires further research, development, and demonstration.

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So far, three alternative techniques for carbon capture have been identified. Carbon dioxide can be separated from gasified coal either before combustion or scrubbed from flue gases. A third approach is to burn the coal in an oxygenrich environment. The component technologies for each of the three approaches exist, but the techniques have not yet been applied on an industrial scale to coal. More development work is needed. The three techniques are being developed in China, the European Union, North America, and Australia.

The final stage of the CCS chain is to transport and store the carbon dioxide in deep underground locations where it will remain locked away.

WATER POWER – THE ORIGINAL RENEWABLE ENERGY SOURCE Hydropower is the most established and long-lived large-scale source of low carbon electricity. There is a tradition of using the flow from rivers which was instrumental in powering the earliest mills in the industrial revolution. In countries with suitable topography, hydropower is the dominant source of electricity. Currently, hydropower produces nearly twenty percent of the world’s electricity.

Big infrastructure projects involve the damming rivers and the creation of artificial lakes to provide hydro power. The effects on the countryside can be considerable, and hydro projects often attract vociferous opposition.

China’s controversial Three Gorges Dam is a huge hydroelectric complex that spans the Yangtze River in Hubei Province. It is the world’s largest power station. The dam is also intended to increase the Yangtze River’s shipping capacity and reduce the potential for downstream flooding by providing large plains that may temporarily receive excess water from the swollen river. However, the dam’s reservoir covers important archaeological and cultural sites and displaced more than a million people. The newly created body of water caused significant ecological change as well.

Run-of-river and small-scale hydro projects avoid some of the environmental consequences of big hydroelectric dams and can provide power in remote and off-grid regions. Historically, hydro installations require high capital expenditure but have low operating costs. The development of smaller, lighter, and more efficient higher-speed turbine equipment, the lower cost of associated CFI.co | Capital Finance International

electronic control systems, and inexpensive plastic pipes are bringing down the capital costs of small-scale, run-of-river hydro projects.

Hydro is one of power-hungry India’s most abundant and underused resources. Only a about 20% of the country’s exploitable hydropower potential – ranked fifth largest in the world – has been harnessed. In a move to bring power to poorer communities, the government has identified nearly six thousand potential sites suitable for small-scale hydro which could notably improve both the energy and economic footprint of rural, remote, and inaccessible areas.

Last year, global hydroelectric output grew by a slender two percent. Even so, it now represents a record seven percent of global primary energy generation. Growth in the Asia Pacific Region offset drought-driven declines in the Western Hemisphere, Europe, and Eurasia. Chinese hydroelectric output grew by over fifteen percent accounting for the totality of the net increase in global hydroelectric output. Severe droughts reduced output in Brazil by five percent and in Turkey by a third.

GEOTHERMAL The surface of the earth is much cooler than the rocks that lie below. In areas of tectonic and volcanic activity, high pressure steam can be extracted from deep underground and used to turn turbines that generate electricity. Hot springs and geysers are surface manifestations of subterranean activity. Subsurface heat held in steam or hot water can be accessed by drilling.

Geothermal power projects are more capital intensive than many other renewable energy undertaking and have a longer lead times before costs may be recovered. Developing geothermal energy involves early costs in surface studies, exploration and appraisal drilling, and feasibility studies. However, if it can be harnessed, geothermal energy has the potential to provide base-load electricity, improving security of supply, and increasing access to electricity.

In Iceland, up to ninety percent of the country’s homes are heated with geothermal energy. The Philippines and El Salvador each generate over a quarter of their electricity from geothermal sources. The East African Rift Valley, stretching nearly 5,000 km, has excellent geothermal potential. Kenya is one of the world’s top ten

Autumn 2015 Issue

Africa & Middle East

Asia

Europe

Latin America & Caribbean

North America

Pacific Region

Country Morocco South Africa Egypt Tunisia Ethiopia Cape Verde Other Total PR China India Japan Taiwan South Korea Thailand Pakistan Philippines Other Total Germany Spain UK France Italy Sweden Portugal Denmark Poland Turkey Romania Netherlands Ireland Austria Greece Rest of Europe EU-28 Total Europe Brazil" Chile Uruguay Argentina Costa Rica Nicaragua Honduras Peru Caribbean Others' Total USA Canada Mexico Total Australia New Zealand Pacific Islands Total

World total

End 2013 487 10 550 245 171 24 115 115,968 91,413 20,150 2,669 614 561 223 106 66 167 115,968 34,250 22,959 10,711 8,243 8,558 4,382 4.730 4,807 3,390 2,958 2,600 2,671 2,049 1,684 1,866 5,715

New 2014 300 560 60

150 150 26,007 5,279 28 1,736 1,042 108 1,050 184 105 444 804 354 141 222 411 114 835

End 2014 Total 787 570 610 245 171 24 129 141,964 114,609 22,465 2,789 633 609 223 256 216 167 141,964 39,165 22,987 12,440 9,285 8,663 5,425 4,914 4,883 3,834 3,763 2,954 2,805 2,272 2,095 1,980 6,543

117,384

11,829

128,790

121,573 3,466 331 59 218 148 146 102 2 250 55 4,777 61,110 7,823 1,917 70,850 3,239 623 12 3,874 318644

12,858 2,472 506 405 53 50 40 50 146 28 3,749 4,854 1,871 634 7,359 567

134,007 5,939 836 464 271 198 186 152 148 250 83 8,526 65,879 9,694 2,551 78,124 3,806 623 12 4,441 369597

14 26,007 23,196 2,315 130 18 47

567 51473

Global Capacity Growth in Installed Wind Power MW 2013 and 2014. Source: Global World Energy Council.

producers of geothermal energy, but currently exploits less than five percent of potential capacity.

Agencies including the World Bank, African Development Bank, USAID, and the Icelandic International Development Agency have schemes offering financing to governments of Rift Valley countries to enable exploratory phase geothermal investigation and to encourage the development of capacity and skills in this field. Kenya, Uganda, Rwanda, and Ethiopia are all gearing up to take advantage of this natural resource.

THE RESURGENCE OF WIND Using the power of the wind is an ancient technique undergoing a 21st century global renaissance. Over eighty countries now use wind turbines to generate electricity with installed capacity increasing rapidly. The global wind power sector received investments of almost $100bn in 2014, up a fifth on the previous year.

Global wind power is dominated by onshore wind. However, as the technology matures, the CFI.co | Capital Finance International

more challenging offshore environment is being developed. More than ninety percent of offshore wind installations are in European waters – around two thirds in the North Sea, a fifth in the Atlantic Ocean, and the rest in the Baltic Sea. Further afield, offshore wind development in China, Japan, South Korea, Taiwan, and the US is underway.

The potential of offshore wind is enormous. It could meet Europe’s energy demand sevenfold and the United States energy demand four times over. However, the costs and logistics of installing and operating wind farms in the harsh offshore environment pose considerable challenges. As the industry expands, developers must look further afield for their sites. This means moving into deeper water further offshore where the winds are stronger and more consistent. The challenges multiply in such hostile surroundings. Building industrial scale wind farms with bigger turbines on bigger foundations is going to be a step up for developers and supply chain alike.

Twenty-five years ago there were no offshore wind farms. Today, thousands of offshore turbines belonging to fifteen countries equal the capacity of seven big nuclear reactors. Most of the capacity is in maritime north-west Europe.

The UK has the largest stock of offshore turbines followed by Denmark, Germany, and Belgium.

SOLAR Technologies to turn heat from the sun into power are, quite literally, hot. Solar thermal panels use sunlight to heat water for washing and heating, while solar photovoltaic (PV) panels convert sunlight into electricity. Solar panels are most effective in direct intense sunlight.

The rationale for governments to subsidise innovative generating technologies is that, as they mature and economies of scale are reached, the supply chain will find ways of reducing costs.

This has certainly been the case with solar PV where the cost of panels has plummeted in the last few years.

In hot countries, heat from the sun can also be used to power conventional plants. Concentrating Solar Power (CSP) technology uses arrays of mirrors or lenses to focus the sun’s heat onto a small area. That heat is then absorbed by a liquid passed on to a conventional power plant.

Unlike solar PV installations, CSP plants can incorporate storage systems. They may also be hybridised with other fuels, enabling generation to continue when the sun is not shining.

Solar thermal power generation was kickstarted in the 1970s when the oil crisis led the US to introduce tax and investment breaks for alternative energy. The world’s largest CSP plant has been operating in the Mohave Desert since the 1980s and continues to produce electricity to this day and still meets the original engineering performance predictions.

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A more recent installation is the UAE’s pioneering Shams 1 Station, an innovative hybrid solar thermal-power station built in the desert of Western Abu Dhabi. The $600m project is fuelled by parallel rows of big curved mirrors designed to catch the solar radiation.

Over a quarter of a million mirrors are mounted on computer-controlled tracking devices which follow the sun’s movement. The mirrors concentrate heat from direct sunlight onto oilfilled absorber tubes which connect to the site’s conventional power plant.

The Abu Dhabi hybrid plant is designed to be augmented by natural gas from a local gas field.

The site was selected because of the strength of the solar irradiance and its proximity to an existing electrical substation. The region is at the centre of the country’s oil and gas industry, and will also house the UAE’s new nuclear plants, making the area a key energy hub for the country.

MARINE ENERGY The industry is also looking for ways to extract power from waves and tides on a sufficiently large scale to provide predictable and affordable low-carbon electricity. Marine energy is a vast resource of great potential, but the technology for converting it into real life applications is still in its infancy. Much investment and development work is needed to bring it to market.

Marine energy includes technologies at varying stages of development, including tidal stream, tidal barrage, wave, and ocean thermal energy conversion. A lot of prototypes and small-scale devices have been developed in laboratories and research centres around Europe and further afield. The transition to full-scale prototypes operating in arrays is needed to bring some of the technology to maturity. Challenges include installing and proving the operational viability of the contraptions in sea conditions, sourcing the necessary capital investment, establishing grid connections, and developing a supply chain for the manufacture, installation, operation, and maintenance of the machines.

Sites for development of wave and tidal energy are dictated by climate and geography. The best European locations lie in the Atlantic arc along the west coasts of the UK, Ireland, France, Spain, and Portugal. The UK’s domestic tidal stream potential represents around half of the European resource, and around ten to fifteen percent of the known global potential.

Canada, Australia, and Japan are amongst the other countries where work on marine energy is steadily progressing.

SPLITTING THE ATOM The technology for splitting uranium atoms to produce nuclear power has been in use for around for sixty years. In the early days of the technology, nuclear power was hailed as the forerunner of “energy too cheap to meter.”

Sadly, this optimism has proved misplaced 132

although nuclear energy today provides about a tenth of the world’s electricity.

Nuclear power is a high-hazard industry which requires a stringent regulatory regime and high safety standards. Thirty countries currently use nuclear power and 67 new reactors are under construction with others in the planning pipeline. The capital costs of building nuclear power stations are exceptionally high and to date government support has always been required.

Although the industry worldwide has a very good safety record, once major accidents do happen, they have far-reaching and terrifying consequences. Over the history of the industry, incidents at Windscale, Three Mile Island, Chernobyl, and more recently Fukushima have all led to a renewed debate about the risks associated with nuclear power.

The tsunami and consequent flooding at the Fukushima-Daiichi plant in 2011 led to major safety reviews across the nuclear estate.

Germany, Switzerland, Belgium, and Spain subsequently decided to phase out nuclear.

The Japanese moratorium on nuclear operations looks set to be lifted in late 2015. China, Russia, India, and the UAE are all committed to nuclear new build programmes, none more so than China which has a massive expansion plan.

The main suppliers of modern reactors are China, Russia, France, Korea, and Japan. The trend has been towards developing ever bigger reactors around an inherently safe design that entails passive security systems which allow for naturally occurring shutdowns in case of malfunction. However, development work on small modular reactors is currently making bigger waves.

Europe’s chief proponent of nuclear power is France. The 1974 oil crisis led the French government to determine to break some of its dependence on oil by developing nuclear power on an unprecedented scale. A fasttrack programme of nuclear reactor building commenced. This initiative saw France become a nuclear energy super-power. It currently generates more than three quarters of its electricity from the splitting of atoms, although the government has recently announced a policy of scaling this back to sixty percent and increasing the deployment of renewables.

France’s ambitions to export its most modern reactor design, the EPR (European Pressurised Reactor) have been adversely affected by the financial failure of the reactor manufacturer Areva and construction delays suffered by the first reactors being built in France, Finland, and China as a succession of manufacturing and design issues have arisen. Currently, controversial plans to build two such reactors in the UK are awaiting an investment decision which relies heavily on the involvement of CFI.co | Capital Finance International

Chinese nuclear companies, and an agreement by the UK government to guarantee the price for electricity generated.

At the other end of the nuclear cycle, dealing with nuclear waste – which remains dangerously radioactive for hundreds of thousands of years into the future – is one of the areas of urgent ongoing international research. The nuclear power industry grew out of nuclear weapons development and the countries which pioneered this now face the toughest challenges in cleaning up their nuclear waste.

The Sellafield site in north-west England contains some of the most hazardous waste in the world, tightly packed into an area the size of Hong Kong. The clean-up bill is currently estimated at £110 billion and rising. At the time these early facilities were built, scant attention was paid to their eventual decommissioning and how radioactive waste was to be safely stored: there was a naïve faith that the scientists and technologists of the future would find solutions.

The nuclear industry is still hoping to find its philosopher’s stone and transmute radioactive waste into harmless, manageable, and quite possibly profitable substances.

The last two decades of the twentieth century have seen a global trend towards the restructuring and liberalisation of state-owned electricity monopolies. The rationale was to unbundle vertically-integrated power generation and distribution systems in order to attract private investment and increase operational efficiency. However, left to its own devices, the free market model seems not to produce either the infrastructure or the low carbon electricity desired.

If low carbon is the priority, then binding regulation is needed to steer investment in the right direction. Ensuring secure, clean, and affordable energy for all is a most laudable pursuit. Politicians, NGOs, industry, science, and technology all have important roles to play in the quest towards this goal. For the economies of the world to converge, multiparty collaboration is needed to ensure that across the globe whenever someone flicks a light switch an energy efficient bulb illuminates their way.

However, the current cacophony of voices representing often diametrically opposed interests produce a dialogue of the hearingimpaired. Reams of research papers and detailed policy roadmaps do not change the fact that power is first and foremost Big Business. As such, it is generated and distributed where the most money may be made. Renewables must, in the end, conform to the logic of the market if they are to prosper. A low carbon world will only be ushered in if there is money to be made. In this era of cheap, and cheaper, oil and natural gas, renewables face an uphill struggle and have lost some of their earlier momentum. i

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>

THE EDITOR’S HEROES

The Pantheon of the Immortals

N

ot all heroes have names that are instantly recognisable. Most go about their business in silence, making a difference as they move along, and the world a better place in the process. In this issue, CFI.co features a number of lesser-known heroes – people who deserve a moment in the spotlight and whose stories may inspire others.

Heroes also often come out of nowhere to enjoy their much-deserved fifteen minutes of fame. Take the three passengers who on August 21 overpowered a Kalashnikovwielding would-be terrorist on the Amsterdam to Paris run of the Thalys high-speed train and handed him to the French police at Arras. The three – two offduty American servicemen and a British businessman – snapped into action as soon as the gunman made an appearance. It took the trio but fifteen seconds to disarm the shooter and pin him to the floor.

Within hours of the incident, the mayor of Arras – a market town in the Nord-Pas-deCalais Region and not normally a stop on the Thalys itinerary – had medals awarded to the three heroes. Both French President François Hollande and his American counterpart Barack Obama were quick to point out that a bloodbath had been avoided on the train carrying over 500 passengers.

The foiled attack was the work of a 26-yearold man of Moroccan descent whose name features on a number lists of suspected terrorists but nonetheless managed to board the train in Belgium.

The global fight against terrorism brings an impressive number of heroes to the fore.

The most heroic of all must be 82-year-old Khaled al-Asaad, a renowned scholar of the ancient world. Mr Al-Asaad was brutally

murdered by jihadists of the self-proclaimed Islamic State after he refused to reveal the place where he had hidden the treasures of Palmyra – one of the oldest cities in the Middle East and a garrison town and commercial hub on a much-travelled trade route in Roman times.

Mr Al-Asaad dedicated over fifty years of his life to the preservation of Palmyra’s priceless heritage as head of antiquities. The scholar also led a number of archaeological digs that uncovered building from the Roman and Hellenic Eras. The excavations also proved that Palmyra had been inhabited since Neolithic times.

Earlier this year, rabidly philistine jihadists of the Islamic State captured Palmyra and imprisoned the frail archaeologist in an attempt to find the city’s famed treasures.

The self-styled caliphate uses the proceeds from the sale of looted antiquities to finance its operations. Questioned in ways that would put even the American’s “enhanced interrogation techniques” to shame, Mr Al-Asaad simply refused to budge. After a month in captivity, the scholar was beheaded on the public square in front of the museum he headed and his mutilated body hung from a column.

Whatever the jihadists wanted to prove by murdering an octogenarian academic, they merely succeeded in drawing worldwide attention to their own barbarism and – more importantly – to the undying passion of an old man who wouldn’t be cowed into destroying his life’s work. There is a very special place for death-defying, largerthan-life heroes such as Khaled al-Asaad.

It may not be populated by maidens, but it does ensure a place in the pantheon of the immortals. i

Rome: Pantheon

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> AMY JADESIMI Wandering into Oil and Gas Dr Amy Jadesimi is a high-achieving, resourceful young Nigerian businesswoman with a career that offers testimony to her belief that hard work pays off. She is committed to ensuring that Nigeria gains the maximum benefit from the development and exploitation of its rich offshore oil and gas resources.

“I grew up with a very strong sense of pride in what it means to be Nigerian and what we can achieve as people. This conviction contradicted the feedback I received from the wider world. For me, it is very important that we, as Nigerians, take time out to look for personal heroes and learn about our heritage. We need to find out who we actually are and what we have achieved as people, instead of listening to the negative narrative the world gives us.”

Marked out as a high-flier from an early age, Dr Jadesimi graduated from Oxford University as a medical doctor. Chance led her away from an intended career as a surgeon. After a spell working at a hospital, Dr Jadesimi joined Goldman Sachs International in London as part of the Investment Banking Division, specialising in corporate finance and mergers and acquisitions.

The job at Goldman Sachs was meant to be a year out from medicine, but in the event she found investment banking so enjoyable that medicine went by the board.

A sojourn at Stanford Business School led to an MBA and then it was back to Nigeria to set up a financial consultancy firm. The move into offshore oil and gas infrastructure came when Dr Jadesimi joined her father, Oladipo Jadesimi, at the Lagos Deep Offshore Logistics Base (LADOL) – the largest privately-financed such establishment in Nigeria which he had founded in 2001.

Dr Jadesmi is now managing director of Nigeria’s only locally-owned deep offshore logistics base. However, promotion to the top was not a given: Dr Jadesmi had to work her way up through the ranks, proving her ability to the management team.

In fourteen years, LADOL has turned a former industrial wasteland into a $500 million industrial zone and port facility for the offshore oil and gas industry. The LADOL Free Zone base is now a centre for drilling and production support, ship building and repairs, and manufacturing and engineering.

The facility in Apapa harbour delivers vessel dry-dock and repair, oil drilling rig repair, and fabrication services to maritime and international oil companies operating in the upstream sector of the sector. The modern facility includes a high load-bearing quay, workshop, warehouses, hotel, offices, passenger jetties, marine craft, and certified handling equipment.

For the past thirty years, ninety percent of Nigerian oil and gas projects have been developed by foreign companies. In 2010, the government passed the Oil and Gas Industry Content Development Act to increase the role of indigenous companies in the industry – a mainstay of Nigeria’s economy. The government wants increased involvement of Nigerian companies in order that the country may become the primary hub for oil and gas and the maritime industry in West Africa.

With Dr Jadesimi at the helm, LADOL seized the opportunity, embarking on a joint venture with Samsung Heavy Industries – one of the largest shipbuilders in the world – to invest in a fabrication and vessel-integration facility suitable for building and repairing a wide range of ships.

The first contract is to build a huge floating production, storage, and offloading vessel (FPSO) for the Egina Project, Total’s huge development in the deep waters off the coast of Nigeria.

Dr Jadesimi has ambitious goals for the future. She wants LADOL to build the largest dry dock in West Africa, creating as many as 100,000 jobs. In collaboration with other facilities in Nigeria she wants to see clusters of engineering, steel manufacturing, general fabrication, offshore

fabrication, and training developed across the country.

However, doing business in Nigeria is not easy. Earlier this year the Nigerian Port Authority ordered LADOL to relocate to Agge, a fishing community in distant Bayelsa State.

This was followed by an instruction to switch the fabrication and FPSO facility to the new location – an under-developed area with limited facilities and no infrastructure. These unrealistic directives have apparently come out of government’s desire to decentralise and stimulate development in other parts of the country. However, issuing instructions cannot convert an under-developed fishing port lacking road access and mains electricity into a suitable site for a massive construction project.

Sorting out this obstacle will test Dr Jadesimi’s political skills. LADOL took the case to the Federal High Court where, in May 2015, a judge granted injunctions restraining the government from carrying out the order.

From medicine to finance to oil and gas may seem an unlikely trajectory, but credit to Dr Jadesimi for honing in on opportunity to exert the maximum influence in bringing jobs and prosperity to her homeland.

“She wants LADOL to build the largest dry dock in West Africa, creating as many as 100,000 jobs.”

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Autumn 2015 Issue

> DAVID WALSH Bringing Down Mighty Lance The issue of doping in sports reverberates across multiple disciplines and continues to dominate the headlines. None more so than cycling where the case of hero-turned-villain Lance Armstrong almost ruined the sport, leaving fans with a legacy of simmering suspicions. Mr Armstrong is a tough American who survived cancer and went on to claim victory seven times in the gruelling three week Tour de France cycling marathon – and continues to hog headlines.

It is a complex story presenting many ethical dilemmas. Rumours about doping circulated for years but, anxious to maintain access to the athletes, sports journalists were often reluctant to dig too deeply, preferring instead to focus on races and results.

One journalist not afraid to investigate was Irishman David Walsh who played a key role in uncovering the systematic and sustained doping regime of Lance Armstrong and his US Postal Service Cycling Team. Mr Walsh’ suspicions was first raised in 1999, but it took him thirteen years of research and legwork to prove Mr Armstrong’s astonishing post-cancer performances were enhanced by drugs. During this time, Mr Walsh became a pariah in the sport and his paper was forced to a million dollar out-of-court settlement to a libel action initiated by Mr Armstrong in 2004.

However, Mr Walsh continued to investigate and to publish. He was vindicated when in 2012 the United States Anti-Doping Agency (USADA) banned Lance Armstrong from competitive cycling for life on doping offences, saying he had been engaged in “the most sophisticated, professionalised, and successful doping programme that sport has ever seen.” Following this, Mr Armstrong was stripped of all his seven Tour de France titles.

In 2012, Sunday Times chief sports writer David Walsh won the awards of Journalist of the Year and Sports Journalist of the Year at the British Journalism Awards. Despite becoming “a pariah for years” in the cycling world, the judges noted that “he pursued his story relentlessly.

The US Anti-Doping Agency would never have snapped into action if it hadn’t been for David Walsh.”

The judges called Mr Walsh’ efforts “a fine example of great investigative journalism.” By this time Mr Armstrong was in disgrace, banned from sport, had his titles rescinded, and faced the prospect of multiple court actions to reclaim prize and sponsorship money. The Sunday Times may yet seek to recover the 2004 settlement it paid.

In the prime of his career Lance Armstrong was a powerful and dominating man whose ability to blacklist journalists and fellow cyclists

was feared. This strength kept him on top of his game and quelled questions about the use of performance-enhancing drugs. The full list of people and organisations complicit in this racket is being compiled.

Doping in sport is a huge ongoing issue.

One of the many ethical issues raised is the role and responsibility of sports journalists. Mr Walsh believes that for many years cycling journalists were aware of doping’s prevalence in the sport, but chose to tiptoe around it in order to maintain the status quo.

This would just not do for Mr Walsh. He believes that the role of the journalist is to find the truth and not to merely slavishly report the results, an approach he describes as “being a fan with a typewriter.”

“At the time, quite a lot of people didn’t think it was appropriate to ask what turned out to be very poignant questions.”

Mr Walsh began his career as a cub reporter on the Leitrim Observer, working his way up to an editorship at 25. He left the paper to join the Dublin-based Irish Press and in 1984 took a year out to cover cycling in Paris before resuming his career in Ireland. In 1996, Mr Walsh joined The

Sunday Times in Ireland. He began working on the story about doping in professional cycling shortly after moving to England in 1998.

His authored a number of books on the Armstrong saga, including From Lance to Landis: Inside the American Doping Controversy at the Tour de France and Seven Deadly Sins: My Pursuit of Lance Armstrong. The latter book has been made into a film titled The Program, directed by Stephen Frears and released earlier this year. Not one to shy away from controversy, Mr Walsh ghost-wrote cricketer Kevin Pietersen’s outspoken and abrasive autobiography published in October 2014.

Speaking at the annual Hugh Cudlipp lecture – an annual event organised to honour the work of editor and journalist Hubert Cudlipp of Daily Mirror fame – Mr Walsh said that he never worried about being unpopular with his peers: “A good story is always worth pursuing, no matter how difficult pursuing it might be.” He also adheres to the phrase coined by American newspaper tycoon Joseph Pulitzer who quipped that “newspapers should have no friends,” implying that if they do, their job is not being done properly.

“A good story is always worth pursuing, no matter how difficult pursuing it might be.”

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> AYAN MAHMUD Meeting Shakespeare in Hargeisa

The sixth edition of the Hargeisa International Book Fair took place in Somaliland in August 2015. While literary festivals and book fairs are commonplace in most countries, they are a phenomenon rarely seen in the Horn of Africa.

Hargeisa, the capital city of Somaliland, features neither theatres nor cinemas, yet it hosts what has now become one of the largest festivals of literature, politics, and culture in East Africa.

The landmark event was founded by Ayan Mahmud who braves the near-constant threat from al-Shabaab jihadis to organise the literary happening together with author and mathematician Jama Mousse. The Hargeisa book fair attracts artists and poets who run workshops and celebrate Somali culture. Both organisers are diaspora Somalilanders who hope to revive the cultural life of their homeland.

“In six years the fair has become the main platform for arts in the Somali region and one of the largest celebrations of literature in East Africa.” In a blog, Ms Mahmud describes the role of the event as a focus for the energies of young people in Somaliland.

“Unlike many other literature festivals around the world, it is the young who make up the majority of the audience. They come to attend workshops in photography and courses on creative writing as well as pack in for events such as poetry readings and discussions on politics.”

Ms Mahmud also organises the annual Somali

Week which takes place in London in October.

The theme of this year’s festival was Journey, reflecting a nomadic culture and the experiences of Somalis over the past two decades: tales of flight and survival mixed with optimism, hope, and great expectations. Poetry is a pillar of Somali culture which boasts a long oral tradition with both male and female poets. Writers and artists from Nigeria, Djibouti, Kenya, Italy, the UK, and the Somali diaspora attended the event.

Performances by Mohamed Ibrahim Warsame – aka the Somali Shakespeare” – and the famous poet popularly known as Hadrawi were the highlights of the festival. International speakers included British journalists Mary Harper (Africa editor at the BBC World Service), Michela Wrong, US writer Ben Stein, Nigerian author Chuma Nwokolo, and the British poet WN Herbert.

One of the best attended events featured Said Salah, a poet and teacher of the Somali language for fifty years. He spoke at length about his experience of teaching in the Somali territories and the United States. The recently appointed British ambassador to Somalia, Neil Wigan, reflected on the historic links between Somaliland and the UK, and on the contributions to British public life by prominent British Somalis such as the journalist Rageh Omar and the Olympic athlete Mo Farah.

The closing ceremony produced some

drama. A story in the local press alleged that one of the delegates, a well-known advocate of gay rights, was planning to set up a local chapter to promote the cause. This raised a few eyebrows. In the light of this, the organisers urged the delegate to lie low for the duration. In the evening the delegates took taxis and headed to the Gulaid Hotel where the closing ceremony was to take place. Drawing near, they saw a large crowd of excited young people milling around the entrance. The guests beat a quick retreat after a gunshot was heard.

Back at the hotel, it was discovered that the excitement had been caused by the imminent arrival of local heartthrob Maxamed BK who has been engaged to perform at the closing ceremony.

Excited young fans had gathered to welcome the singer.

Reassured, the keener and braver delegates promptly headed back to the hall to watch the local pop hero perform. The event was wrapped up by the foreign minister of Somaliland who implored those present to spread the word and the story of Somaliland and so help the country gain international recognition.

The Hargeisa International Book Fair is a coup for a region more usually in the news for disaster, famine, conflict, or piracy. It may not yet rival Hay or Edinburgh, but Ms Mahmud and Mr Mousse have managed to make the festival a prominent fixture on Somaliland’s cultural calendar.

“Unlike many other literature festivals around the world, it is the young who make up the majority of the audience.”

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> EDI RAMA An Artist in Politics

Strong, wise leadership is a scarce asset in the simmering political cauldron that is the Balkans.

However, Albania’s Prime Minister Edi Rama brings a striking and unusual breadth of experience to the region along with the creativity and perspective of a successful conceptual artist.

Mr Rama’s apprenticeship for the top job was served in local politics. As mayor of Tirana, he transformed the city within a decade: “It’s the most exciting job in the world. I got to invent and fight for good causes every day. Being the mayor of Tirana is the highest form of conceptual art.

It’s art in a pure state.”

Mr Rama has been prime minister of Albania since 2013. After years of isolation under a totalitarian regime, the country now faces many challenges. Mr Rama wants Albania’s future to lie within the EU, and he foresees danger ahead if Balkan countries are excluded from the union.

“Enlargement fatigue [in western European countries] is a kind of self-indulgence for those who have lost the point of why the EU was built in the first place. I am sure the founding fathers of the union would be ashamed. My humble view is that Europe needs the Balkans today as much as the Balkans need Europe. That is because enlargement into the Balkans is, first and foremost, an issue of security for Europe.”

As the son of a sculptor and a doctor growing up under the totalitarian regime of Enver Hoxha,

Mr Rama excelled at sports and played for the national basketball team. As an art student, he was one of the most publicly outspoken members of the students’ movement at the Academy of Fine Art. He graduated to teaching at the establishment, also exhibiting work and publishing a couple of books.

In 1994, he moved abroad to further his artistic work, living in France and exhibiting widely in Europe and the USA. In 1998, although a staunch critic of the first postcommunist regime, Mr Rama was invited to join the Albanian government as the Minister of Culture, Youth, and Sports. He threw himself into the role winning wide appreciation from Albanian public opinion for his creative and efficient ways of promoting art and culture.

In 2000, Mr Rama won a landslide victory to become mayor of Tirana. He energetically set about transforming and regenerating the drab capital city by restoring public spaces, demolishing illegal buildings, increasing the green areas, and instilling a new spirit and vision in the administration. His ambition was for Tirana to become a modern European city.

Mr Rama’s Clean and Green Project led to the creation of acres of green land and parks in the city and the planting of nearly 1,800 trees.

He ordered the painting of many old buildings in bright pink, yellow, green, and violet hues, which

have become known as Edi Rama colours. He gained international recognition and received the World Mayor Award in 2004. The popular mayor was promptly re-elected in 2003 and 2007 serving for a total of eleven years.

In 2005, Mr Rama was elected chair of the Socialist Party of Albania. A popular and charismatic leader, he became Albania’s prime minister in June 2013 and has led important post-communist reforms, including the vetting of government officials to re-establish civic trust.

However, big challenges lie ahead for his country. Over the years, the Balkans has been a battleground for territory and sovereignty. The break-up of Yugoslavia resulted in many festering sores which still remain such as the future of Kosovo whose majority Albanian population craves a union as Greater Albania. Serbia is, of course, dead-set against this. Until a solution is found, neither Albania nor Serbia can expect affiliation with the EU to be forthcoming.

Albania’s leader brings an unusual perspective to his role: “I don’t think I am a politician. I would say that I am still an artist, trying to use politics as an instrument for change.” The artist’s perspective may yet contribute to a defusing of disputes and see this Balkan country firmly rooted in the greater European concert of nations.

“I don’t think I am a politician. I would say that I am still an artist, trying to use politics as an instrument for change.”

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> GEORGE FERGUSON An Anti-Hero in Charge of Bristol Architect and urban-planner-turned-politician George Ferguson became Bristol’s first directly elected major in 2012. His manifesto included transforming the city into a laboratory for urban change, vowing to test out ideas that, if successful, other cities could follow.

A range of novel transport policies were promptly introduced such as a 20mph speed restriction blanketing the city, the closing of some roads on summer Sundays, and programmes that encourage cycling.

Mayor Ferguson explains: “The new speed limit is one of a number of measures that we are introducing and which will help promote road safety, improve traffic flow, support sustainable transport and active travel, and help to make Bristol a more positive place to live and work.”

The Make Sundays Special Initiative was inspired by Bristol’s twin city Bordeaux and the extensive weekend scheme operating in Bogotá, Colombia. Freeing city centre streets from traffic one Sunday a month, opens the downtown district up for people to exercise, cycle, entertain, trade, and socialise. Summer Sundays see local markets, street entertainment, sports, choirs, and assorted musicians draw in large crowds. One of the flagship events is the Wallace and Gromit Trail, inspired by the loveable clay animation of an absent-minded inventor and his smart anthropomorphic dog.

Mayor Ferguson led Bristol’s successful bid to win a European competition which made the city the 2015 Green Capital of Europe. The win secured millions of pounds in funding from the European Union. This infusion helps finance municipal transport and energy programmes.

Under Mayor Ferguson’s watch, Bristol has brought in a range of green initiatives including energy efficiency measures. A building renovation programme was launched and a new Bristol power company formed.

The city also partners with universities to promote innovative new environmentally-friendly technologies to extract energy from the worldrenowned Severn tidal bore. The Severn Estuary features the third largest tidal range in the world with a range of about 13 vertical metres.

Another first is the Bristol Pound; the city is the UK’s first to have a local currency and the first to have electronic accounts managed by a regulated financial institution. Bristolians can even use their municipal pound to pay local council tax. Introduced in 2012, the scheme is intended to reduce the length of the supply chain and encourage localism. With around 900 business accepting the Bristol pound, people can use the currency to pay purchases at local

shops, bus fares, and bills. The mayor’s salary is equivalent to that of a member of parliament and Mr Ferguson takes some of his earning in Bristol pounds.

Mayor Ferguson is a colourful character who is normally seen wearing his trademark red trousers. He hates wearing a suit. Quizzed about this, Mayor Ferguson readily admitted to having switched to green trousers on the evening his city was awarded green capital status. This change in attire was, however, a one-off event.

Mayor Ferguson has spent most of his adult life in Bristol. An architect by trade, he used urban renewal coupled to environmental sustainability as the pillars of his approach to design. He has written and presented articles, broadcasts, and lectures on planning, architecture, and sustainability. Mayor Ferguson also played a leading role in the regeneration of the Bedminster

district on the south side of the city and heavily bombed during the Bristol Blitz in the Second World War. The mayor was instrumental in the development of The Tobacco Factory, a mixed-use project that includes a theatre, bars, and creative industry workspaces that has helped kick start the regeneration of the area.

Mayor Ferguson is a past president of the Royal Institute of British Architects and was a founding director of the Academy of Urbanism.

Additionally, he is a founding member of the British sustainable transport charity Sustrans.

In the 2010 New Year Honours List, Mayor Ferguson was appointed Commander of the Order of the British Empire (CBE) for services to architecture and to the community in the South West of England.

In 1973, Mr Ferguson was one of the first three Liberal candidates to be elected to Bristol City Council. However, he lost his seat in 1979.

Mr Ferguson fought for the Liberal Democrats as candidate for Bristol West in the 1983 and 1987 general elections. After this, he quit both the party and politics for a few years until the role of elected mayor entered the political landscape.

Elected mayors are fairly new to the UK. The first was voted into office in 2000 when Ken Livingstone became London Mayor, subsequently replaced by the ever-extravagant and largerthan-life Boris Johnson. However, elsewhere in the country voters have displayed a pronounced lack of excitement regarding the changes to local government structures that now include elected mayors. Bristol is one of a few cities to opt for this particular form of devolution.

In the 2012 Bristol campaign, Mr Ferguson ran as an independent but did register his Bristol 1st Party. During the campaign he repeatedly assured voters that his political ambitions do not extend beyond city limits: “My only purpose is to make Bristol, the city I love, a better home for all.

I have no political ambition beyond Bristol.”

Mayor Ferguson may be green, but he is not whiter than white. His nicknames are Red Trousers and Junket George – the latter for his much publicised trips to green schemes in Europe. It recently caused much mirth when he was caught speeding in the city. Having spearheaded the not entirely popular £2.3m project to implement 20mph zones across the city, the eco-minded mayor had abandoned his electric-powered car for a Bristol City Council fleet car when the police clocked him speeding. The mayor immediately described the offence as an inexcusable mistake and said he would promptly pay the £100 fine.

It is not clear if they mayor disbursed British or Bristol pounds to settle his debt to society.

“An architect by trade, he used urban renewal coupled to environmental sustainability as the pillars of his approach to design.”

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Autumn 2015 Issue

> LEILA JANAH Impact Sourcing Making a Difference A dynamic young management consultant is blazing a trail as a social entrepreneur, transforming the prospects for hundreds of disadvantaged young people in Africa and India. Leila Janah is the founder of Samasource, an outsourcing company that hires and trains people in poor regions of Africa and Asia to work in the global digital industry.

Ms Janah saw the outsourcing industry generating huge profits for a few wealthy businessmen in India, China, and the Philippines and wondered if it was possible to invert the model in order to generate a few dollars for billions of people at the bottom of the pyramid?

Out of tiny acorns grow massive oaks.

Samasource (sama means equality) came out of this observation. By breaking down data projects into small tasks, and by taking advantage of cheap access to connectivity and hardware in developing countries, the thriving social enterprise provides work to poor women and young people in East Africa, South Asia, and Haiti.

Today Samasource provides work for thousands of people in the developing world. The company’s clients for data services include digital giants such as LinkedIn, eBay, Walmart, and the US State Department.

A decade ago, Pulitzer Prize winner Thomas Friedman argued that outsourcing could “flatten the world” by eradicating poverty in countries that host call centres and business processing facilities carrying out outsourced work for multinational corporations, generating millions of new jobs. The Sama Group is working to make this vision become a reality.

Ms Janah named her idea “socially responsible outsourcing” – later abbreviated to “impact sourcing.” Subsequently adopted by other organisations, it is an approach to outsourcing that benefits disadvantaged people in low employment areas. The model differs from traditional foreign aid by using market mechanisms to distribute wealth and access to employment.

Ms Janah explains: “Clients pay nothing for the extra benefit of reducing poverty; they pay what they would have anyway to complete their work. Impact sourcing firms, many of which are run as non-profit businesses designed to break even or earn but a small profit, benefit from growing client revenues that offset the cost of recruiting and training a marginalised workforce.

Workers gain a living wage, valuable computer and English language skills, work experience, and socialisation in a formal work environment – factors known to catapult people out of poverty.”

The daughter of Indian parents who immigrated to the USA, Ms Janah was brought

up to believe in the virtues of hard work and self-reliance. She took a break from Harvard University to obtain work experience with Ashoka – a social entrepreneurship programme – and the World Bank. This left her with a strong understanding that what people need in order to emerge from poverty is jobs rather than aid. After graduating with a degree in African Development Studies, Ms Janah started working in Mumbai as a management consultant for a big outsourcing company.

“The industry was creating millions of jobs in places that the West thought of as backwaters.

But if you wanted to get a job at a call centre, you had to come from a middle-class family. Very low-income people were not walking into Infosys and handing out their CVs. That got me thinking: Maybe there’s a way to use this model to help people in the slums, especially for some of the easier tasks like data entry.” Lateral thinking let her to set up and succeed with Samasource.

Ms Janah is buzzing with ideas. Samaschool

is another of her projects. This epiphany came about after colleagues observed that Samasource workers continued to make good incomes after they left the company. For example earnings of the average worker in East Africa and Asia rose from $800 a year before Sama, to $3,300 a year after, and stayed at that level.

This led to the establishment of Samaschool, a project to train people how to find work in the Internet economy. The job-training programme for low-income workers is now being rolled out in the USA. Recruits are trained to become Internetsavvy, and set up profiles which help them get work from online services like TaskRabbit, an online advertising service outsourcing household tasks. Thus Samaschool helps people develop confidence to find economic outlets for their traditional skills via the Internet.

This dynamic young social entrepreneur is a shining example of how idealism, enterprise, and technology can combine to improve the quality of people’s lives.

“This dynamic young social entrepreneur is a shining example of how idealism, enterprise, and technology can combine to improve the quality of people’s lives.”

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> SEBASTIÃO SALGADO Capturing the Moment “Mr Salgado’s distinctive pictures belong to a classic tradition of black and white documentary photographs from a predigital age.”

Sebastião Salgado abandoned a promising career as an economist in his 30s to become a highly-regarded and iconic photojournalist. His extraordinary black and white images record the lives of people in harsh conditions, finding beauty and strength in the bleakest of environments. His portfolio is unlike that of any other photographer.

Mr Salgado was born on a farm in southeast Brazil. He gained a PhD in Economics and discovered the magic of photography while travelling the world working for the International Coffee Organisation in the 1970s. “When I first took a camera, I had never looked through a viewfinder in all my life.” He says it was electrifying, and he promptly abandoned coffee for the camera.

Mr Salgado’s distinctive pictures belong to a classic tradition of black and white documentary photographs from a pre-digital age. Humans are at the centre of much of his work. Over the last forty years he has documented many of the world’s major events from war to famine and from genocide to exodus.

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Photography has taken him all over the world, recording extraordinary people, places, and events. A photograph records but an instant, but getting great images takes time. Mr Salgado immerses himself in his subject in order to understand the flow of events and the mood of people. “Photography is one 250th of a second,” he says. “There are a lot of variables. There must be light. There must be power. And if it is a portrait, there must be personality.”

Mr Salgado’s images are characterised by a sense of depth and scale. They are large panoramas encompassing human history and the environment. He is a self-taught photographer learning and refining his techniques over a lifetime. Digital photography does not interest him. He likes to work with celluloid, using very fast film and a small diaphragm to give a huge depth of field: “Reality is full of depth of field.”

Recently, the celebrated German filmmaker Wim Wenders collaborated with Sebastião Salgado’s son Juliano Salgado to make a documentary about the photographer. The Salt of CFI.co | Capital Finance International

the Earth, released last year, has been nominated for an Oscar and won awards at Cannes and a number of other film festivals. It sees Mr Salgado revisit his past and discusses some of his most famous photographs, providing personal, social, and political insights into the events around the stunning images.

Story telling is another of Mr Salgado’s skills.

In the film, the director placed the photographer in a soundproof room, and projected his photographs with the camera hidden behind a one-way mirror. He then invited the photographer to talk about the shots. The striking and heartwrenching images include those taken at the Serra Pelada mine in Brazil, where 50,000 distant miners scale rickety ladders that rise up from the mud pits, pictures of burning oilrigs in Kuwait after the First Gulf War, and some photos taken during the Rwandan genocide.

The footage is interspersed with film of Mr Salgado at work shooting his most recent photo-series, Genesis, which documents the world’s forgotten people and places. Genesis was shot between 2004 and 2011. It is a series of photographs of landscapes, wildlife, and human communities that continue to live in accordance with their ancestral traditions and cultures.

Work dictated that Mr Salgado was often away from home while his children were growing up. His son Juliano Salgado decided to accompany his father on some of his Genesis adventures. They visited Inuit tribes in Alaska and filmed great walruses in the Arctic Circle.

The shared experience, shown in the film, helped the photographer to rekindle a strong relationship with his now adult son.

Over the last twenty years, Mr Salgado and his wife Lélia have worked to restore the former cattle ranch in Brazil’s Atlantic Forest inherited from Salgado’s father. The land had been over-farmed and they set out to return it to its natural subtropical state as a rainforest.

In 1998, they turned the property into a nature reserve and created the Instituto Terra dedicated to reforestation, conservation, and environmental education, a symbol of hope for the future.

Words cannot do justice to Mr Salgado’s images, only a visit to an exhibition featuring his shots can do that. Prepare to be impressed.

Autumn 2015 Issue

> SHIRIN EBADI Throwing Books at Antagonists Iran’s first female judge has paid a high personal price for her human rights advocacy: Dr Shirin Ebadi lives in exile while her family remains in Tehran. After the Iranian revolution, women were excluded from the judiciary and Dr Ebadi was deposed from the bench where she had served as a judge for four years.

Dr Ebadi eventually won the right to practice law in Iran and took up social causes and cases involving dissidents. In 2003, her work for human rights advocacy – notably for the rights of Iranian women, children, and political prisoners – was recognised when she won the Nobel Peace Prize. The lawyer was the first Iranian, and the first Muslim woman, to win the award. It did not endear her to the local authorities.

Dr Ebadi has written many books and articles in peer-reviewed journals. She continues to work for human rights, especially those of women and children, and now travels extensively to speak on those issues. She has lived in exile in London since the election of President Rouhani in June 2009.

Dr Ebadi is critical of the Iranian regime but opposes forced regime change, believing that the most important goal is to promote democracy and human rights. She argues that Islam is compatible with human and women rights.

However, in Iran, authorities have been highly selective in their interpretation of religious texts: “Islam is not religion that binds women. It is the selective dictates of some that keep women cloistered. That belief, along with the conviction that change in Iran must come peacefully and from within, has underpinned my work.”

Speaking at a conference, earlier this year in The Hague, marking the hundredth anniversary of the International Congress of Women, Dr Ebadi gave her views on the threat posed by the selfproclaimed Islamic State: “We have to remember that ISIS is not simply a terrorist group. It’s an ideology. And an ideology cannot be fought with bombs. This wrong ideology can only be fought with a correct interpretation of religion. Had books been thrown at people such as the Taliban, instead of bombs, and had schools been built in Afghanistan – 4,000 schools could have been built in memory of the 4,000 people who died on 9/11 – at this time, we wouldn’t have suffered ISIS. Let’s not forget that the roots of the ISIS rest in the Taliban.”

She playfully suggested “…that the United Nations, through a convention, encourage all countries to reduce their military budgets by 10 percent and use it for the education and welfare of the people… I want to ask the United States and the Western world to throw books at people.

You will see that we will have a better world in the future.”

Dr Ebadi was born into a Muslim family of lawyers and academics. After studying at the Tehran University Faculty of Law she did a six-

“Dr Ebadi is critical of the Iranian regime but opposes forced regime change, believing that the most important goal is to promote democracy and human rights.” month apprenticeship in adjudication with the Department of Justice and in March 1969 she began serving as a judge. Two years later, she gained a doctorate with honours in private law from Tehran University. Dr Ebadi held a variety of positions in the Justice Department. In 1975, she became the first woman in the history of the country to serve as a judge when she was appointed President of Bench 24 of the Tehran City Court. Sadly, others are unable to follow in her footsteps.

Following the Islamic Revolution in February 1979, all female judges were dismissed from their posts and given clerical duties at the courts over which they once presided. Dr Ebadi quit and attempted to gain permission to practice law. During this time she wrote several legal books and papers. Eventually, in 1992, she was granted a lawyer’s licence and set up her own practice specialising in social cases.

Dr Ebadi also took on some high profile cases representing journalists or their families accused CFI.co | Capital Finance International

or sentenced for exercising their freedom of expression. In 2000, she produced videotaped evidence of a murder confession which was highly embarrassing to the government. As a result, she was herself was put on trial for allegedly manipulating evidence. She was handed a five year suspended sentence and her law license was revoked.

Dr Ebadi led research projects for the UNICEF office in Tehran, and co-founded the Association for Support of Children’s Rights in 1995 and the Human Rights Defence Centre in 2001. She also taught human rights courses at university. Despite living in exile, Dr Ebadi continues to write and lecture. In her 2006 book Iran Awakening she writes: “In the last 23 years, from the day I was stripped of my judgeship to the years of doing battle in the revolutionary courts of Tehran, I had repeated one refrain: an interpretation of Islam that is in harmony with equality and democracy and, as such, constitutes an authentic expression of faith.”

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> TIM COPE Venturing Beyond the Last Disco in Outer Mongolia Tim Cope is an engaging and self-deprecating Australian who has led an extraordinary life as an explorer, film-maker, and writer immersed in the culture of the steppes of Central Asia. He is an old fashioned explorer: not for him the thrill of being first to climb highest or move fastest with the help of some high-tech gadget. Instead, he travels using traditional local conveniences, savouring both landscape and culture. He meets and mingles with locals and lingers whenever opportunity arises and onward travel would be foolhardy.

“Journeys are integral to all our lives. They present testing challenges, moments of exquisite reward and insight, and times when you are racked by self-doubt and problems. Battling it out involves confronting fears, making yourself vulnerable, aiming for something worthy, and clinging onto self-belief and passion even when it seems that everything is stacked against you. In the end, a journey invariably offers us a chance to learn and grow and reach out for our dreams. I am still amazed at how things seem to work out in the most unlikely ways; it’s as if you just have to be willing to give it a go.

There is always something new to be discovered, something waiting to surprise us around the next corner.”

Mr Cope’s adventures in Central Asia began when aged twenty. After studying Russian, he and a friend cycled across Russia and Mongolia.

The duo was struggling to push their bikes through the rocky Gobi Desert when horsemen came thundering across the horizon rounding up a herd of wild horses. The young traveller was awestruck by the ease and freedom of the riders who were unconstrained by the presence or absence of roads or tracks. This was the start of his dream to ride across the steppes of Asia following the trail of Genghis Khan, the unifying 13th century ruler of the vast Mongol Empire.

It was several years before in June 2004 Mr Cope embarked on the 10,000km trip which would take him from Kharokorin – the capital of the old Mongol Empire – across the vast steppes to the Danube River, travelling on horseback following Genghis Khan’s route across the largest contiguous empire in history. He acquired local horses and travelled slowly, overwintering when conditions were too hostile to move on, and spending three months in a desolate almost– deserted Russian mining hamlet whose residents described it as the town “that god forgot.”

The adventure was not defined by the

destination: it was all about the journey. His trusty companion and confidante was Tigon, a singular Mongolian dog given to Mr Cope by a local who considered that the traveller needed someone to protect him from the wolves and keep him warm at night.

Tigon is a Kazakh sight hound. The Tazi breed is prized by nomads. The dogs are used for hunting hare and fox. Known for their endurance, Tazis have lived with nomads on the steppes for

probably thousands of years. After the journey, a passport was acquired for Tigon and he now lives Mr Cope’s family in Victoria. The horses that made the trip have settled in Hungary.

During the three-and-a-half year odyssey, Mr Cope immersed himself in the nomad society of the Eurasian steppe. The first four months were spent travelling across Mongolia. Reaching the Kazakh border he discovered he could not take the horses out of Mongolia as they were considered national treasures. Into Kazakhstan and with winter snapping at his heels, Mr Cope bought three Kazakh horses which carried him for the rest of the journey into Hungary.

It took 14 months to cross Kazakhstan and an additional six weeks to sort out Russian visa for his horses and dog. The first night in Russia, disaster struck when the horses bolted taking everything with them. After a night’s refuge at a local police station, the resident policeman announced that there was a solution: he had dreamed where to find the horses. They leaped into the police vehicle and set off to the lake which had featured in the dream. Sure enough, the belongings which had been strewn from the saddle started to appear, followed soon after by the horses.

Mr Cope registered his journey on video and has now made the remarkable footage into an award winning film. Long after completing his epic trek, Mongolia continues to exert a powerful pull on the 35-year old Aussie. Most of all, Mr Cope enjoys coming to know the people in their home environment by traveling about in traditional ways. He cites the old nomad wisdom: “to understand the wolf, you must put on its skin and see through its eyes.”

Mr Cope has spent the better part of a decade travelling across Russia, Mongolia, and Central Asia by bicycle, row boat, and on skis, horse, and camel. He now guides expeditions to Siberia and Mongolia. In July 2015, he was officially inaugurated as tourism envoy for Mongolia, and given the Mongolian Tourism Excellency Medal.

“I am very proud and honoured to have been acknowledged by the Mongolian people for my work in promoting the nation’s culture through books, films, and tourism. I think that the most important message the Mongolian culture carries for the rest of the world is one of living sustainably and harmoniously with the environment with a sense of tolerance, community, and friendship towards others.”

“I think that the most important message the Mongolian culture carries for the rest of the world is one of living sustainably and harmoniously with the environment with a sense of tolerance, community, and friendship towards others.”

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Autumn 2015 Issue

> VERA SONGWE Quenching Africa’s Thirst for Power

What are the prospects for smart, educated women in Africa? None too bad. Cameroonian economist Vera Songwe is carving out a high-flying career as an economist with the World Bank. Her job provides an opportunity to influence economic development in Sub-Saharan Africa.

Ms Songwe’s areas of expertise include governance, fiscal policy, competitiveness, trade, financial markets, and agriculture and commodity price volatility. She was listed as one of twenty “power women” in Africa by Forbes – the US magazine that celebrates and adores success.

Ms Songwe knows about Africa. Recently appointed as the International Finance Corporation’s (IFC, part of the World Bank group) regional director for West and Central Africa, her job involves attracting private investment in sectors including infrastructure, small and medium-sized enterprises, and agribusiness – all key for sustainable and inclusive development.

She writes: “Innovation in development financing has the potential to be a determining factor for rapid, sustainable, and inclusive growth over the medium term.”

A stellar academic career saw the polyglot

Ms Songwe garner undergraduate degrees in politics and economics from the University of Michigan. Ms Songwe then switched to Belgium’s largest French-speaking university in Louvain where in short succession she gained an MA in Law and Economics, a diploma in Economics and Science, followed by a doctorate in Mathematical Economics. She speaks English, French, Spanish, and Italian.

Ms Songwe was a visiting scholar at the University of Southern California and at the Federal Reserve Bank of Minneapolis in the US. She is a non-resident senior fellow at the Brookings Institute with the Global Economy and Development and Africa Growth Initiative.

She has published a number of articles on governance, fiscal policy, agriculture and commodity price volatility, and trade and new financial infrastructure.

She joined the World Bank Group in 1998 as a young professional and worked in the Middle East and North Africa in the bank’s Poverty Reduction and Economic Management Unit.

Ms Songwe then switched to the East Asia and Pacific Region where her roles included senior economist for the Philippines. She has worked in

Cambodia and Mongolia as country economist, managing different World Bank programmes before becoming the country director for five African countries: Senegal, Cape Verde, The Gambia, Guinea Bissau, and Mauritania.

Her latest promotion gives her the opportunity to leverage private sector investment into the larger region of West and Central Africa which includes her home country of Cameroon.

“Over the past few years, I have observed the significant impact of the private sector in advancing the aspirations of many countries,” said Ms Songwe. “I am honoured to have this opportunity to lead IFC’s team in providing the investments and advice that will help to further grow vibrant private enterprise, promote economic development, and create jobs.”

In September 2015, United Nations member states will decide on the sustainable development goals that will guide the global development agenda to 2030. The Common African Position (CAP) agreed by the African Union in January 2014 places emphasis on “structural transformation for inclusive and people-centred development.” Making this reality requires investment in infrastructure, basic services, and job creation. Difficult questions of peace, security, and governance also require attention.

In a recent interview Ms Songwe was asked what changes in Africa’s business environment are needed to encourage investment. On the supply side she says, “Africa must take care of three things: Energy, Energy, and Energy. Years ago, it were macroeconomic issues and then governance and then energy. But the limited availability and high cost of energy is now an even more important constraint than governance.”

Ms Songwe believes that governance issues are being addressed. However, the cost of production remains high: “On the agricultural side, many studies have shown that several African products are competitive at the farm gate – but then most of this profit is lost in transportation. Issues of trade facilitation and farm-to-market connectivity are also important elements of the competitiveness basket.”

The World Bank says its recruitment policy aims to seek out the brightest and most talented individuals from around the globe. It strives for a workforce that is diverse in gender, nationality, and ethnic background. Possessing a clear vision of the short, medium, and long-term actions needed to improve African economies, Ms Songwe’s latest role gives her the opportunity to influence development in her home region. That constitutes a formidable challenge.

“Innovation in development financing has the potential to be a determining factor for rapid, sustainable, and inclusive growth over the medium term.”

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> Brazil & Argentina:

Only One Getting Real

By Wim Romeijn

Brazil is just one step removed from facing its reality. With nearly all macroeconomic indicators pointing in the less desirable of directions, the country is facing a downgrade of its sovereign credit rating with S&P on July 28 changing its outlook on Brazil from neutral to negative. As it stands, the country is only a single notch removed from having its government bonds reduced to junk status.

P

ublic debt has ballooned to levels now deemed too high for an emerging market to maintain its investment grade status.

Even in the most optimistic of scenarios, Brazil’s debt-to-GDP ratio is expected to peak at around 73% in 2019 from less than 50% ten years ago.

Retreating into junk territory would imply an exit of institutional investors from the Brazilian bond market, driving up interest rates as they slam the door on the country. Most institutional investors are not allowed to buy or hold equities that are rated below investment grade. Currently, about a quarter of Brazil’s domestic federal debt is held by foreign investors.

Latin America Special

Their departure is expected to cause havoc in an already unstable market. Gone are the days that Brazil was universally hailed as the economic powerhouse of the emerging world, second only to China in its potential to change the global balance of economic power. However, with unemployment, inflation, interest rates, and debt levels shooting up and economic growth dipping into negative territory while consumer confidence remains weak, Brazil’s present looks dismal and the country’s future gloomy.

“Gone are the days that Brazil was universally hailed as the economic powerhouse of the emerging world, second only to China in its potential to change the global balance of economic power.”

GETTING REAL The administration of President Dilma Rousseff is valiantly attempting to replace its slant from ideology to pragmatism. The president started her second term in office with the intention of pursuing a much more ideologically driven set of policies designed to redress remaining social inequities. President Rousseff put long-serving finance minister Guido Mantega in charge of shifting to a more heterodox – and slightly less business-friendly – approach to economic management.

The stock market reflects this sorry state of affairs with the formerly stellar-performing Bovespa Index tumbling down from a high north of 60,000 to around the 46,000 mark. The second largest exchange in the Americas according to market capitalisation, the Bovespa is now even outperformed by the Moscow Stock Exchange whose MICEX Index eked out an 18.7% annualised return despite the international sanctions. As far as the BRICS economies go, Brazil is hanging on by a thread.

The administration’s pronounced shift towards more progressive policies coincided with a marked deterioration of Brazil’s terms of trade.

As the commodities boom ended and growth returned, albeit slowly, to both North America and Europe, investors traded the iffy outlook of an overrated emerging market for the certainties of generally under-appreciated traditional markets. Thus, Brazil got caught in the perfect storm: income from commodity exports fell off a cliff while foreign investors lost their appetite and government expenditure snowballed.

In the weekly survey of the prevailing sentiment amongst top economists, a poll conducted by Brazil’s central bank, most of those questioned agree that the country’s GDP will contract by close to 2.1% in 2015 after moving ahead a barely noticeable 0.1% last year.

In all fairness, the resulting economic downturn does carry a silver lining: the weak real and manufacturers seeking to compensate lacklustre domestic consumer demand via increased exports have managed to get the balance of trade back in black. Blamed, justly or not, for the

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country’s economic malaise, Guido Mantega was replaced by Joaquim Levy.

With a PhD in Economics from the University of Chicago – and as such a confidence-inspiring latter-day Chicago Boy – Mr Levy previously worked at the International Monetary Fund (IMF) and held a number of top jobs in the Cardoso Administration (1995-2003) and at state level. Known as “scissorhands,” Joaquim Levy promptly embarked on a mission to rein in expenditure, imposing budget cuts across the board, and taking to task colleagues who showed reluctance in complying with the restrictions on spending.

Brazil’s central bank has also let go of heterodoxy – a perennial policy favourite of the country’s left – to concentrate on its main task of keeping inflation in check. The stated goal of slashing the annual inflation rate in half to 4.5% by the end of this year is no longer within the realm of reality, much like Mr Levy’s promise to run a primary fiscal account surplus of 2% in 2015.

FALTERING ON ALL CYLINDERS Judging by the volume and intensity of criticism levelled against Mr Levy, one could be forgiven for thinking the minister is already heading towards the exit. However, President Rousseff – not usually accused of strong leadership – seems to be holding firm. Hers is not an enviable position at all: beset by protesters demanding her resignation or impeachment – both rather silly propositions – over the still escalating corruption affair involving state-owned oil company Petrobras, President Rousseff has but the smallest windows of opportunity to show leadership.

Brazil’s chickens are now coming home to roost.

While it was relatively easy for the first Workers Party administration to deliver the goods amidst a situation of overall plenty and unbound optimism, the second one requires a bit more vision and policy acumen in order to become a success.

As China is faltering as the engine of global

Autumn 2015 Issue

economic growth, demand for Brazil’s main commodities has slackened significantly. At the same time, low oil prices transform the country’s deep water drilling efforts into an expensive – and quite possibly losing – proposition.

With oil at barely $45 per barrel, the bonanza expected from the huge offshore fields could cause disappointment. Industry experts estimate that the deep water wells now producing 1.4m barrels per day – a volume expected to double by 2020 – need crude prices to hover around $60 in order to break even.

Both the United States and Europe also contribute to Brazil’s predicament: the former mulling an interest rate hike, and the latter showing weak growth and continued worries surrounding Greece and other trouble spots.

While Finance Minister Joaquim Levy and his team are making the right noises and know fullwell what needs doing in order for the country to return to sustainable growth, they depend on President Rousseff for authority and leadership.

That is troublesome, for Ms Rousseff has an increasingly vociferous left flank to contend with and is not really interested in economic matters.

Hers is – au fond – a government that prefers to concentrate on spending, rather than on generating income or cash flow.

A DISSONANT TANGO What happens when this is kept up long enough may be appreciated in next-door Argentina which has caused its neighbours nothing but trouble for the past decade. Argentina’s haphazard economic policies – more akin to a collection of ad hoc decisions than a framework for the management of the nation’s affairs – have caused Brazil and other countries in the region no end of trouble.

It first started in 2005 when Argentina left Chile – its neighbour on the western fringe of the Andes – out in the cold after it flatly refused to honour its obligations under a treaty signed in 1995 to supply natural gas, forcing the Chileans to scramble for prohibitively expensive alternative sources. The Argentinean government of the day, headed by Néstor Kirchner, reneged on its commitment to Chile solely to keep domestic energy prices artificially low and reap the resulting electoral rewards.

Brazil: Rio de Janeiro

It is, however, the Brazilians who have had to endure the brunt of Argentina’s seemingly never-ending antics. While both countries are CFI.co | Capital Finance International

Since the introduction of the much-maligned import control system in 2012, Brazilian exports to Argentina have dropped by nearly 20%. While it has been ruled illegal by the World Trade Organisation, the government in Buenos Aires has so far refused to dismantle the system.

Facing mounting obstacles and even outright hostility, Brazilian companies operating in Argentina have now joined forces to petition the government in Brasília to get tough with Buenos Aires. Brazilian corporations with a presence in Argentina have been prohibited from remitting profits, suffer price controls, and are often unable to keep production lines operating due to a shortage of imported parts and components.

While ignoring the country’s obligations under the Mercosur free trade agreement, the government of President Cristina Kirchner has actively tried to stop Brazil from pursuing a trade deal with the European Union. While Brazil’s other Mercosur partners Uruguay and Paraguay have already put all requisite trade liberalising measures in place, Argentina steadfastly refuses to implement the reforms necessary to clear the road towards an intra-block deal between the Mercosur and the European Union.

On the world stage, Brazil’s close association with an increasingly recalcitrant and contrarian Argentina has significantly weakened the country’s position and profile. Brazil has been instrumental in shielding its Mercosur partner from sanctions for failing to abide by the rules of the International Monetary Fund (IMF).

Argentina has consistently declined to provide the IMF with accurate data on its economic performance in violation of the fund’s articles of agreement.

Last year, Brazilian representatives rallied the support of other emerging market members to stop the IMF from throwing the book at the Argentineans. Though they managed to spare Argentina the worst, the Brazilians did end up with a reputation for tolerating rule-breaking behaviour.

WANTED: A LESS ABRASIVE LEADER However, the Kirchner era now seems to be drawing to its close – sort of. A general election is scheduled for October 25 and voters are slowly moving away from Kirchnerism in the direction of candidates proposing slightly more pragmatic policies for addressing the country’s lingering ills. However, and most significantly, Argentineans are not turning their backs on 147

Latin America Special

Uruguay, just across the River Plate from Buenos Aires, has suffered severe fallout from the currency controls Argentina imposed in 2012 to relieve pressure on the country’s dwindling foreign exchange reserves. The controls also kept Argentinean tourists at home. Uruguay responded by exempting visitors from VAT and offering rebates on holiday rentals, Argentinean vacationers never returned in significant numbers. Uruguay’s hospitality sector has yet to recover from this heavy blow.

founding members of the Mercosur trading block and customs union, trade flows between them have been subjected to a draconian regulatory system imposed by Argentina with the express view of reducing its imports. Any item ordered from abroad by a business or private person, no matter how small or cheap, must first be vetted and approved by the state. The process involves establishing a Kafkaesque paper trail that defies all but the most persistent of importers.

outgoing president Cristina Kirchner; they are just choosing a slightly less abrasive version of her in opting for Daniel Scioli, a former vicepresident and currently the governor of Buenos Aires Province – and as such the second most powerful politician of the country.

During their twelve years in power, the Kirchners – Néstor (2003-2007) and Cristina (20072015) – have expertly manhandled the nation into a time capsule: by any measure, progress has been negligible though the country’s economy fares not as bad as many outside observers and other assorted pundits would have their readers believe.

A high-income nation with the statistical appearance of a faltering pioneer market, Argentina presents a baffling conundrum to most observers brave enough to make an attempt at unravelling the country’s inner contradictions.

What most outsiders fail to appreciate is that Argentina, for all the urban swank of Buenos Aires, remains a rural nation perhaps best described as the agricultural equivalent of a gushing oil well.

While in Brazil the administration of President Dilma Rousseff is now determined to disentangle the country from its love affair with economic heterodoxy, no such thing is being considered in Argentina – not even by the front-running presidential hopefuls. There is a simple reason for this: the country has benefited tremendously from the near-record high prices that its agricultural commodities demand.

Latin America Special

For an economy that stands in dire need of maximising foreign exchange receipts on short notice, maintaining an overvalued currency may not make much sense: however, in Argentina it does. The high-riding peso essentially constitutes a tax levied on agricultural exports.

It is much more palatable to farmers than the export taxes that caused a widespread rural protests in 2008. The resulting inflow of cheap dollars helps spread the rural wealth around.

By keeping the dollar cheap – and mostly unavailable thanks to currency controls – the government is also able to cobble together and pursue an industrial policy by deciding which sectors are granted access to dollars, and which are starved of foreign exchange. The policy entails limiting imports by means other than tariffs and subsidising industry via a backdoor.

While the policy is, well, unorthodox in the extreme, it bears fruit: whilst inflation has been running at an annual average of 24% during President Cristina Kirchner’s second term in office, median wages have increased by slightly over 28% annually. Meanwhile, unemployment has remained stable at around 7%.

The heterodoxy is in the weighing of interests: whilst holders of peso denominated bonds may certainly prefer official policy to 148

“Since the introduction of the much-maligned import control system in 2012, Brazilian exports to Argentina have dropped by nearly 20%.” alleviate inflationary pressure, most workers and businesspeople would opt for keeping unemployment low and internal demand – boosted by rising wages – up.

THE ARGENTINE WAY It is the Argentine way – imperfect, perhaps, but surprisingly resilient and moderately successful.

It is also how the country managed to progress in the decades following World War II when Argentina enjoyed robust and sustained economic growth, with an attendant rise in living standards, while strict import and currency controls were kept in place. At the time, inflation hovered around twenty percent annually and the economy periodically suffered short, sharp recessions.

However, unemployment levels remained steady throughout and gains in living standards were mostly preserved.

After the turbulent 1970s, things turned awry each time heterodoxy was dumped to allow for a more monetarist approach. What the Kirchners concluded from the economic upheavals of the 1980s and 1990s was that orthodox monetary policy simply has no place in Argentina’s development model. The wider world may find this remarkable, seen from Buenos Aires’ perspective the conclusion was not entirely irrational.

The economic orthodoxy Argentina pursued during the 1990s pushed the purchasing power of the median wage down to barely 65% of its 1975 level. At the same time, unemployment levels jumped from the historical average of 6-7% to just shy of 20%.

Today, Argentina may not be a trustworthy international partner, left to its own devices the country is doing reasonably well. Argentina’s GDP has been expanding steadily, poverty levels are falling as are the number of jobless people, and inflation is high but not out of control. In fact, since the financial meltdown of 2002, Argentina’s growth has bested even regional top performers with prosperity levels now reaching almost 150% of the Latin American average, compared to 101% for Brazil, 128% for Mexico, and 138% for Chile.

Not bad for a notoriously contrarian nation. Just don’t believe a word coming out of Buenos Aires: Argentina’s discourse is meant for domestic consumption only and so is the country’s economic policy. i CFI.co | Capital Finance International

Argentina: Buenos Aires

Autumn 2015 Issue

> Energy Case Study:

Peru

By Penny Hitchin

P

eru is the third largest country in South America with a land area five times that of the UK. Peru has a long Pacific Ocean coastline buttressed by the high and rugged mountain ranges of the Andes which are flanked to the east by the heavily forested slope leading down to the Amazonian plains. The tropical latitude and varied topography give Peru a large diversity of terrain and climates including beaches, plains, deserts, mountains and rainforest.

“Peru’s energy sector is proving an attractive market for foreign investors and big consulting and construction firms.”

Peru has a vibrant economy but a small energy sector. Energy prices have been kept low by successive governments and both installed capacity and energy consumption are currently at modest levels. Increase in demand for energy is highly dependent on new mining investments.

Current growth levels of around eight per cent mean that the installed capacity will need to double within ten years from its current level of less than 8GW.

The last two decades of the twentieth century saw a worldwide trend for restructuring and liberalisation of state-owned electricity monopolies. The rationale was to unbundle vertically integrated power generation and distribution systems in order to attract private investment and increase efficiency. Globally, the standard reform model has arguably been most influential and far-reaching in Latin American countries.

Peru is blessed with rich energy resources. It has substantial reserves of proved onshore oil reserves in the Amazon region and third largest natural gas reserves in Central and South America, following Venezuela and Mexico. While difficult geography and a lack of investment means that much of the established reserves remain in the ground, the oil industry believes there is considerable unexplored potential for new discoveries.

Peru’s neighbour Chile pioneered privatisation of power generation and distribution systems and liberalisation of the electricity market with its 1982 Electricity Reform Act. In Peru the poor performance of companies, cross subsidy policies, political intervention in price regulation and adverse macroeconomic conditions were identified as the main drivers for change. Peru applied a standard reform model including the creation of independent regulator, unbundling, privatisation and wholesale competition in its electricity market reform which began in 1992.

The Peruvian power sector saw the generation, transmission and distribution activities of Electroperu and Electrolima unbundled as private companies emerged as a result of the reforms.

Currently six private companies own nearly all the high voltage transmission system, with the public sector owning some lines to supply remote areas.

Historically Peru relied on hydropower until natural gas from its huge Camisea field in the Amazonian rainforest came on-stream in 2004 and now electricity generation capacity is split equally between thermal and hydropower. Peru’s National Energy Plan for the decade to 2025 aims for sixty per cent of generation to come from renewable sources, including traditional hydro.

Renewable energy resources are excellent notably because Peru’s climate and terrain is so suitable for hydropower. The potential for wind and solar power is good, but a lack of infrastructure, regulatory framework and investment means that these new industries are in their infancy.

ELECTRICITY MARKET In 1972 Peru’s biggest electricity distribution

The last two decades have seen expansion of electricity coverage, reduction of distribution losses and improvements in quality (duration and number of interruptions). In 1990 only 45 percent of the population had access to electricity but this figure has doubled in the last thirty-five years.

CFI.co | Capital Finance International

Peru’s energy sector is proving an attractive market for foreign investors and big consulting and construction firms including Siemens, Alstom, Vestas and Voith are finding Peru a key emerging market to offset the decline of projects in Europe.

Development of an integrated electricity market is a key plank of a liberalised energy policy.

European countries transmission systems are linked with interconnectors bringing islands (including the UK) into the market.

Integrating South America’s energy markets could be advantageous, but political will as well as infrastructure is lacking. Peru’s previous government’s ambitions to turn the country into a regional energy hub, generating electricity from the Amazonian rivers and its abundant supplies of natural gas for export to Brazil and Chile foundered on social and environmental objections. An existing transmission line connecting Peru with Ecuador is under-utilised because the two countries cannot agree a price for electricity.

A recent report on Peru’s power sector by Londonbased Business Monitor International says: “We hold a positive outlook for Peru’s power sector, based on our forecast for strong growth in power consumption over the coming decade and abundant investment opportunities in both the generation and transmission and distributions segments. The energy-intensive mining sector and expanding consumer base will continue to drive economic growth in Peru - and by extension fast growth in power consumption. Growth in electricity generation will come primarily by additional hydropower and thermal (particularly natural gas-fired) capacity, but we also expect to see increasing investment into the solar and wind power sectors over the coming quarters. Delays to project implementation remain the main risk to our upbeat growth forecasts for this market.” i 149

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Peru is one of the region’s fastest growing economies. It is rich in mineral resources including silver, zinc, copper, molybdenum, lead and gold. Ores and minerals make up over half the country’s exports with China a key trading partner. Demand pull from Chinese manufacturers for raw materials is so significant that the strength of Peru’s economy shadows the health of the Chinese manufacturing sector.

network owner Electrolima was nationalised and a state-owned company Electroperu created with exclusive rights on national generation expansion. Peru’s public service system was organised into vertically integrated power utilities with Electroperú and Electrolima providing about two-thirds of the country’s electricity services through the national interconnected system Sistema Eléctrico Interconectado Nacional (SEIN) and nine regional companies providing the rest to isolated power systems.

Between 2006 and 2013 Peru increased access to electrical power to more than one hundred thousand low income rural households in a project to extend the electrical grid and install solar power systems. The project required investment of 145 million US dollars, with a World Bank loan accounting for around a third of the total. Schools, health clinics and community centres benefitted as well as householders and small businesses. The project was instrumental in the establishment of a national tariff for regulated service with household offgrid photovoltaic systems and led electricity distribution companies to devise and operate rural electrification subprojects as part of their regular commercial operations.

> Venezuela:

Hobbling from Bad to Worse

By Wim Romeijn

I

t’s a place where a kilo of grapes costs about ten times as much as a kilo of prime beef.

In fact, it is a place where people know the price of everything and the value of nothing.

Once upon a time the lone success story of South America and eons ahead of its neighbours, contemporary Venezuela is but a shadow of its former self. The nation has been looted by a long string of corrupt rulers duly replaced by a class of incompetent ones.

Now, Venezuela’s economy is not doing too well.

However, it is hard to quantify the crisis as the government declines to publish economic data.

Inflation is rampant, but its rate is anybody’s guess. The central bank stopped releasing price index data when annual inflation hit 68%. The bank likewise declines to publish figures on the country’s finances. Analysts at Ecoanalítica, a firm that helps foreign banks navigate the local markets, have since devised a proprietary price index which rose just shy of 130% over the last twelve months.

In its most recent report on the (sorry) state of the Venezuelan economy, Ecoanalítica places the budget deficit at around 20% of GDP. According to the firm’s analysts, economic activity is expected to contract by “at least” 4.2% in 2015.

The International Monetary Fund (IMF) is less optimistic still and forecasts GDP to shrink by as much as seven percent.

Latin America Special

Venezuela constitutes a singularly instructive example of how not to manage a resourcedependent economy. The country’s government has based its lavish expenditures on an oil price of $110 per barrel and failed to adjust. It also failed to sustain oil production at the anticipated level.

The typically extra heavy crude Venezuela supplies to world markets requires pre-processing in purpose-built upgraders where naphtha is added so that the resulting mix may be cracked in standard refineries. However, the country’s four upgraders are running at diminished capacity due to inadequate maintenance and an acute shortage of naphtha which similarly degraded local refineries are unable to produce in sufficient quantities.

State oil company Petróleos de Venezuela, bled dry of funds by the current and previous administration, has been forced to import naphtha at market prices. This drove up production costs to around $40 a barrel – the exact same amount Venezuelan crude commands on the world market. The country – dependent on oil exports for 96% of its foreign exchange earnings – now sells a significant part of the crude it produces at cost.

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While sitting atop the largest proven reserves of oil in the world, most of Venezuela’s recoverable crude – up to 300 billion barrels – is of the extra heavy variety found in the Orinoco Belt. The country’s reserves of lighter crudes are dwindling fast and now stand at slightly less than 20 billion barrels.

Plans to ramp up oil production to six million barrels per day (bpd) by 2019 look increasingly unrealistic. Reduced profit margins discourage oil companies from investing the estimated $110bn needed to halt and revert the current decline of production levels. According to the International Energy Agency, Venezuela’s oil production has retreated from 3.5 million bpd in 1998 to an average of barely 2.3 million bpd last year.

It would thus seem rather unfair to blame Venezuelan president Nicolás Maduro for the economic downturn: his administration not only needs to absorb the losses resulting from the precipitous drop in oil prices, but also faces declining production levels. As far as President Maduro is concerned, his country has, at best, fallen prey to circumstance and, quite possibly, to the machinations of evil foreign empires.

Everybody is to blame, but the government itself.

Meanwhile, Venezuelans get a taste of how life used to be in the countries of the former Eastern Bloc with supermarkets featuring empty shelves, a thriving black market, and shoppers hoping – perhaps against better judgment – that some staple such as sugar or flour may miraculously materialise. Queues of clueless people string the sidewalks leading up to mostly empty governmentrun stores where the arrival of any delivery truck causes a frenzy.

Without a domestic industry to speak of, Venezuela relies on imports for even the most basic of everyday necessities. However, importers are unable to obtain the dollars needed to pay for merchandise. Currency controls have also affected pharmacies which now lack even the most basic medicines.

Price controls – enforced by the army which regularly storms the premises of “saboteur” shopkeepers to distribute whatever merchandise left to anyone lucky enough to be passing in a form of officially sanctioned looting – ensure that even local suppliers prefer to halt production. Beef may be cheap, but is not on the menu. As the Bolivarian Revolution descends into the realm of madness, police forces raid ranches to round up cattle and armed militiamen guard shipments of toilet paper.

However, as the crisis deepens, some strike gold.

The select few with friends in high places keep busy carting off part of the country’s foreign exchange CFI.co | Capital Finance International

reserves. It is estimated that last year alone, up to five billion dollars seeped into the parallel economy via fraudulent currency transactions whereby dollars are bought at the official exchange rate only to be resold on the black market at mark ups of 2,000% or more. The central bank operates three exchange rates with the lowest two reserved for the payment of imports deemed essential such as food and medicine. However, for every ten dollars sold at the lowest rate, only three dollars’ worth of goods actually reaches Venezuela.

Private business is hurting too. Airlines are threatening to cancel all flights to and from the country now that the government has decreed that the proceeds from local ticket sales may only be repatriated using the highest exchange rate, even though the tickets were sold at the lower rate. The carriers sit on a $3.6bn pile of bolivares which may ultimately be worth around $140m – a 96% loss. Earlier this year, Spanish telecom operator Telefónica took a $3.2bn loss after the company was bumped to a higher exchange rate. Ford Motor Co. had to write off $800m on its Venezuelan subsidiary while Clorox Co. simply pulled out of the country.

The Bolivarian Revolution, unleashed by paratrooper-turned-president Hugo Chávez in 1999 and inherited by bus driver Nicolás Maduro upon the former’s death in 2013, is now in deep trouble. Spending on large-scale distributive programmes has been curtailed as the government can no longer afford to bestow its largess on Venezuela’s poor. So far, President Maduro has been able to keep his administration afloat, thanks to an ineffectual and fractured opposition which is easily intimidated and suffers from political infighting amongst its members.

While President Maduro’s term in office does not expire until 2019, the country is now gearing up for legislative election scheduled to take place on December 6. No less than 29 opposition parties have joined forces – not entirely without argument – in the Democratic Unity Roundtable to wrestle power away from the ruling United Socialist Party which has not lost a vote since Hugo Chávez came to power sixteen years ago.

According to opinion polls, over two thirds of those questioned disapprove of President Maduro’s handling of national affairs with 58% willing to consider voting for an opposition party. However, those same polls show that the Democratic Unity Roundtable fails to make an impression with more than half the voters distrusting its intentions.

While Caracas is burning, do not expect its inhabitants to oust their rulers just yet. i

Autumn 2015 Issue

> Electrotango:

Tango With a Club Beat

By Wim Romeijn

T

ango may be timeless, it is also on the move with its fringes drifting away from melancholy to embrace modernity.

Connecting with a younger crowd inhabiting the club scene rather than the ballroom, Electrotango is now approaching the mainstream. A fusion of the classical tango argentino with pulsating electronic beats and, at times, topped with a smooth sprinkling of jazz notes, Electrotango was showcased at the 2014 Glastonbury Festival – one of Europe’s largest outdoor music events – when the eight-member Argentinian / Uruguayan ensemble Bajofondo, billed as South American trip-hop, took to the Other Stage and managed to promptly draw a significant crowd away from the main event.

Music with purpose, style, and – most of all – punch: Bajofondo’s interpretation of Electrotango usually gets noticed. Its latest hit track Pa’ Bailar received intensive radio play in the United States after it was prominently featured earlier this year in the CBS television series The Good Wife. As the series’ star Alicia Florrick (Julianna Margulies) strutted down a Chicago sidewalk to the Bajofondo beat after yet another victory in court, the group saw online sales of its albums skyrocket.

Electrotango’s ascendancy received a gentle push from the members Kraftwerk, the German pioneers of electronic music who were much awed by the Tanghetto cover of their hit Computer Love.

Tanghetto was formed in 2002 by songwriter Max Masri who almost single-handedly redefined Argentina’s national genre by adding electronic drums, samplers, and synthesisers to the standard tango instrument fare of bandoneon, violoncello, and acoustic piano and guitar.

Emigrante was nominated, but failed to win, in two categories of the Latin Grammys. Less concerned with convention, the judges of the Premio Gardel – the Argentinian music industry awards – handed the band two wins. Now touring Latin America, with occasional escapades to Europe and North America, Tanghetto has reached a cult-like status as the fearless pioneers of electrotango going as

Gotan Project

far as retouching – or better, reassembling – the almost sacrosanct songs of all-time tango great Astor Piazzolla. They’re getting away with it too.

As with traditional tango, Paris – and not necessarily Buenos Aires – has been instrumental in the development of electrotango. It was in the French capital the Gotan Project was formed in 1999 around Argentine musician Eduardo Makaroff and a few of his friends. Their 2001 La Revancha del Tango (Tango’s Revenge) album was “discovered” – albeit belatedly – by British DJ Gilles Peterson who featured it on his BBC Radio 1 show in 2004, propelling the Argentinian/French/Swiss band to almost instant fame. That same year, the movie Shall We Dance? – starring Jennifer Lopez alongside Richard Gere – featured a song from the La Revancha del Tango album for its breath-taking dance sequence.

“Everything changed as soon as we decided to CFI.co | Capital Finance International

apply electronics to tango, producing something that simply had not existed before. While many predicted that by doing so Gotan Project had willingly confined itself to the outer reaches of the music scene, if not its underground, amazingly enough the whole thing just worked and became a huge success without any marketing effort on our part,” remembers Eduardo Makaroff. La Revancha del Tango went on to sell over a million copies: “From messing around with specialist vinyl records for DJs that had a press run of at most a thousand, we all of a sudden found ourselves surrounded by record company executives eager to sign us on.”

Though there is some dispute, often quite acerbic, amongst music critics about the inventors of electrotango, the two most likely candidates – Gotan Project and Bajofondo – couldn’t care less.

Band members figure the world offers a large enough stage for both to upset convention. And so it does. i 151

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The release of Tanghetto’s first album Emigrante (electrotango) in 2003 coincided with yet another of Argentina’s interminable series of economic depressions and captured the moment with finely composed lamentations on the sorry state of the nation and the departure of almost an entire generation of talented young people to foreign – and more prosperous – shores. Promptly, parallels were identified between Tanghetto and the UK’s Massive Attack in the “smoky textures and delicate piano lines” that the Los Angeles Times’s music critic keenly detected.

Bajofondo

> CFI.co Meets the Executive Chairman of Commonwealth Bank:

William B Sands Jr

W

William B Sands Jr has become an institution within an organisation that is one of the most respected and admired in The Bahamas.

over 6,500, Commonwealth Bank enjoys a synergy with the Bahamian people that no other institution can match.

The bank also knows its market like no other.

With around seventy per cent of its business in consumer lending, Commonwealth Bank understands the financial needs of ordinary Bahamians and tailors its service to perfectly fit those requirements.

Mr Sands took up the post of executive chairman of Commonwealth Bank Limited on January 1, 2011, in what was seen as a fitting recognition for a career spanning forty years during which he has attained iconic status. “I have had the opportunity to employ and assist in the development of a large number of our management staff who are still with us today.

This has been immensely satisfying.”

“One of the main factors behind our success is the bank’s core values of providing customers with outstanding services and helping them achieve their financial goals, while being responsible and effective financial managers.

This has helped us generate and retain a phenomenal amount of support and good will from the average working Bahamian,” said Mr Sands.

Mr Sands is the fourth Bahamian in Commonwealth Bank’s 50-year history to be named chairman of the board of directors, and the first to be appointed executive chairman. He served in a wide variety of senior management and executive roles in Grand Bahama and New Providence before being appointed the bank’s president and chief executive officer in 1997.

Mr Sands is a graduate of the Richard Ivey Business School at the University of Western Ontario and has been a member of the board of directors since 1990. In 2004 he was named Executive of the Year by the Bahamas Financial Services Board.

“We provide a complete range of products for personal banking as well as mortgages and commercial loans. The remit from my board, when I was appointed executive chairman, was to continue to do what we have always done, namely, be the leader in personal banking.”

Mr Sands is one of a number of executives at the bank who have established its business ethos and practices. “Over the past forty years, we have built considerable customers loyalty.

It is therefore imperative that our young staff coming on board understand our philosophy and continue to do what it takes to ensure that every customer is treated with the greatest of respect and appreciation. One of our thrusts is training at every level throughout the bank, particularly within the ranks of our junior management. My job is to prepare this institution for the next level of management.”

He is clear that his appointment to the top job will make little difference to the way Commonwealth Bank goes about its business. He will ensure continuity of the business philosophy that has produced such an impressive track record over successive decades.

Even the global economic downturn, which still lingers, had little impact on Commonwealth Bank’s financial performance. The bank has registered an enviable record during this period.

“If we all stay committed, this year will be another great year for the bank, notwithstanding the major challenges in our economy. Our motivation is our competitors. We firmly believe we can continue to own a larger slice of the pie, so to speak. We won’t have to wait for the economy to turn around, we just have to continue to improve customer service at every level.”

Indeed, customer service is at the very heart

“I have discovered over the years that the best bankers we have, for our area of banking, are the ones we develop from within.”

Executive Chairman: William B Sands Jr

of Commonwealth Bank’s success story. The bank has built its outstanding reputation on an unrivalled commitment to the welfare of its customers and, with a shareholder base of

“Commonwealth Bank has never been about me. As they say, “the team work makes the dream work,” and I have been fortunate enough to work with a heck of a lot of good, committed and professional people throughout the whole of my career here.” i

“One of the main factors behind our success is the bank’s core values of providing customers with outstanding services and helping them achieve their financial goals, while being responsible and effective financial managers.”

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Autumn 2015 Issue

Your partner in financing public infrastructure projects in Mexico

+ 52(55) 5326.8600 www.interacciones.com CFI.co | Capital International Paseo de la Reforma 383 Col.Finance Cuauhtémoc C.P. 06500 Méx., D.F.

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> Grupo Financiero Interacciones:

Facilitating Development Grupo Financiero Interacciones (GFI) is the largest specialised financial group in Mexico focused on providing government and infrastructure lending, risk management, and financial advisory services to the domestic public sector.

T

he group ranks third in government lending in Mexico and serves a customer base that includes the federal government, states, municipalities, as well as government suppliers.

The company focuses on innovative lending alternatives that support the development and growth of the country, offering timely and personalised services to clients from the very beginning of their projects, while providing solutions that adjust precisely to their evolving needs. Banco Interacciones, which represents over two-thirds of total group assets, is complemented by a brokerage subsidiary, Casa de Bolsa Interacciones, and an insurance unit, Aseguradora Interacciones. The group employs more than a thousand people and is present in 35 major cities and 16 of Mexico’s 32 states.

GFI’s successful execution and focused low-risk business model – in which approximately 90% of the company’s loan portfolio is secured by federal government contributions or guarantees – has delivered superior loan growth and profitability, reporting more than ten years of consecutive quarterly profits.

HISTORY Grupo Financiero Interacciones has achieved a long track record of success and profitability.

Since the acquisition of the insurance company, now Aseguradora Interacciones, in 1966, GFI has grown organically and now is Mexico’s leading financial group specialised in government and infrastructure lending.

An important milestone was the creation of the brokerage firm in 1987. Around the same time, GFI began structuring credit vehicles to finance infrastructure projects such as toll roads, airports, and water dams.

With new financial regulatory policies coming into effect in the early 1990s, the company in 1992 created the financial group by combining its insurance and brokerage firms. A year later, GFI obtained a banking license and in 2001 created a mutual fund company – completing the expansion into a financial group.

A pivotal development in the history of the group was the appointment, in 2000, of Carlos Hank 154

“The group employs more than a thousand people and is present in 35 major cities and 16 of Mexico’s 32 states.”

González as CEO. This was also an important time for Mexico. As the new CEO, Mr González’ responsibility was to set the strategy and direction of the group to deliver growth and profitability.

A key component of his strategy was to focus the company on government and infrastructure financing. As a result of his vision and its successful execution, Interacciones is now the third largest government lender in Mexico and ranks first if measured by financed customers.

By 2011, GFI’s assets exceeded MXN 100 billion and profits totalled more than MXN 1.3 billion.

While Grupo Financiero Interacciones has been a publicly traded company since 1993, the followon offering in October 2013 is a key milestone in its development and provided additional capital to pursue further growth plans, while enhancing the group’s visibility and increasing its stock liquidity.

During 2014, the company continued to strengthen its market leadership position in the different segments it operates, while launching new financial products to effectively serve the needs of clients. Mr Carlos Rojo Macedo was appointed CEO of Grupo Financiero Interacciones in 2014, replacing Mr González who stepped down from this position to accept the nomination made by a group of Banorte shareholders to join that bank’s board of directors. Mr Rojo Macedo played an integral role in the development and implementation of GFI’s strategy and business model, holding different senior management positions since 2000.

GFI’s solid growth path continues in 2015, highlighted by a running track record of more than ten years of consecutive quarterly profits.

BUSINESS MODEL Grupo Financiero Interacciones operates an CFI.co | Capital Finance International

integrated business model that is based on specialisation and tailor-made products. The main lending business serves three specific banking segments: Government Lending In government lending, GFI targets the federal government, states, and municipalities and is the third largest player in this segment with a 15.9 % market share. The group’s in-depth knowledge of banking regulations enables it to originate wellstructured loans, while thirty years of expertise in government lending allows the group to offer prompt, complete, and high quality responses to its clients.

GFI is locally based – and knows the market – and responds quickly. The group benefits from three core competencies: detailed analysis of the financial status of each of the 32 states in Mexico; an in-depth understanding of local regulations; and, a local government credit risk model. GFI views government lending as a very appealing proposition based on this segment’s attractive risk-return profile which is further enhanced by structuring fees; fast time to market; and low-risk nature due to loans that are highly collateralised. In fact, in this segment GFI has achieved strong growth combined with close to 0% NPL ratios and lower-than-average capital requirements.

Infrastructure Lending With over three decades of experience in infrastructure lending, GFI is one of the leaders in this growing segment in Mexico. The group has expanded its infrastructure loan portfolio at a compounded annual growth rate of 35.26% during the past two years and manages a portfolio that is well diversified with projects across multiple sectors. The country’s energy and fiscal reforms, for instance, further bolster the growth outlook for this sector.

SME Banking Consistent with GFI’s specialisation philosophy, the group only serves SMEs that are suppliers to the government. It does so with two products: working capital for specific projects and factoring. GFI has over twelve years of experience in providing SME loans to federal government suppliers. For example, the group was a pioneer of the “Productive Chains” factoring programme

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funded by NAFIN to finance federal and local government suppliers. The Mexican government makes it mandatory for all federal government institutions to publish their bills to suppliers through NAFIN’s “Cadenas Productivas” programme, reinforcing the group’s favourable outlook for this initiative. Today, GFI is the undisputable leader in the federal government segment of this programme.

INSTITUTIONAL STRATEGY Interacciones will continue to focus on government lending, a market in which it has vast expertise and where enormous potential is found.

Strategy Summary: • Increase GFI’s penetration in the three lending segments by targeting new municipalities, increasing the company’s share in infrastructure financing projects and factoring to government supplier SMEs. • Further improve the funding structure while maintaining capitalisation levels • Continue to drive synergies and maintain low operating costs • Achieve organic loan growth, increase GFI’s national footprint and pursue strategic external growth opportunities, leveraging the proceeds from the follow-on offering.

REASONS TO INVEST Through its specialisation in government and infrastructure lending, which makes up approximately 90% of the loan portfolio, Grupo Financiero Interacciones offers investors a unique vehicle for participating in the transformation and growth of Mexico’s economy.

In the group’s government and infrastructure lending operations, including SME banking to federal government suppliers, it has established strong client loyalty, a solid understanding of complex legal and administrative processes across states and government entities, and efficient, specialised credit risk models.

ONE OF THE MOST EFFICIENT FRANCHISES IN MEXICO’S FINANCIAL SYSTEM GFI’s focused business approach, lean operating structure, and non-branch operation delivers bestin-class operating efficiency and an outstanding efficiency ratio. Among Mexico’s financial groups, the group ranks first in operating efficiency and fourth in efficiency ratio, with figures of 1.67% and 43.29%, respectively, as of 2014.

HIGH PROFITABILITY AND REMARKABLE CONSISTENCY GFI stands out as one of country’s most profitable financial groups, with an average ROAE in excess of 19% over the past five years.

Furthermore, Grupo Financiero Interaccciones CFI.co | Capital Finance International

has been consistently profitable with a track record of more than ten years of consecutive quarterly profits.

LOW-RISK, HIGH-QUALITY ASSETS, AND PRUDENT CAPITALISATION GFI operates in one of the lowest risk segments of the industry given that government-entity loans are essentially risk-free compared to other loans in the financial system. Primary and/or secondary federal government entities fund approximately 90% of the group’s loan portfolio, resulting in a low-risk business model with strong asset quality.

In fact, GFI’s NPL ratio of 0.14% ranks second in Mexico’s financial system.

SOLID GROWTH TRACK RECORD AND OUTLOOK Over the past several years, GFI has achieved mid-teen 16% CAGRs in total loans as well as net income, reinforcing the merits of its focused business strategy. The group plans to augment future growth by increasing its footprint beyond the 16 states currently served. Mexico’s compelling macroeconomic fundamentals and reform agenda, along with industry-specific drivers, bolster the group’s growth outlook. As government spending increases on infrastructure and other projects, GFI will be there to provide the financing and facilitate the country’s future development. i 155

> Commonwealth Bank:

The Financial Success Story of The Bahamas In a land blessed with an abundance of sunshine and sophisticated offshore finance options, a bank that started out from modest beginnings has emerged as the financial services success story of The Bahamas. Fully locally owned and operated, Commonwealth Bank has figuratively taken the financial services sector in this rich island archipelago by storm, outperforming giants like RBC, Scotiabank, and CIBC First Caribbean. In 2014, the bank that has been compared to “the little red engine that could” was the nation’s most successful retail bank.

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n 2014, while the Bahamian operations of major international commercial banks were shrinking – with some closing branches and laying off staff – Commonwealth Bank reported one of its best years ever with profits of just over $53 million on assets of approximately $1.5 billion. The bank has 6,000plus shareholders, 560 employees, and operates 11 branches on the islands of New Providence, Grand Bahama, and Abaco. It pays dividends quarterly and has done so since it went public in the year 2000.

Additionally, in most years the bank has also paid an extraordinary dividend. The bank was one of the first companies to list on the Bahamian International Stock Exchange when it launched in May 2000. The issue was so successful that the Commonwealth Bank was the largest public company in the Bahamas based on the number of shareholders, until 2013. Many of those shareholders were customers of the bank. The share issue was targeted towards being affordable to the ordinary working Bahamian whose custom had fuelled the success of the bank.

The prominence to which the bank has risen would not have been conceivable when Commonwealth Industrial Bank was born in the early 1960s. Launched as a subsidiary of a Canadian finance company, the bank commenced business by purchasing the charge accounts from a furniture store. Two decades later, as the Canadian economy was struggling and Canadian banks everywhere feeling the effects, the widow and son of the first premier of The Bahamas, the late Sir Roland Symonette, put together a small group of Bahamian investors and bought out the then-Canadian parent, The National Bank of Canada in 1984. Total assets at the time were some $17 million.

The new owners fed funding into the previously starved bank, and the rest is history. Still 156

“The bank was one of the first companies to list on the Bahamian International Stock Exchange when it launched in May 2000.” focused on domestic consumer lending, the Commonwealth Bank introduced the first Bahamian dollar denominated credit card for Bahamians. Other innovative lending products soon followed. The most recent innovation has been offering Saturday banking services to the Bahamian public.

Faced with scepticism that a local bank could compete with the foreign giants, Commonwealth Bank established a clear identity over the years that followed, buying and constructing flagship branches that are instantly recognisable – stately soft grey buildings with an island feel topped by white Bermuda hip roofs. Most of the other financial institutions in the nation lease nondescript property.

Commonwealth Bank Branch

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The bank has focused on establishing itself as a leader in corporate governance and transparency in financial reporting to shareholders and regulators alike.

Commonwealth Bank also never lost touch with the ordinary working Bahamian and perhaps this is exemplified most by the bank’s current executive chairman, who has worked at the bank for over forty years, joining at the lowest level and working up to the highest position. Unlike the competitors who have to find staff overseas and bring them in on work permits, Commonwealth Bank has been able to staff itself without having to resort to staff on work permits. In a country of 300,000 people, this has been a notable achievement.

“The bank’s ascent is clearly reflected in our slogan, Commonwealth Bank, The Leader in Personal Banking Services,” says President Ian Jennings. “Customers feel like they have a personal relationship with the bank. In a way, it is a bit of a throwback to days gone by when people connected with each other. But that connection is now backed by technology that lets us deliver with reliability and speed.”

The bank has managed its credit risk exposure

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Fix It,” says Mr Jennings. “This is a case of being cautious and prudent in a volatile market, watching operational costs carefully, and deciding to grow slowly and steadily. When you don’t know exactly what lies ahead because you are not the one creating your economy, and you are only playing your part in it, you just put one foot in front of the other and tread gently.

Commonwealth Bank has always been the conservative consumer-oriented bank with the common touch. People felt they could turn to us when there was a need. We wanted to be there for them whenever we could.”

That does not mean the bank was giving away money with the hot coffee that is always freshly brewed at its eleven branches. The majority of its lending is backed by salary deduction payments, a safety net that has allowed the bank to spread a higher quality of living to those citizens who meet the basic requirement of holding a secure job.

What those profits have meant is that Commonwealth Bank has been able to contribute to the community. Its outreach touches just about every segment of society and every need imaginable. Last year’s contributions in outright gifts and grants totalled more than $400,000 helping to support over fifty organisations.

That generosity is more significant given that there are no tax breaks for charitable donations in The Bahamas. What happens to the profits is up to the corporation and while many businesses pocket the lion’s share, others like Commonwealth Bank prefer to reinvest. The bank shares with the public and with shareholders.

Its greatest contributions, though, have been to education – more than $1.5 million in less than a decade – funding everything from backpacks and school supplies for thousands of returning students to underwriting a scholarship program at the College of The Bahamas for the Emerging Leaders Programme.

Performance against industry: impaired loans - 90 days + arreras.

In July, the bank made its single largest donation to date – a $50,000-a-year, 10-year pledge to the Cancer Society of The Bahamas, one of the country’s best-run and most needed NGOs. The society operates a residential cancer caring centre for patients undergoing treatment, and manages ongoing education and screening programmes in addition to providing many other free services.

Earnings per share and dividends per share.

by focusing on relatively small consumer loans.

Its average loan balance at December 2014 was less than $18,000. It is a formula that has worked especially since the global meltdown of 2008. The bank has worked extensively with its customers since then, helping them through the recession by amending loan terms. It has done so in a way that gives the bank the best protection against default and adjusting loan impairment allowances accordingly.

impacted the real estate mortgage market, resulting in default rates amongst the highest in the region, has not impacted the bank as significantly as it did its competitors due to the smaller composition size. The Bahamian economy continues to struggle with problems over the completion of the $3.5 billion Baha Mar development, high unemployment, and ratings agency downgrades, yet the bank still maintains a positive outlook.

The protracted economic downturn which has

“This is not a case of If It Ain’t Broke, Don’t CFI.co | Capital Finance International

Throughout its history, rising from a drawer collecting funds for front room sofa sets to being the most successful clearing bank in The Bahamas, Commonwealth Bank’s story has been delivering steady performance and solid returns on investment plus dividends for its shareholders.

Commonwealth Bank is on an even keel with a cautiously optimistic outlook and a continuing commitment to conservatism, aimed at allowing the bank to retain its top position and remain what it declares itself to be, the Leader in Personal Banking for Bahamians. i 157

> CIBC FirstCaribbean:

Client-Centric Banking Taken to the Next Level Eleven years on, CIBC FirstCaribbean continues to deliver cutting edge Internet Banking solutions. When the bank – formerly known as FirstCaribbean International Bank – launched a new internet banking platform in December 2004 to its then fifteen member-country footprint, it knew it was on to a good thing.

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ith a growing demographic of customers demanding banking solutions to meet fast-paced lifestyles, the bank took a bold step to convince them that this new medium would provide all that they asked for, with tight security controls and guaranteeing a more efficient processing of banking transactions to effectively eliminate the onerous task of waiting in long lines in the banking halls.

BACKGROUND & THE EARLY YEARS Launched as a quick, convenient, and secure alternative to in-branch banking, CIBC FirstCaribbean’s Internet Banking product was born out of the strong commitment to become the primary financial services provider throughout the region by placing the clients’ needs at the very centre of all operations. At the end of 2004, the bank’s retail banking segment had already embarked on an ambitious project to change its sales and service delivery model.

The essence of this revitalisation exercise was to create a more nimble organisational structure in which sales specialists would be more empowered to determine and deliver complete solutions to the bank’s customers. This more customer-centric model resulted in key changes including a more proactive approach to sales.

The bank’s Internet and telephone banking services got off to a good start in 2005 with levels of subscription increasing over the months following. Later that year, the service gained additional features and functionality such as an online bill payment facility and the ability to issue international wire payments.

These added benefits clearly established the

“A key selling point was that customers could better track their spending and view transactions in real time.” bank’s electronic channel offerings as first among equals across the region.

A key selling point was that customers could better track their spending and view transactions in real time. Moreover, they could do so from the comfort of their own homes or offices and recapture lost productivity from standing in line to perform the exact same transactions.

Now, clients could delight in the new interface that promised ease of navigation to perform transactions that have today become second nature to them.

Internet banking has now evolved into a staple among households and businesses across the region as customers have availed themselves of products and services that are best supported through Internet banking such as managing credit cards, choosing from amongst a range of savings and chequing accounts, each carefully designed to fit and complement particular lifestyles.

As the bank’s brand continues to evolve, that early promise to maintain a customer-centric focus remains the CIBC FirstCaribbean’s raison d’être with its core value system resting on a keen desire to build enduring client

relationships through both trusted advice and superior service.

CURRENT STATE OF AFFAIRS In the eyes of its customers, there is little doubt that CIBC FirstCaribbean’s Internet banking platform has surpassed all expectations – and there is yet more to come. According to David Small, director of Alternate Channels and group head of Strategy, there are more than 86,000 active users of the online application and its numbers are growing steadily as a result of the bank’s intensive cross-sell efforts which make Internet and mobile banking sign-up a prominent feature of the client acquisition process.

According to Mr Small, the bank is continuously improving this service as the clients’ needs evolve: “We’re focused on usability – making the rich feature set easy to use. That is how we are creating value for our customers.”

Today, CIBC FirstCaribbean’s Internet banking platform boasts the following features: • Superior usability and ease of navigation – online banking made simple • Real-time transactions and information to make managing finances easy. Customers can: • Check balances and view transactions online • Make electronic wire payments to beneficiaries locally and worldwide • View transactions for the past six months • Pay bills online • Pay third parties • Order chequebooks • Transfer funds between same currency chequing & savings accounts • Multi-factor authentication for wire payment transactions

“Launched as a quick, convenient, and secure alternative to in-branch banking, CIBC FirstCaribbean’s Internet Banking product was born out of the strong commitment to become the primary financial services provider throughout the region by placing the clients’ needs at the very centre of all operations.”

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Most of all, the bank is proud of its green initiative that has now seen the implementation of online statements for all internet banking clients.

CIBC FirstCaribbean’s managing director of Technology Operations and Corporate Services, Jude Pinto observes that the superiority of online banking has been built on a solid technological and operational infrastructure which has made the system the success it has been to date.

“The bank strives to ensure that every transaction is processed with flawlessly, with an emphasis on completeness, timeliness, accuracy, and speed. As a result, it has been able to deliver a set of enhancements that provide new capabilities in the areas of payments, information security, encryption and compliance, amongst many others. With our new thrust to provide an integrated customer experience in an increasingly digital age, we will be continuing our efforts to provide a cost effective and secure infrastructure, in an evolving environment that always meets the needs of CIBC FirstCaribbean’s clients – both businesses and private accountholders.”

PROSPECTS The future is indeed bright for this awardwinning regional institution which, since inception, has been internationally recognised by global financial analysts for its excellence in providing cutting edge financial solutions to over 429,000 clients.

The excitement that surrounds these achievements is best summed up by the institution’s managing director of Customer Relationship Management and Strategy (CRMS), Trevor Torzsas: “There is little doubt that our mission in 2015 and beyond remains the maintenance of our high standards and sustain performance in all spheres of service delivery. We can only get better.”

“We are still a relatively young bank and are amazed at all of the things we have managed to achieve over the years. Customer satisfaction and service are important to us and we constantly undertake a range of customer surveys. We also engage in mystery shopping and subject both our own operations and those of competitors to regular benchmarking surveys.

At CIBC FirstCaribbean, we take customer satisfaction, market share, and economic forecasting seriously and carry out new product development to anticipate customer needs. Our innovation brings great products to the market and our client-centric focus will be our hallmark as long as we are in business,” Mr Torzsas concluded.

With the commitment of 2,900 employees providing their daily expertise and exhibiting a drive to succeed, along with the support of its customers, CIBC FirstCaribbean is well poised to do just that. i CFI.co | Capital Finance International

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> World Bank Group:

Ask Citizens Where Public Money Should Go - The Surprising Results

By Tiago Peixoto

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s citizen engagement gains traction in the development agenda, identifying the extent to which it produces tangible results is essential. Participatory budgeting, a process in which citizens decide upon and monitor budget allocation, offers promising results, including increased local government revenues and reduced infant mortality.

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PROMOTING CITIZEN ENGAGEMENT: A QUEST FOR EVIDENCE In recent years, there has been a growing interest in citizen engagement as a means to promote better development outcomes. The Open Government Partnership (OGP), for instance, is a multilateral platform where governments from 66 countries commit, amongst other things, to promote public state structures that are more CFI.co | Capital Finance International

open, participatory, and accountable to their citizens. Similarly, Making all Voices Count is an international initiative supported by private donors and development agencies that provides funding to projects which aim to promote “citizen engagement and open, responsive government.�

The rationale behind this renewed enthusiasm

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However, a clearer picture emerges when we examine some particular practices that fall under the general “citizen engagement” umbrella, of which participatory budgeting is one. Originating in the Brazilian city of Porto Alegre in 1989, participatory budgeting (PB) can be broadly defined as the participation of citizens in the decision-making process of budget allocation and in the monitoring of public spending. Experts estimate that up to 2,500 local governments around the world have implemented PB, from major cities such as New York, Paris, Seville, and Lima, to small and medium-sized cities in countries as diverse as Poland, South-Korea, India, Bangladesh, and the Democratic Republic of Congo.

Over the years, PB has attracted significant attention from scholars and development professionals. As it reaches over a quarter-century of existence, it is generating a substantial amount of evidence of the benefits of involving citizens in budgeting decisions. Here, we briefly examine some of this evidence.

Some argue – and there is growing evidence – that citizen participation increases government tax revenues. At the beginning of the 2000s, researchers studying participatory budgeting began to see an unexpected result, with some municipalities reporting substantive increases in their tax revenues. In 2004, for instance, a comparative study of 25 municipalities in Latin America and Europe found a significant reduction in levels of tax delinquency after the adoption of participatory budgeting. But, in reality, how surprising were these findings?

Mostly unknown, even among seasoned public engagement advocates, a growing body of evidence in the field of “tax morale” suggests a relationship between citizen participation and tax compliance.

The argument, in an oversimplified manner, is as follows: citizens are more willing to pay taxes when they perceive that their preferences are properly taken into account by public institutions.

This argument finds ever-growing empirical support. For instance, a number of studies in Switzerland – notably those by the economists Bruno Frey and Benno Torgler – show that Swiss cantons with higher levels of democratic participation present lower tax evasion rates, even when controlling for other factors. Suggesting that this is not simply a Swiss exception, a cross-national study by Friedrich Schneider and Désirée Teobaldelli found that “the effect of direct democratic institutions on the shadow economy is negative and quantitatively important.”

“The rationale behind this renewed enthusiasm for civic engagement is seemingly simple: citizens know best what their needs are and how to address them.”

for civic engagement is seemingly simple: citizens know best what their needs are and how to address them. Or, as spelled out in the OGP declaration, public engagement “increases the effectiveness of governments, which benefit from people’s knowledge, ideas and ability to provide oversight.” Yet, the evidence on the benefits of citizen engagement often seems fuzzy, scattered, and – sometimes – contradictory.

CFI.co | Capital Finance International

These observational findings are increasingly supported by a growing number of controlled experiments across a variety of cultural settings. At odds with conventional economic reasoning, some evidence in the field of “tax morale” suggests that participation may be even more effective at curbing tax evasion than traditional and commonly adopted deterrence measures, such as fines and controls.

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In the specific case of participatory budgeting, more robust data is also emerging. For example, a recent working paper by the Inter-American Development Bank presents similar effects of participatory budgeting on revenues in a randomised controlled trial in Russia. As noted by the authors, Diether Beuermann and Maria Amelina, these results are by no means negligible: “Implementing the planning cycle of participatory budgeting increased local revenues per capita by US$30.22 in regions without previous decentralised experience and by US$37.34 in regions with previous decentralized experience […]. These are sizeable effects as they represent differences of around seventy percent with respect to the control group mean.”

HOW GOOD IS IT FOR CITIZENS THEMSELVES? Participatory budgeting promotes pro-poor spending, better access to services, and may even reduce infant mortality. The available evidence suggests that participatory budgeting leads to significant shifts in priorities and policies, towards expenditures that directly benefit the poor. A 2008 World Bank report demonstrated that participatory budgeting has a statistically significant impact on a number of social indicators. Among others, the report highlights that PB is positively and strongly associated with improvements in poverty rates and access to water services.

Despite producing evidence of its effectiveness on a number of fronts over the years, only 25 years after its initial implementation in Brazil do we start to see systematic evidence of sound development outcomes. This is mainly due to two recently released, major studies of participatory budgeting in Brazil. The first, published by Sonia Gonçalves in World Development, finds that municipalities that adopted participatory budgeting in Brazil “favoured an allocation of public expenditures that closely matched the popular preferences and channelled a larger fraction of their total budget to key investments in sanitation and health services.”

in the development agenda, staying focused on which types of processes work and which do not will become particularly relevant. Participatory budgeting offers some promising evidence for policy reformers who want to see tangible impact on the ground, but it might take more than enthusiasm to get there. Determination, and a certain amount of patience, remain essential ingredients when it comes to delivering results. i

The views expressed in this article are not necessarily those of the World Bank.

ABOUT THE AUTHOR Tiago Peixoto is a political scientist and team leader at the World Bank’s Digital Engagement Unit, focusing on technology-enabled participation for better public policies and services. As the lead of the Bank’s Digital Engagement Evaluation Team (DEET), he also coordinates evaluation and research activities on the effects of technology on participation, transparency, accountability, and government responsiveness.

Prior to joining the World Bank, Mr Peixoto managed projects and worked for various organisations, such as the European Commission, OECD, United Nations, and the Brazilian and UK governments. He is also a research director of the Electronic Democracy Centre at the University of Zürich and faculty member of NYU’s Governance Lab. Mr Peixoto holds a PhD and a Masters in Political Science from the European University Institute, as well as a Masters in Organised Collective Action from Sciences-Po Paris.

As a consequence, the author also finds that this change in the allocation of public expenditures “is associated with a pronounced reduction in the infant mortality rates for municipalities which adopted participatory budgeting.” Barely a year later, a study by Michael Touchton and Brian Wampler in Comparative Political Studies generated similar findings, demonstrating that the adoption of participatory budgeting in Brazil is strongly associated with increases in healthcare spending and decreases in infant mortality rates.

These studies also highlight another important takeaway for those working with development and public sector reform: the need to consider the fact that participatory institutions may take time to produce noticeable effects. As shown by Touchton and Wampler, for instance, the effects of PB adoption become significantly more visible after the fourth year of implementation.

Author: Tiago Peixoto

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> Mack International:

Executive Recruitment as an Art Form In business since 2002, Mack International is a highly specialised boutique firm that helps family offices and enterprises as well as investment management and wealth management firms find key executives. The distinction between Mack International and others in their industry is evident not so much in what they do, but in how they do it.

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ow does a firm elevate executive placement from a wholesale hit-andmiss endeavour to an art form? Mack International has not only raised the proverbial bar, but created a unique bar altogether. Simply put, their approach is carefully constructed around getting clarity and consensus around a client’s objectives and then finding the perfect match that suits both client and candidate. “The depth of experience, amount of quality time we spend assessing and co-interviewing and ultimately identifying the perfect cultural “fit” is something no one else can claim. That is our value proposition,” says Linda Mack, President and founder. “Our approach paints the bull’s eye so clearly, we cannot miss it.”

relationship between client and the chosen executive, the company uses a creative, yet disciplined and structured approach capturing the right candidate time-and-again. “From our standpoint in order to get it right the first time, you must invest the time up front around a vision and profile of ideal candidate. We have a dedicated team of consultants considered thought leaders in the industry. Together they bring the benefit of best practices to every client.”

Its proprietary search formulae result in frequent referrals that has seen the company’s business expand. However, corporate growth is not pursued at the expense of excellence: “At Mack International, clients always have our full and undivided attention. We mobilise our collective efforts and expertise to ensure no detail is overlooked and no opportunity is lost. Quality comes first as a matter of course. Our clients wouldn’t have it any other way,” explains Ms. Mack.

To Mack International, bigger is the antithesis of better. Rather than juggling dozens of placements, the entire firm focuses on single assignments which receive its full attention, ensuring consistently superior results.

The firm believes academic credentials, experience, and accomplishments – while important – constitute but a subset of the selection criteria applied. “For family offices or enterprises it is of paramount importance that values and personalities match as well.

Our candidates are not dealing with distant shareholders interested solely in the bottomline, but with unique people or families whose considerations may not always be merely financial in nature.”

Ms. Mack boasts a quarter century’s worth of experience in the financial services industry with an emphasis on human resources management and private banking. She obtained a degree in Financing and Accounting from the famed JL Kellogg Graduate School of Management, part of Northwestern University in Chicago.

She founded Mack International subsequent to a highly successful career at one of the top retained executive search firms.

While a number of firms specialise in recruiting professional managers of family offices and enterprises, Mack International has carved out a

Founder and President: Linda Mack

niche at the very top of the business. The firm’s distinction lies in its exceedingly personalised services and in the thoroughness and breadth of its selection procedure: “While the pool of highly skilled family office, investment and financial executives is fairly large, we are not just looking for the best professional, but for one who fits seamlessly with our client’s culture. No matter how skilled the candidate, if he or she cannot stay in sync with what the employer values, relationships tend to sour. Culture trumps skill.”

Ms. Mack explains that the search process starts with gaining a true understanding of clients’ needs, ambitions, and cultural values and philosophy. “Once we have gained these insights, a candidate profile is carefully assembled. A picture emerges which enables us to commence the actual search process. ” Mack International takes pride in its ability to consistently deliver exceptionally high standards of service. Committed to ensuring a lasting CFI.co | Capital Finance International

Mack International serves the full spectrum of private and family wealth management, from first generation creators to fortunes rooted in history.

The firms also helps investment management and wealth management firms find executives who are finely attuned to their specific needs.

Mack International maintains a vast globespanning network of contacts in the family office, investment management and wealth management spheres. This allows the firm to maintain its definitive edge and keep abreast of the latest trends and developments, such as social impact investing--a hot topic among younger generations. The network also enables Mack International to formulate effective recruitment strategies and provides the firm with the market intelligence critical to sustain its success.

What is the next big thing? According to Linda Mack it is staying true to the essence of what makes Mack International special. “We fulfil a very real need. The next big thing has nothing to do with numbers. It has to do with continuing to do it right the first time, every time.” i 163

> Asia Pacific:

Devaluation in China Reverberates in Africa

By Darren Parkin

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As China dances on the trapdoor of financial Armageddon, many eyes are turning to a region where the vast nation has been involved in a slow, but altogether productive, spell of economic empire building – Africa.”

China’s curious interest in Africa has, until recently, gone largely unchecked in the West, yet Chinese business affairs in the continent

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have steadily grown to vast proportions. But as China’s economic woes send shockwaves around the globe, have Africa’s business leaders got one hand hovering above the panic button?

On the whole, it would appear not.

When trading halls across the globe were rocked

by China suddenly whipping the legs from under its own financial standing as the world’s second largest economy, August 2015 seemed doomed CFI.co | Capital Finance International

to be confined to the history books as another dark period in Planet Earth’s slow recovery from deep recession. Stocks plunged, triggering a domino effect which then toppled currency values and left commentators lamenting what looked to be the beginning of the end for China’s rapid and impressive economic growth.

The colossal connection between China and Africa was only fully appreciated when, in 2013,

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it emerged that the two had surpassed any other trade partnership the continent had enjoyed before. The startling fact to emerge from the mind-boggling figures was that Beijing’s business interests with African nations were double that of the US. South Africa and Nigeria have been the biggest beneficiaries to date, but many other nations have queued for front row tickets to the Chinese investment circus.

However, some experts are warning the ticket holders may end up paying a heavy price for what could end up being a complete antithesis of the greatest show on earth.

Should China’s thirst for Africa’s riches begin to wane – and many will argue there is a predictability about a slowing economy’s lack of desire for the reserves of others – the knock-on effect wouldn’t just put the brakes on Africa’s ambitious drive towards an era of new-found wealth, it could bring the wheels right off.

The first signs of distant brake lights have already been spotted and, amid the dramatic fall of oil prices which can only apply more anchors, experts are fearing a certain inevitability about the strength of the props China has wedged under its African trade partners. With the devaluation of the yuan, African exports are likely to be lessened during nervous market conditions.

Angolan oil and Zambian copper have joined South African wine and gold as China’s biggest imports from Africa.

The yuan, however, is not the main issue, according to Amadou Sy who is the director of the Africa Growth Initiative. A keen blogger on capital markets and African macroeconomics, Mr Sy argues that a two per cent devaluation has already had an impact on some African currencies, but the turbulence of the yuan may be a distraction from the main issue. “I would argue that the real concern should not be the yuan devaluation,” he stresses.

China: Hong Kong

“Meanwhile, that highlyanticipated reassessment of the likelihood and depth of a Chinese slowdown has already begun.”

“Rather, African policymakers should focus on the impact of China’s possible economic slowdown on their economies and the policy measures needed to manage it. First, a two per cent drop in a currency is not that large, especially when compared to movements of floating currencies. For instance, the US dollar has appreciated by about 20 per cent relative to the euro and the yen, and the South African rand has dropped by about 12 percent against the US dollar this year.”

“Second, African countries trade with China mostly in US dollars since the yuan is not internationalised. Because the US dollar has been appreciating against African currencies, the impact of the CFI.co | Capital Finance International

Chinese devaluation is less important for African countries than for the US.” “Third, China’s possible economic slowdown is the real issue. The turbulence in global markets following the devaluation has been mostly driven by market participants’ concerns over a stronger-than-anticipated slowdown of the Chinese economy. China’s GDP official growth rate has dropped to seven per cent from a double-digit average in 2010, and there are questions whether it is on a downward trend.”

Mr Sy further argues that reports of China’s demise may be premature, and that Africa’s trade partnerships with the secretive communist nation are being reported with a side order of scaremongering. Wary that further deterioration in global liquidity conditions could curtail foreign investment, he urges the shrewd African nations to set up “China Watch” teams to keep tabs on the Chinese real estate market as well as investments and consumption.

“A Chinese economic slowdown will definitely shrink the window of opportunity for policy action in Africa,” he says while adding that no one has a grasp on the extent of the slowdown. “Instead,” he says, “African policymakers should accelerate the pace of reform while praying for a resilient Chinese economy and EU rebound.”

Meanwhile, that highly-anticipated reassessment of the likelihood and depth of a Chinese slowdown has already begun.

Plus, there is plenty of fuel in the tank attached to the possibility that a potential slowdown could even be beneficial to some African nations. The theory goes that devaluation of the yuan will provide a spending-power boost to countries such as Kenya or Ethiopia which are currently engaged in a programme of buying heavy plant machinery from China. Consumers will likely benefit too, as goods imported by retailers should become cheaper.

Positivity is, of course, a wonderful quality when things work out in everyone’s favour.

However, should a slowdown in China’s economic growth become a long-term reality, then Africa faces some very real risks. This would be especially sharp should oil prices fall further, or global markets endure nervous stutters.

One of the key issues hanging over any effect that China’s economy may have on Africa, of course, is what repercussions any impact of their trade partnership would have on the rest of the world. Prices of some vital commodities have already begun to slide worldwide – something the IMF has described as potentially leading to a “much weaker outlook” for growth. i 165

> Michael Pettis:

China - What the New Currency Regime Means and How It Affects the World n Tuesday, August 18, the People’s Bank of China (PBoC) surprised the markets with a partial relaxing of the currency regime, prompting a great deal of discussion and debate about the value of the renminbi (RMB). Part of the discussion was informed by a consensus developing in one part of the market that the RMB is no longer undervalued but is in fact overvalued. Why? Because, if left to the “market” – that is if the PBoC stops intervening – the excess demand for US dollars would force the RMB to depreciate in value.

O

This argument is based on a pretty confused understanding of how markets work and why investors do what they do. I thought it might be useful if I were to try to lay out the issue a little more clearly, and along the way address related topics. Because it isn’t necessarily easy to tie all of the topics together in a single essay, I thought it might be better if I put it in the form of a series of questions.

There are two conclusions, or at least two points I would argue: 1. Market forces, that is the balance of supply and demand, do not always indicate the relative valuation of an asset. This is partly because there are several ways to define market forces, but mostly because we usually think of valuation in terms of economic fundamentals. An overvalued currency is one in which market fundamentals – i.e. the valuation of assets on the basis of expected cash flow discounted at an interest rate that is not distorted – drive supply and demand.

2. Supply and demand for an asset can also be driven by what traders often call “technical” factors. These are generally changes in supply in demand caused by other than fundamental factors.

When China first approved the QFII (qualified foreign institutional investors) programme that permitted foreign investors to buy stocks, for example – or had China’s stock markets been included in the MSCI global benchmark in June as was expected – there was or would have been an immediate increase in demand for Chinese stocks: This would have caused prices to rise for reasons that had nothing to do with an improved economic outlook.

When I was a student, I was taught that if prices did rise, they would do so by an imperceptible amount because they had been trading at a level consistent with a fundamental balance between demand and supply. As soon as foreign purchasing caused prices to increase, Chinese investors would take advantage of these “excessively high” prices to sell out. Of course this is almost the opposite of what happened. Prices rose precisely because of 166

“Without PBoC intervention, the RMB almost certainly would decline in value. However, this does not indicate that the currency is overvalued.” expected buying, and then fell in the case where the buying materialised.

There was no fundamental valuation to anchor prices. Once I became a trader, this was one of the many things I had to unlearn. However, rather than reject altogether the idea that fundamental valuation plays any role – which too often is the reaction traders have when they first learn that markets are not always driven by value – I thought it would be more useful to identify the conditions under which market prices do or do not respond to fundamentals.

Without PBoC intervention, the RMB almost certainly would decline in value. However, this does not indicate that the currency is overvalued.

In fact, the market is driven largely by technical factors. If we try to extract information from fundamental markets, we almost certainly would arrive at a very different conclusion. The RMB, it turns out, remains undervalued, although I suspect not by very much.

HOW DID THE PBOC CHANGE ITS CURRENCY REGIME? The PBoC’s statement on August 11 that it was changing the country’s currency regime set off an explosion of analysis, accusation, praise, and assorted questioning that hasn’t yet subsided much. Along with devaluing the currency by 1.86% – the steepest drop since 1994 – the PBoC announced that it would modify the way it set the reference rate – known as “central parity” – that determines the RMB’s trading band. The bank said it would do so “for the purpose of enhancing the market-orientation and benchmark status of central parity.”

It has, in effect, partially deregulated the exchange rate mechanism by relaxing intervention procedures, although it is still able to intervene as much as ever. Effective August 11, the central parity would be set on a daily basis equal to “the closing rate of the inter-bank foreign exchange market on the previous day.” Probably to indicate that this did not mean the end of PBoC intervention, it added that the rate would be set “in conjunction CFI.co | Capital Finance International

with the demand and supply conditions in the foreign exchange market and the exchange rate movements of the major currencies.”

Until that day, the PBoC set central parity every day at whatever rate it thought appropriate. In principle this is supposed to mean that the value of the currency is a function of the PBoC’s best estimate of the exchange rate that maximises China’s longterm productivity. In the best of cases, however, the sheer complexity of any economy – let alone the global economy within which it operates – would make this impossibly difficult to determine even if there were objective ways of valuing the choice between a short-term cost or benefit and a longterm cost or benefit – or of choosing how costs or benefits will be distributed among different economic sectors or social groups.

This is why there is a grudging consensus, although certainly not unanimous (nor is all the consensus grudging), that the most effective and efficient way to determine the exchange rate is to let the market decide. If all potential buyers and all sellers of RMB, whatever their reasons, collectively decide on a price at which all transactions can clear, that price is presumably the best estimate of the exchange rate that maximises China’s long-term productivity.

WHY DID THEY DO IT? There are three different reasons that might explain the PBoC’s recent move.

• Improve trade. While China’s current account surplus has been very high, this is mainly because imports have done worse than exports. Both have fared poorly. The numbers were especially bad in July, when imports were down 8.1% year-on-year while exports were down 8.3%. Because of its peg to the appreciating dollar, the renminbi has been very strong on a trade-weighted basis. The new currency regime may be aimed at reversing this.

• Qualify for SDR. There may have been concern that the large and persistent gap between the fix and actual trading in both the onshore and the offshore markets would prevent the RMB from qualifying for inclusion in the SDR (special drawing rights) basket. What is more, by including a RMB pegged to the dollar, the already overly dominant weight of the dollar in the SDR would be substantially increased, something the IMF clearly does not want. Beijing may be eager for the RMB to become part of the SDR basket because it believes this will result in significant foreign inflows that will help reverse China’s very large and potentially destabilising capital account deficit. Its strategy may be working. The IMF described the

Autumn 2015 Issue

new pricing mechanism as “a welcome step as it should allow market forces to have a greater role in determining the exchange rate.” It followed by noting, a little obviously, that the “exact impact will depend on how the new mechanism is implemented in practice.”

• Monetary freedom. The well-known “impossible trinity” makes it impossible for a central bank to control both domestic interest rates and the exchange rate if its capital account is open.

Although technically not open, China’s capital account is porous enough for all practical intents and purposes. This means that as long as the PBoC intervenes in the currency, it cannot provide debt relief to struggling borrowers, and to the economy overall, by lowering interest rates without setting off potentially destabilising capital outflows. This constraint would be even tighter if the Fed began to raise interest rates. Reform of the exchange rate mechanism restores interest rate flexibility.

HOW DOES THE MARKET PROVIDE INFORMATION? We can usefully think of the “market” as a machine that processes a vast amount of information quickly and smoothly. Any agent who possesses superior information about a product or service that will cause a change in its supply or its demand will buy or sell based on that information. This buying or selling becomes the way in which information is absorbed by the market and presented, in the form of a price, to all other agents.

There is no way to say for sure which of these drove the PBoC decision because the bank, like most central banks, has preferred to be a little vague about its reasoning. However, I suspect that it changed the currency regime primarily either to gain monetary freedom or, more likely, to qualify for inclusion in the SDR. I doubt that the desire to turbocharge exports played much of a role, but I worry that if the PBoC was hoping to reverse the huge deficit on its capital account, the success of its plan will hinge on whether it was able to distinguish between fundamental demand and technical demand.

The market implicitly does determine the answer to these questions, like the trade-off between the present and the future, or the different values it places on the needs of different social groups. We know that the market does these things because that is what it means for the market to clear. The answers it provides will vary according to the institutions, including moral values that form part of the system within which the market operates.

WHAT DETERMINES THE PBOC’S BEST ESTIMATE OF THE APPROPRIATE EXCHANGE RATE? The exchange rate has several functions in any economy, and what the PBoC decides is the most appropriate exchange rate depends on what it is trying to accomplish. These include: By transferring wealth from one sector to another, the exchange rate can be used to subsidise favoured sectors at the expense of others. High exchange rates benefit household consumers, the services sector, and urban residents, amongst others. Low exchange rates benefit the tradable goods sector and commodity producers, amongst others.

This process of transferring wealth also means that a higher exchange will speed up the rebalancing process, in this case by transferring wealth from the PBoC and the tradable goods sector to households.

The interest rate and the exchange rate are two of the most important prices in an economy, or put differently: they are two of the most important pieces of information economic entities, including businesses, use to make investment and operating decisions. When the RMB trades at its fundamental value, economic agents within China are most likely to make the decisions that optimise overall value today and preserve the sustainability of economic behaviour. Anything that pushes it away from fundamental valuations will distort the investment and operational behaviour of all economic entities.

CFI.co | Capital Finance International

This isn’t necessarily the most accurate of ways in which to determine a price, but it seems to be more accurate than any other method we have been able to come up with. Put differently, it seems to be the most accurate way to drive the allocation of goods and services to maximise social wealth – which is, after all, what a market is supposed to do. We shouldn’t assume, however, that all of the tough questions have been adequately answered.

One of the most important advantages, or efficiencies, of “letting the market decide”, however, is that it doesn’t seem like the answers the market gives us are in fact affected by our institutional setup. The market’s “decisions” are given a veneer of neutrality that everyone accepts, even though the decision is not neutral at all. This seeming neutrality reduces the political manoeuvring that might otherwise occur.

DOES PBOC INTERVENTION TO SUPPORT THE RMB MEAN THAT IT IS OVERVALUED? One of the main questions being batted around is whether, under the new system, the value of the RMB is finally going to be determined by the market. If it is, it almost certainly means that the value of the RMB will decline.

Why? Because the balance of payments, which is the sum of the current account surplus and the capital account deficit, is in deficit if we exclude PBoC interventions. At current prices there is more RMB selling than there is buying, and the PBoC has to sell reserves and buy RMB in order to keep the currency from depreciating.

This, many people argue, proves that the RMB is overvalued. The “market”, they claim, has spoken, and it has told us that the RMB is overvalued.

They are wrong. The “market” is not telling us that the RMB is overvalued. It is telling us only that there is more supply of RMB than there is demand for the currency at the current exchange rate.

Because “overvaluation” and “undervaluation” usually refer to the fundamental value of a currency, this excess of supply over demand would only imply an overvaluation of the RMB if supply 167

and demand were driven primarily by economic fundamentals.

WHAT DRIVES SUPPLY AND DEMAND FOR THE RMB? Excluding central bank intervention, which is mainly a residual contributed automatically by the PBoC to balance supply and demand for foreign currency, all purchases or sales of foreign currency in China can be divided into current account activity, which mostly consists of the trade account, along with other transactions including tourism, royalty payments, interest payments, etc., and capital account activity, which consists of direct investment, portfolio investment, and official flows.

Imbalances in both the current account and the capital account can be driven by economic fundamentals, in which case it might make sense to say that the RMB’s “correct” exchange rate is broadly equal to the clearing price at which supply is equal to demand. In this case, if the central bank were to purchase RMB, reserves would decline and it would be reasonable to assume that PBoC intervention would cause the RMB to become overvalued. On the other hand, PBoC sales of RMB would cause reserves to increase and the RMB to become undervalued.

But neither the current account nor the capital account is necessarily driven only by economic fundamentals. During the past thirty years especially, reserve accumulation and private capital flows have overwhelmed trade flows, to the extent that small changes in gross capital flows have often forced large changes in trade and current flows. Even in the 1950s and 1960s, when international capital flows were much smaller and did not drive trade flows to nearly the same extent, capital flows very often constrained trade flows – most famously the “dollar shortage” – which was only relieved by the Marshall Plan.

WHAT MIGHT PUSH THE CURRENT ACCOUNT BALANCE AWAY FROM FUNDAMENTALS? If the domestic and foreign tradable goods sectors are not subsidised or penalised, the market for tradable goods can be seen as operating largely on the basis of fundamentals.

In that case, imbalances in the supply and demand for foreign currency may indicate underor over-valuation of the currency. But the trade account can depart from fundamentals under these or similar conditions: • If Beijing were to impose significant tariffs, prohibitions on imports, or otherwise intervene directly in trade, it could distort the current account in ways that do not reflect economic fundamentals.

• Regulations that discriminate against or in favour of imports can distort fundamentals.

• Without central bank intervention, the capital account must balance the current account, so that if there were significant net inflows or outflows on the capital account, these net flows would force the RMB up or down in order that the current account surplus or deficit balances the capital account.

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WHAT MIGHT PUSH THE CAPITAL ACCOUNT BALANCE AWAY FROM FUNDAMENTALS? If capital enters or leaves China in order to earn higher expected returns on investment in business or manufacturing capacity, or to purchase undervalued assets, we can broadly assume that such capital flows are driven by fundamentals.

Non-fundamental capital flows into or out of China might include: • Wealth or portfolio diversification; • Speculative inflows driven by asset bubbles, or “carry trades” driven by arbitrage opportunities based on capital-flow restrictions; • Flight capital driven by fear of political instability, financial instability, or the anticorruption drive; • Official flows driven by political considerations, and; • Investment outflows that are not sensitive to economic fundamentals, for example those driven by government directives to acquire commodityproducing businesses and land, or to acquire technology or management skills.

CAN THE MARKET DECIDE ON AN APPROPRIATE VALUE FOR THE RMB? Whether or not we believe that the market should determine the value of the RMB is one of those questions – like whether or not we support of free trade, supply side economics, fiscal deficit limits, debt, etc. – that tends to be framed as a question of principle, when in fact it isn’t. These work well to enhance productivity and wealth under certain conditions and fail under others, so that it is much more useful to specify the conditions under which they work – for example, what are the conditions in which China would generally be better off if the markets decided the value of the RMB? To answer, we need first to decide what our objective is. If we have political goals, for example wealth redistribution or the protection of certain types of industries until they are sufficiently competitive, we would probably want to start with an idea of the economically optimal exchange rate on a fundamental basis and then move it in one direction or the other.

In China’s case, I would argue that the goal is to eliminate some of the distortions in the Chinese economy that weaken domestic demand and systematically misprice economic inputs, most notoriously capital. These have left China with a dangerous dependence on debt, excess capacity and inventory, and a state sector in which incentives to innovate and create value are overwhelmed by political incentives (that include capturing explicit or implicit subsidies).

One consequence has been so much wasted investment that I am convinced that many years from now we will look back at China in the 2000s, rather than Japan of the 1980s, as the classic example of capital misallocation. If eliminating these distortions is indeed the goal, I would argue that the correct exchange rate would probably be one that is determined by the country’s economic fundamentals, i.e. one that matches supply and demand for dollars in the real economy – or CFI.co | Capital Finance International

Autumn 2015 Issue

perhaps a little stronger than that in order to help the rebalancing process.

If on the other hand the goal is to ensure that China has sufficient reserves, I would argue that the correct exchange rate would probably be one that is determined by the country’s overall balance of payments. In the past, a country’s money supply was often a function of its gold or silver reserves, and economic performance could be severely impaired by a shortfall of specie reserves. Today, there are countries running persistent deficits, or in which domestic investment is severely constrained by insufficient savings. In these two cases, it might make sense to focus on the overall balance of payments and the information it might give us about an appropriate exchange rate for the RMB. China is obviously not one of these countries.

WHAT HAPPENS IF THE EXCHANGE RATE IS SET AT A “WRONG” PRICE? An important characteristic of a market is its systemic ability to adjust, whether quickly or not.

If there is a distortion in the price of any good or service, the price of other goods and services automatically adjust to return the market to what is assumed to be an optimal stage.

This is why economists who argue that the value of currencies like the RMB should be fixed – usually in terms of other major currencies, such as the dollar, or in exchange for commodities, the longest serving of which has been cowries, followed by gold – can also argue that markets should determine all prices without being inconsistent. If the central bank pegs the value of its currency to another currency, as the PBoC pegs the value of the RMB to the USD, all other relevant variables, most importantly the interest rate, will automatically adjust so that the economy will presumably get the full benefit of the market’s superior ability to process information.

HOW DO PRICES ADJUST TO DISTORTIONS? Every transaction or policy moves a system away from equilibrium, just like every price distortion does. If there are reasons to prevent a quick return to equilibrium, the system becomes increasingly unbalanced. This is why Albert Hirschman argued that all growth tends to be unbalanced, and in economies with very large state sectors, these imbalances can persist.

In the idealised “Smithian” world of innumerable economic agents none of which is big enough to distort the adjustment process, an economy must quickly adjust so that the system is never far from equilibrium. In this world, the only thing that can cause a crisis – which essentially represents nothing more than a very rapid, disruptive adjustment of a major imbalance – is some kind of major external shock, soon followed by a crisis.

However, in a world in which there are institutions or institutional players large and powerful enough to block the adjustment process, the imbalances can build for a very long time. As they do, these imbalances put increasing pressure on CFI.co | Capital Finance International

the institutions that prevent adjustment, and so the adjustment itself becomes increasingly disruptive – often causing policymakers to react by preventing adjustment even more aggressively, thus locking the country into a potentially selfreinforcing process of growing imbalances.

Eventually the adjustment must occur, either rapidly in the form of a crisis – and it takes an increasingly small external “shock” to trigger such a crisis – or slowly in the form of a long and usually difficult period of rebalancing.

This is not the place in which to enter into a long discussion of how economic systems work, but it should be clear that we live in a world in which there are many large institutions, most obviously governments, as well as legal and regulatory constraints, perhaps most importantly within the financial system, that prevent automatic adjustments from occurring immediately.

There are however at least two important points worth reminding anyone thinking about how currencies are pegged: 1. Volatility is transformed, not eliminated. All economies are volatile, and while the impact of volatility on any economic entity can be exacerbated or minimised by the structure of its balance sheet, this only happens as volatility is assigned to agents less able, or more, to absorb it. Pegging the RMB to the USD, for example, does not eliminate the volatility associated with expected changes in the USD value of the RMB. Instead the volatility shows up as higher volatility in China’s money supply, higher volatility between USD and non-USD currencies, greater trade imbalances, and so.

2. Interventions are effectively forms of wealth transfer. Pegging the RMB to the dollar at a low rate, for example, transfers wealth from importers to manufacturers in the tradable goods sector in a process well understood by most economists. But while it reduces currency volatility, it increases volatility in the money supply. What is more, as the PBoC attempts to control the interest-rate component of this volatility by fixing interest rates (which until recently also transferred wealth from savers to borrowers directly), there is even more volatility in China’s money supply, both in the present, in the form of inflows and outflows, and in the future, as it is “stored” in the form of rising bad debt.

Because regulators can never choose how much volatility they will permit, at best they can choose the form of volatility they least prefer and try to control it by transferring it elsewhere. This is usually a political choice and not an economic one, and is about deciding which economic group will bear the cost of volatility.

Even when it is an economic choice aimed at resolving a particular problem, once that problem is resolved and the transfers begin to undermine productivity, the beneficiaries are often powerful enough to prevent reform.

Government interventions in the currency usually aim at creating wealth transfers to subsidise favoured sectors or at suppressing volatility that 169

penalises favoured sectors, or both. The analysis of their impacts is never complete until we have also worked out the impact on those sectors from whom wealth has been transferred or to whom volatility has been transferred.

THE “IMPOSSIBLE TRINITY” ADJUSTMENT The best-known of these adjustment processes, and the one most relevant to the RMB, is the impossible trinity, which is simply a restatement of the way money supply must automatically adjust.

In an open system – with free capital flows being one of the three legs of the trinity – the PBoC can choose to peg the USD value of the RMB, in which case the money supply adjusts as money is created or destroyed in order to match supply and demand in the market in which RMB and USD are exchanged. Or it can chose to determine the size of the money supply – which it attempts to measure by looking at interest rates – in which case the exchange value of the RMB will rise or fall in order, once again, to match supply and demand in the market in which RMB and USD are exchanged.

This, in fact, may be one of the main reasons the PBoC changed its currency regime. For the past two years, Chinese interest rates have been too low relative to the value of the currency for supply and demand in the capital markets to balance.

We know this because China has a large capital account deficit. It experienced massive net outflows on the capital account.

Because these net outflows put destabilising pressure on a banking system used to net inflows, there were two ways the PBoC could manage the process. It could raise interest rates high enough to satisfy investors, or it could cause them to reduce their required yields.

But it is important to understand that there is no particular reason in principle for supply and demand in the capital markets to balance.

Before 2014, China ran large surpluses on both its current account and its capital account, and because the balance of payments must balance, by definition, it had elsewhere to run a massive deficit equal to the sum of the two, and it did in the form of a central bank deficit – another name for rising foreign exchange reserves.

The increase in central bank reserves was a residual, and not a decision by the PBoC. When it decides to peg the value of the currency, it has no choice but to accumulate or lose reserves, as the impossible trinity ensures that money supply rises or falls to match supply and demand in the market in which RMB and USD are exchanged.

THE STRUCTURE OF THE INVESTOR BASE MATTERS The fact that the capital account deficit has grown to overwhelm the current account surplus does not tell us whether or not the net imbalance is driven by fundamentals. What matters is whether or not the capital account is driven by fundamentals.

There are, very broadly, two reasons to bring money into China and two reasons to take it out, 170

and we can define these as fundamental and speculative. As I explain in my book Avoiding the Fall, there are three different types of investment strategies that explain most investment decisions.

Depending on the mix of investment strategies in any given market, the behaviour of that market – including what it decides is information – determines whether that market will react to fundamental or technical information and how it will interpret that information.

A fundamental investor brings money into China in order to invest in a project that will deliver value over the long term. A speculator brings money into China in order to purchase an asset, usually stocks or real estate, which he can quickly sell at a profit. Investors who borrow USD or HKD to buy short-term RMB-denominated government bonds or other debt in order to earn the interest rate spread, as well as profit from any increase in the value of the RMB, are technically relative value investors. However, for our purposes are speculators because they provide net inflows into China if seen separately from the offshore markets.

More importantly, they process and interpret information in the same was as speculators do and rather than act to stabilise prices, they tend to enhance volatility by reinforcing appreciation and depreciation expectations. Technically, the second and third of the three are illegal and violate capital restrictions, but these involve domestic investors, businesses, or SOEs who are able to take advantage of corruption or weak regulation to circumvent these restrictions.

Similarly, a fundamental investor takes money out of China in order to invest in foreign projects that will deliver value, including diversification benefits, over the long term. Investors who take money out of China in order to hide it, however, or because they are frightened by perceived financial or political risk, should for our purposes be classified as speculators, not because they seek speculative profits but because they have the same systematic impact as speculators.

Finally, there are investors who take money out of China in order to achieve political objectives.

For example they may seek to reduce China’s dependence on foreign-owned agricultural or nonagricultural commodities.

The purpose of this classification is not to identify the good guys and the bad guys but rather to understand market dynamics. I spent most of my career on Wall Street trading floors, and like most traders and institutional investors I think of markets differently than do most economists and policymakers. In order to understand how markets will perform I try to work out the structure of the investor base, understand market “technicals” – i.e. potential changes in supply and demand, along with their triggers, and look for convexities or implied options. A market dominated by speculators must react in a profoundly but predictably different way than one dominated by fundamental investors.

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Autumn 2015 Issue

HOW DO SPECULATORS INTERPRET INFORMATION DIFFERENTLY FROM FUNDAMENTAL INVESTORS? One of the reasons the PBoC may have permitted RMB depreciation is to regain control of monetary policy. The “impossible trinity” prevents a central bank from controlling both domestic interest rates and the exchange rate if its capital account is open. Although technically not open, China’s capital account is porous enough for it to be “open” for all practical purposes.

It turns out that interest rates in China are higher than they are elsewhere in part because of the constraints imposed by the impossible trinity. Even with higher interest rates on its government bonds, in which the risk of default is widely perceived to be close to zero, there is nonetheless a large net outflow on China’s capital account. Why don’t more investors take advantage of higher Chinese interest rates and equally low credit risk by bringing money into the country?

The most obvious reason is that they are worried about depreciation risk. Because most wealthy Chinese seem to think about RMB in terms of USD or Hong Kong dollars, it is the fear that any depreciation of the RMB against those two currencies (the Hong Kong dollar is pegged to the USD through a modified currency board) greater than the couple of percentage points interest rate differential would yield less than equivalent USD or Hong Kong dollar bonds.

This means that as long as the PBoC intervenes in the currency, it cannot provide debt relief to struggling borrowers, and to the economy overall, by lowering interest rates without setting off potentially destabilising capital outflows as the interest rate differential narrows. This constraint would be even tighter if the Fed began to raise interest rates, which would also cause the interest rate differential to narrow.

So how do we reconcile the PBoC’s desire to reduce interest rates with the higher interest rates investors need to compensate for the greater risk of devaluation? The answer, it turns out, is fairly straightforward. The interest rate investors require to buy bonds must decline until it is equal to the PBoC’s target interest rate.

Because the interest rate investors require is a function of their perception of the devaluation risk, this means that the currency must decline until the perception of devaluation risk is low enough to meet the PBoC targeted interest rate.

In that case it would be a fairly easy matter to reduce the value of the RMB to the point at which investors believe the currency to be correctly valued. Once it reaches that level, there is no longer a bias to currency volatility and the RMB is as likely to rise as it is to decline.

The currency would then be fairly priced, the expected volatility very low and unbiased, and investors would require nothing more than the risk-free cost of capital (assuming, of course, that expected inflation is positive).

But is the capital account buying dollars for fundamental reasons – that is, because foreign assets are cheaper that Chinese assets or foreign growth expectations higher than Chinese growth expectations? Probably not. Three things seem to drive the outflow, which was a net inflow two years ago and has only recently surged to such astonishingly levels.

• Government-directed purchases of commodity producing assets or of strategic technologies, which are not sensitive to issues of fundamental valuation.

• Flight capital, driven probably by rising political or financial uncertainty, which is not sensitive to issues of fundamental valuation.

• Speculative capital worried about currency depreciation.

The capital account does not seem to be driven by fundamentals and is instead driven mainly by outflows that are not sensitive to valuation issues. But in a highly speculative market, price movements are usually self-reinforcing, so that a falling RMB may actually increase the desire or need to sell. This might be because there are leveraged investors, including investors in derivatives, whose borrowing costs are inversely indexed to the exchange rate. More likely, it may also be because speculators interpret a dramatically falling RMB as signalling a change in PBoC policy and higher risk, so that the more the RMB depreciates, the higher the required premium.

Finally, in a speculative market, if investors believe that they are collectively big enough to set off a self-reinforcing selling process, they may self-consciously decide to interpret a declining RMB as a sell signal. This last, especially, is well understood by traders, even when non-traders sometimes find it too “irrational” to be credible.

In theory this means the value of the RMB could fall infinitely, but in practice it can only fall until it is low enough to bring out enough fundamental investors to convert the market from a speculative market to a fundamental one.

Their buying then stabilises the market and can actually set off a self-reinforcing price reversal.

Alternatively, the decline might be halted by very sophisticated interventions by the PBoC that convince speculators that the currency is more likely to rise, and so have the same impact.

SO IS THE RMB OVERVALUED OR NOT? Capital is leaving China for reasons that have little to do with economic fundamentals and that do not imply that the RMB is overvalued, and the capital account deficit is large enough to overwhelm the current account surplus.

This suggests that the balance of payments is unbalanced, before PBoC intervention is factored in. However, this imbalance tells us little about the fundamental value of the RMB. On the other hand, the fact that the trade account is in such large surplus seems to tell us that the RMB is undervalued. Why? CFI.co | Capital Finance International

Because if China is growing much faster than its trading partners, and if it has much lower unemployment than its trading partners, and if it is leveraging up while its trading partners are deleveraging, standard trade theory tells us very clearly that absent intervention and distortions, China would run a trade deficit, probably even a large one, and its partners the corresponding surplus.

But China is, instead, running a trade surplus.

This “surprising” trade position should be a very clear indication that either the currency is undervalued, or that there is some other equivalent trade distortion. In itself, it seems fairly clear, at least to me, that the current account surplus indicates that the RMB is undervalued on a fundamental basis, and that the balance of payments deficit is caused primarily by speculative outflows, or other kinds of outflows that are not sensitive to economic valuation issues.

HOW DOES THE RMB AFFECT INFLATION? One final point concerns the impact of China’s devaluation on global deflation. As of this writing, the RMB has depreciated by too small an amount to matter much, but assuming that it had depreciated by a lot more, would this add to global deflationary pressures?

Most analysts say that it would. A depreciating RMB causes the price of Chinese goods to fall, and so lower prices add to deflationary pressures. While I think it would indeed add to deflation, this is not because it reduces the price of Chinese goods. Ultimately, deflation requires that aggregate supply for goods and services rise relative to aggregate demand, or that aggregate demand fall relative to aggregate supply.

If Chinese prices drop, how does it affect supply and demand abroad? By reducing the price of Chinese imports, it represses the tradable goods sector, which may respond by firing workers. It also raises the real value of disposable household income and in so doing may increase household consumption. The net impact depends on whether or not the consequent increase in the household income share of GDP is overwhelmed by the increase in unemployment.

How does it affect supply and demand in China?

By increasing the price of foreign imports, it subsidises the tradable goods sector, which – because unemployment in China is low – may respond by bidding up wages. It also reduces the real value of disposable household income, which can reduce the consumption share of GDP. The net impact depends on whether or not the consequent increase in the household income share of GDP is overwhelmed by the increase in unemployment.

By itself, a depreciating RMB is not deflationary for the world. It is only deflationary if it causes a relative increase in supply over demand, and this is most likely to occur because of the impact of consequent wealth transfers. i 171

> ABC Banking Corporation:

Claiming Top Awards Originally a leasing company, ABC Finance & Leasing Ltd was converted into ABC Banking Corporation Ltd and started operations as a fully-fledged commercial bank on December 9, 2010 with offices at Place d’Armes, Port Louis.

E

ssentially, ABC Banking Corporation was erected on three main pillars: domestic banking, international banking, and treasury operations.

The bank offers a comprehensive range of traditional and innovative products and a palette of services that cater to both the local and international market through its dedicated, highly-qualified, and competent staff and management.

The bank is also equipped with a top-ofthe-line Oracle IT System which ensures service accessibility to valued clients with an emphasis on providing a comprehensive Internet banking platform.

In 2014, ABC Banking Corporation won the Best Private Bank in Mauritius Award of Euromoney Magazine in the category of offshore services. This was the second consecutive win based on a survey based primarily on a peer ranking methodology which has become one of the leading benchmarks in the global wealth management industry.

During that same year, ABC Banking Corporation also won the prize of Best Bank for International Banking Services Mauritius awarded by Global Banking & Finance Review, a well-known online portal that publishes informative and independent news within the financial community. This award was obtained again by the bank in 2015, in the course of which it achieved yet another distinction – that of the Best International Bank Indian Ocean. This award was adjudicated by the reputed financial magazine Capital Finance International (CFI.co).

Less than five years into its corporate trajectory, ABC Banking Corporation has built up a strong reputation through its capacity for innovation and the outstanding quality and integrity of its services. This year, the 172

“The bank offers a comprehensive range of traditional and innovative products and a palette of services that cater to both the local and international market through its dedicated, highly-qualified, and competent staff and management.” bank launched a number of new products such as the New Home Loan which falls under the Housing Empowerment Scheme, and the new SME (small and mediumsized enterprise) and micro-entity loans.

ABC Banking Corporation also launched ABC Optimum+ in September 2014. This is an innovative feature of our product line specifically targeting the middle income group and comprises a series of special benefits such as an interest-earning account, a chip-embedded debit card and cheque book, and free withdrawals at any ATM displaying the MasterCard logo in Mauritius.

The bank recognises the urgent need for mobilising savings in Mauritius. The savings rate has fallen drastically over the past years. The bank has undertaken a number of initiatives in this field with periodical billboard campaigns. It also offers attractive interest rates on its ABC Premier Savings Account.

In December 2014, the bank has moved its head office and main branch to the newlyacquired and prestigious WEAL HOUSE, strategically located in the heart of the nation’s financial capital at Place d’Armes in Port Louis. i CFI.co | Capital Finance International

Autumn 2015 Issue

> CFI.co Meets the Director and CEO of ABC Group:

Donald Ah-Chuen

P

rofessor Donald Ah-Chuen is the director and CEO of the ABC Group since 1995 and also serves as the managing director of ABC Banking Corporation. Prof Ah-Chuen holds an MBA from the University of Strathclyde in the United Kingdom.

He is also a fellow of the Chartered Accountant Institute of England and Wales and a fellow of the Chartered Accountant Institute of Australia.

Furthermore, Prof Ah-Chuen holds an MCIPD from the Chartered Institute of Personnel & Development in the United Kingdom.

In 2009, Prof Ah-Chuen was conferred the distinction of Grand Officer of the Star and Key of the Indian Ocean in recognition of his valuable contributions to the banking & financial services sector and to tertiary education in Mauritius.

“Less than five years into its corporate trajectory, ABC Banking Corporation has built up a strong reputation through its capacity for innovation and the outstanding quality and integrity of its services.�

Professor Ah-Chuen is a director of the Stock Exchange of Mauritius Ltd (SEM) and a former president of the Mauritius Chamber of Commerce and Industry. He is also a director of ABC Motors Company Limited and POLICY Limited, listed on the DEM (Development and Enterprise Market) and SEM respectively. i

Director and CEO: Donald Ah-Chuen

CFI.co | Capital Finance International

173

> IFC:

Corporate Governance Gains Prominence with the Forthcoming ASEAN Economic Community

By Chris Razook, IFC’s Corporate Governance Lead in East Asia Pacific

O

ne of the much-anticipated events in Asia this year is the formation of the ASEAN Economic Community which will allow goods, services, and investments to flow more freely across the borders of Southeast Asian countries.

The potential economic upside is significant.

According to 2013 figures, ASEAN countries have a combined per capita gross domestic product of just $3,800 – only slightly more than half of China’s $6,600 and a fraction of 176

developed East Asian countries such as Japan ($38,000), South Korea ($23,000), and Taiwan ($20,000). Amongst other things, the ASEAN Economic Community is expected to bring more foreign investment to the member countries and help unlock their potential.

This, however, will present both opportunities and challenges for companies in those markets. One critical factor in determining their chances for success will be ensuring these companies possess CFI.co | Capital Finance International

the high standards of corporate governance that are needed in order to remain competitive and well-positioned to attract foreign investment.

Numerous studies have shown that investors have greater confidence in companies with good corporate governance, and more generally, in markets that are backed by sound legal and regulatory regimes. For example, one regional study shows that both firm-level governance improvements and country-level investor

Autumn 2015 Issue

protections in Asia can lead to significant reductions in the cost of capital (The University of Hong Kong, 2003).

Yet, comparisons across the six primary ASEAN markets – Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam – reveal a significant asymmetry of governance standards and practices. Two recent studies are instructive in this regard.

First, the Asian Corporate Governance Association (ACGA) produces a bi-annual corporate governance update across the top eleven markets in Asia (not just ASEAN), covering both overall country-level rankings and ratings of specific companies. The 2014 results are largely consistent with those of prior years, revealing a clear dichotomy for the five ASEAN countries included in the study.

Three of them – Singapore, Thailand, and Malaysia – ranked in the top half, with Singapore tying for first with Hong Kong and Thailand and Malaysia clinching the 4th and 5th spots respectively. On the other hand, Indonesia and the Philippines ranked at the bottom for the third consecutive time (Vietnam was not included in this study).

Further, amongst the Top 20 companies ranked across all eleven markets, not a single one comes from either of those two bottom-ranked countries.

The second notable study is the Asian Development Bank’s annual ASEAN Corporate Governance Scorecard Report which examines the corporate governance practices of the largest listed companies in the six primary ASEAN markets. Once again, the results reveal a similar split between the top performers (Singapore, Thailand, and Malaysia) and the bottom ones (Indonesia, the Philippines, and Vietnam).

What does all of this tell us? It clearly shows that, as the ASEAN countries prepare for further integration, three of the key countries involved – Indonesia, the Philippines, and Vietnam – need to push for corporate governance reforms.

Thailand: The Democracy Monument

“One critical factor in determining their chances for success will be ensuring these companies possess the high standards of corporate governance that are needed in order to remain competitive and wellpositioned to attract foreign investment.”

CFI.co | Capital Finance International

Common themes emerge both at the company and market level in these three countries which together represent around 70% of ASEAN’s total population. For individual companies, some of the common challenges include: • Improving levels of transparency, particularly the disclosures of non-financial information and price-sensitive or insider information, which is now often not disclosed, or at least not in a timely manner; • Improving the functioning of corporate boards, such as by increasing their level of independence, strengthening their stewardship and oversight roles, reinforcing director duties, and adopting more effective procedures; • Strengthening risk management, internal control, and audit functions by ensuring formal structures are put in place with appropriate levels of independence; • Managing conflicts of interest and related-party 177

transactions better, through fair and transparent processes; • Improving shareholder rights and practices, including more formal shareholder meeting procedures and stronger protections for minority shareholders.

At the market level, there is still much work to be done by regulators and governments in these three countries. For example, regulators should continue to strengthen and harmonise corporate governance codes and regulations to ensure international standards are incorporated, as appropriate, and to help create a level-playing field with the other ASEAN countries.

State ownership remains high, particularly in Vietnam and Indonesia, which can hinder overall market competitiveness. In Vietnam, more than a third of the country’s GDP stems from stateowned enterprises and over 350 of more than 600 listed companies have some state ownership (World Bank, 2012).

Indonesia’s capital market likewise has a significant level of state ownership. Lastly, more should be done to raise awareness and advocacy for good governance across markets by regulators and through local partners such as institutes of directors. Indonesia and the Philippines already have established institutes, while Vietnam is in the process of creating one.

It is crucial that the governance improvements not only focus on large companies and banks, but also consider the needs of small and medium enterprises. SMEs are the backbone of the ASEAN economies, accounting for roughly 96% of companies and between 50-85% of domestic employment.

ASEAN integration will bring opportunities to many SMEs in the region, including possibilities to expand into new markets. These SMEs will be seeking more capital to fuel their growth.

Yet, enterprise surveys conducted by the World Bank confirm quite clearly that SMEs in emerging markets face more severe financing constraints than do large firms. For example, about 77% of Vietnamese SMEs are reportedly undercapitalised (Economic Research Institute for ASEAN and East Asia, 2009). Thus, future governance improvements should include efforts to help SMEs adopt proper standards of governance, which will give banks and investors – not to mention potential customers and business partners – higher levels of confidence.

To be sure, all three countries have made substantial progress in recent years. There have been various changes in laws and regulations to promote good governance and strengthen investor protection. For example, Indonesia’s Financial Services Authority (OJK) developed its ambitious Corporate Governance Roadmap in January 2014, which will lead to important governance improvements in the coming years.

Likewise, Vietnam’s new company law, the Law of 178

Author: Chris Razook

Enterprises, just took effect in July and introduced key changes such as strengthening the notion of independent directors and audit committees, improving shareholders’ rights, and introducing good governance practices such as board and internal control to state-owned enterprises.

In the Philippines, a number of governance improvements have been made in recent years, particularly for listed companies and banks. The Philippine government is revising its Company Law and the Philippines Securities Exchange Commission plans to strengthen its code for listed companies this year.

With such big changes ahead for the ASEAN community, it is crucial that Indonesia, Vietnam, and the Philippines continue such reforms.

IFC (International Finance Corporation) and the World Bank Group – with support from the

CFI.co | Capital Finance International

Swiss government – are committed to helping these countries raise their corporate-governance standards and transparency.

ABOUT THE AUTHOR Chris Razook is the IFC Corporate Governance Lead for the East Asia Pacific region. He has more than fifteen years of experience in the area of corporate governance and supports IFC’s investments by working with companies to strengthen their governance frameworks. Mr Razook has also supported central banks, capital market authorities, and other regulatory bodies in drafting corporate governance laws, codes, and listing rules to help develop stronger investment climates. He has an undergraduate degree in Engineering, an MBA in International Finance, and an LLM in Corporate Law. i

Autumn 2015 Issue

> Indian Ocean Rim:

Basin of Opportunity

By Penny Hitchin

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conomic development theory has variously identified the BRICs (Brazil, Russia, India, and China), the MINTs (Mexico, Indonesia, Nigeria, Turkey), and the Next 11 (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam) as all having the potential to become amongst the world’s largest economies this century.

An innovative approach from the Centre for International Development at Harvard University singles out the Indian Ocean Region as the likely powerhouse for the coming decades.

Head of the centre, development economist Ricardo Hausmann, believes that growth is driven by economic complexity. He posits that countries “accumulate productive knowledge by developing their respective capacity to make both more products and products of increasing complexity.” Transferable skills and collective knowledge underpin economic growth while countries that focus on agriculture or extracting resources, industries whose skills do not readily transfer to other products or industries, are at a long-term disadvantage.

The analysis of Mr Huassman’s research group uses global trade data for 2013 and the Atlas of Economic Complexity, an online tool which measures a country’s productive knowledge and predicts its rate of growth. The theory says that countries lacking natural resources, for example Japan and South Korea, need to be cleverer and more adept, diversifying into new industries and developing the skills needed for growth.

By looking at the diversity and complexity of the products that a country is exporting, Mr Hausmann forecasts the top ten countries by GDP growth to 2030 will be India, Uganda, Kenya, Malawi, Tanzania, Egypt, Madagascar, Zambia, Senegal, and the Philippines. This analysis leads to the prediction that it is time for the Indian Ocean rim to replace the Pacific Ocean rim as world-leading growth performers.

“Economic Complexity is like a game of Scrabble”, says Mr Hausmann. “The more letters you have, the more words you can make; the more capabilities a country has, the more diverse products it can generate.”

The vast Indian Ocean is the world’s preeminent seaway for trade and commerce and is endowed with a wealth of natural resources, as yet, largely untapped. For centuries, explorers, pilgrims, fishermen, traders, and merchants have criss-crossed the Indian Ocean establishing economic, cultural, and trading links.

“Today, the vast ocean is the world’s major seaway for trade and commerce with Indian Ocean Rim ports handling a third of global trade and half of global container traffic.”

Today, the vast ocean is the world’s major seaway for trade and commerce with Indian Ocean Rim ports handling a third of global trade and half of global container traffic. The countries and islands around the ocean are separated by language and history and have very different land areas, populations, and levels of economic development. They may belong to different subregions – Australia, Southeast Asia, South Asia, West Asia, and East and Southern Africa – but the two and a half billion people who inhabit the countries along the Indian Ocean Rim share their reliance on the ocean’s resources.

During a visit to India in 1995, Nelson Mandela said, “The natural urge of the facts of history and geography should broaden itself to include the concept of an Indian Ocean Rim for socioeconomic co-operation and other peaceful endeavours. Recent changes in the international system demand that the countries of the Indian Ocean become a single platform.”

The Indian Ocean Rim Association (IORA) was founded soon after. It now has twenty member states ranging from small island-countries, such as Comoros and Seychelles, to G20 members India, Indonesia, and Australia.

An emerging concept of relevance to Indian Ocean Rim countries is that of the Blue Ocean Economy, a pan-regional development programme which meshes ocean economy development with the principles of social inclusion, environmental sustainability, and innovative business models. United by the common bond of an ocean and a common commitment to the prosperity and sustainable economic growth of the region, IORA held its first Blue Economy Conference in Mauritius in September 2015. Aims include boosting coastal and national economies, promoting entrepreneurship in new areas of economic activity, facilitating interconnection between regional economies, and exploiting the untapped potential of the Indian Ocean while contributing to sustainable development and climate change mitigation.

CFI.co | Capital Finance International

Mauritius’s ambitious Ocean Economy Plan aims to transform the island by promoting the ocean economy as one of its main pillars of development. Surrounded by ocean, the country has a massive maritime zone and continental shelf. Five diverse key ocean economy investment opportunities have been identified.

• Fiscal, regulatory, and legal frameworks are currently being developed to accept expressions of interest for exploration and exploitation concessions for hydrocarbons and minerals.

• The fisheries and seafood processing sector currently represents around a fifth of total exports. Fishing activities comprise both islandbased artisanal fisheries and offshore fishing.

Opportunities for growth include harvesting the healthy tuna stock in the South West Indian Ocean and increasing value-added activities at the ports such as cutting, filleting, and packaging. In-lagoon aquaculture is growing and sites are available for marine aquaculture.

Farming of high-value and niche products such as seaweed, oyster and oyster pearl, crabs, sea-urchins, and other shellfish are also being encouraged.

• Deep Ocean Water Applications (DOWA) capitalise on the coldness and nutrient rich properties of very deep sea water to develop a series of commercial activities. Marine services could include a regional platform for marine finance, marine ICT, ship registration and marine biotechnology.

• Marine Renewable Energies can contribute to energy security and contribute to the target of one fifth of electricity production from renewable energy sources. Preliminary research on offshore wind and ocean-wave energies in the waters off Mauritius and Rodrigues has yielded encouraging results. The ocean contains a high potential for pioneering ocean current, ocean thermal energy conversion, and ocean saline energies.

• The University of Mauritius has set up a Faculty of Ocean Sciences to support the country’s aim of becoming a centre of excellence for ocean knowledge within the next fifteen years.

Centuries of economic domination by Atlantic Rim countries has been followed by the stellar growth rates of the Pacific Rim. With the west stagnating and China’s growth rates dropping, India, East Africa, and their Indian Ocean Rim neighbours look set to rise to the top of the economic growth table. i 179

> UNCTAD:

Developing Future Business Leaders with an Appetite for Delivering on the SDGs Work on the formulation of a new set of development goals to replace the MDGs (Millennium Development Goals) is now almost complete. By the end of September 2015, the United Nations announced the SDGs (Sustainable Development Goals). We already know these goals are quite ambitious − UNCTAD estimates put the investment requirements at some $3.9tn per year – that private sector participation will be a requisite if progress is to be made delivering on them.

T

he good news is that since 2012 investment flows to the developing world have increased and FDI (Foreign Direct Investment) to developing countries now surpasses flows to developed countries.

But most of that investment has gone to middleincome emerging economies while investment to least developed countries (LDCs) still lags. The challenge is to mobilise private sector finance to flow to regions – and sectors – where needs are greatest, and make sure adequate management skills are on the ground to ensure successful project implementation.

It would seem that courting the private sector to support the SDGs will spring up almost as an auxiliary goal alongside the primary set of goals.

In short: we’ve got to get business to fully grasp the business case of the SDGs. Immediate efforts to rally business buy-in for the SDGs will focus on interventions to improve the investment climate in earmarked sectors.

Regulation and incentives will go some way to provide the right signals to prospective investors.

To be sure, some novel approaches are already steering more capital towards developmentoriented outcomes. Business models are revised to turn non-profit social enterprises of old into for-profit impact ventures; dedicated social impact exchanges are springing up to link impact-seeking capital with social enterprises that deliver financial returns; and technology is increasingly harnessed to drive down the costs of goods and services to the poor.

But the new business approach is sporadic, piecemeal, and often focused on mature markets. In the meantime, conventional business approaches remain entrenched, particularly in markets where needs are most acute. Most businesses systematically exclude the vast majority of the global population: their money bypasses low-income markets, their products and services are beyond the reach of poor

180

“Business schools will be instrumental in developing a new generation of business leaders who can help solve the global development challenges.” consumers, and their business models often fail to recognise the poor as potential contributors to economic activity.

The situation points to a deeper malaise, which calls for a commensurate remedy. Corporate mind sets are simply not geared to factor in non-traditional markets. Regulatory carrots and sticks alone will not convince them to switch perspective. The long term challenge is to rewire business brains to recognise opportunity in lowincome markets and build the appetite and skills to invest and do business in these markets. And this is a task that obviously needs to be taken on by business schools.

With some notable exceptions, many schools have been slow to recognise their pivotal role in helping build a new business blueprint that weaves sustainability principles into the heart of the curriculum. While sustainable development imperatives are addressed, many of the programmes really only scratch the surface.

In reality most courses continue to direct students towards business models that work in developed country contexts, failing to point out that lower income, higher risk contexts call for alternative approaches and different models.

This neglect has left most graduates unprepared for the particular challenges associated with underdeveloped markets and ill-equipped to effectively invest and operate in them.

Case studies illuminate this point. These real life examples have become an integral part of the business school curriculum to impart knowledge CFI.co | Capital Finance International

and skills based on real world business examples.

Yet the vast body of business case studies are based on examples of conventional business models situated in mature markets. Less than 13% of these cases are based on real life studies situated in developing countries. For LDCs that figure drops down to less than half a percent.

Similarly, students most commonly gain real world experience through internship opportunities in large corporations operating in developed markets. But demand shows a large and growing number of students have an appetite to hone their skills in developing countries and then with SMEs (small and medium-sized enterprises) or alternative business model, such as social or fair trade enterprises.

It is clear that short and medium term public policy and corporate interventions need to be complemented by longer term educational interventions to help evolve business mind sets that understand sustainable development objectives should form an integral part of business decision making. It is important that educational programmes gear up to help students develop the skills that will equip them to manage business accordingly. This is the only sure bet to turn the current trickle of development finance into a committed and steady stream.

Last year, UNCTAD’s World Investment Report proposed an action plan for investing in the SDGs, which puts the private sector at the heart of strategies to deliver the post-2015 development agenda. As part of that action plan, UNCTAD launched its Business Schools for Impact Initiative, which seeks to help schools understand and take on the role of changing business minds.

In partnership with key business school associations the initiative has built a community of educators, students, and impact practitioners to exchange ideas, contribute materials, and

Autumn 2015 Issue

$790 bn

Power and transport infrastructure Climate change mitigation

$530 bn

Water and sanitation

$260 bn

Food security and agriculture

$260 bn

Education

$250 bn

Health

$140 bn

Figure 1: Investment Gap in Developing Countries for 2015-2030 (average difference between required and current levels of annual investment per sector). Source: UNCTAD World Investment Report 2014.

2.6 bn

Clean cooking facilities

2.5 bn

Sanitation facilities 1.3 bn

Electricity Clean water

750 m

Figure 2: Population lacking access to... Source: WHO, 2012, IEA, 2013.

LDCs 2%

Other developing economies 52%

Developed and transition economies 46%

discuss new approaches needed to transform business education and develop the skills that will channel more finance and business skills to markets and sectors where needs are greatest.

The project approach is novel: it solicits contributions of free materials from educational institutions that can be used by other schools, thus creating a global commons of business education materials to help educators introduce a wholesale new approach in the classroom.

The teaching materials are complemented by opportunities for relevant on-the-ground practical experience and fieldwork. To date, the key elements that have been brought together on the Business Schools for Impact Platform are: • 38 impact-oriented teaching modules – in both elective and core courses – which can be introduced into existing curricula or may be used to build a new curriculum that puts sustainable development imperatives at the core of the teaching plan; • More than 45 case studies that (i) are located in relevant markets; (ii) illustrate alternative business models and ownership structures; and (iii) focus on sustainable development sectors, including agriculture, education, energy, health, water, and women and youth entrepreneurship; • Internship opportunities in developing countries, and with social enterprises and SMEs, to give students practical exposure to operating in these markets. A pipeline of internships has been established in 13 developing countries across Africa, Asia and Latin America.

The initiative has met with unprecedented enthusiasm by the business school community, confirming the interest in impact-oriented business practice and the need for an initiative of this nature. Stakeholders are clamouring to sign up, and since its official launch at the World Investment Forum in October 2014, the community has grown to more than 550 educators, students, and practitioners, representing 210 business schools and 85 companies and related institutions worldwide.

Figure 3: Where do investment flows go? Source: UNCTAD, 2014.

Other developing countries 13%

LDCs 0,4%

Developed countries 87%

Figure 4: Which countries do case studies apply to? Source: The Case Centre, 2014, based on case studies published by The Case Centre

(2004-2014).

CFI.co | Capital Finance International

The community of contributors is also growing.

Contributing partners include UNDP (United Nations Development Programme), UNWomen, the Principles for Responsible Management Education (PRME), the Globally Responsible Leadership Initiative (GRLI), the Global Business Schools Network (GBSN), the Global Alliance in Management Education (CEMS), UNCTAD’s Empretec programme, the Aspen Institute, the Case Centre, the Institute of Social Entrepreneurship in Asia, PeaceNexus and a growing number of top global business schools.

Business schools will be instrumental in developing a new generation of business leaders who can help solve the global development challenges. With Business Schools for Impact, UNCTAD hopes to spur schools into action and help equip them to do just that. i www.businessschoolsforimpact.org 181

Greek Drama: Winners and Losers

A

simple thank you would have been nice.

However, no such acknowledgment of gratitude was given, nor is any forthcoming.

Instead, Germany’s benefactors were repeatedly told off with a resounding “nein.”

This is apt to happen when the fate of a nation – and by extension that of almost an entire continent – is entrusted to a lawyer with a tainted past. Undermining Europe’s financial stability and derailing its progress, German Finance Minister Wolfgang Schäuble – he of the 2000 party financing scandal – is on an unrelenting quest to keep the Greek debt crisis alive, and Greece crippled, so that his country may continue to reap its plentiful benefits.

Mr Schäuble understands law and economics.

He studied both at the University of Hamburg and the University of Freiburg in the late 1960s.

The law says that Greece must pay what it owes, while economics dictate that keeping markets in suspense with the threat of a looming Grexit pays off big time.

Between 2010 and 2015, Germany has pocketed a €100bn windfall courtesy of long-suffering Greece. As jittery investors sought refuge and succour in German government bonds, their yield dropped from 3% to a barely noticeable 0.05% or lower. Each year, Germany refinances about €180bn of its national debt, swapping maturing high-yield bonds for new ones issued at negligible interest. The exercise is a highly lucrative one and shaves on average 300 basis points off debt servicing costs for a total savings thus far of about €100bn.

Final Thought

Germany’s direct exposure to Greek debt currently stands at around €90bn. Should Greece renege on its debt, the Germans would still be in the money. However, maintaining Athens afloat is a far more interesting proposition as long as the Greek nation is kept teetering on the brink of the financial precipice. The new €86bn bailout package now extended to Greece aims to do just that: perpetuate the crisis by imposing conditions that forestall any chance of a speedy recovery.

Pointedly, Mr Schäuble has repeatedly rejected any solution that would provide for debt relief even though he stands virtually alone in considering Greece capable of meeting its financial obligations once the punitive reform package is fully implemented. The International Monetary Fund (IMF) and the European Commission (EC) beg to differ: both agree that Greece cannot possibly sustain a national debt equivalent to more than 200% of the country’s GDP. 182

“Mr Schäuble and his fellow finance ministers simply cannot allow the Greek drama to ever reach its climax.”

Mr Schäuble finds the IMF reluctant to participate in the rescue package that is expected to recapitalise the Greek financial system – whose fleeing billions now reside in German, Dutch, Austrian, and Swiss banks – and help the country meet its obligations. Germany’s finance minister insisted the IMF should shoulder at least part of the burden and thus offer the deal its institutional blessing. This would have eased Chancellor Angela Merkel’s job of convincing lawmakers to ratify the deal.

However, IMF Managing-Director Christine Lagarde refused to sign on. She pointed out that the IMF cannot possibly lend credence to a bailout – a misnomer of monumental proportions –that merely pushes Greece’s day of reckoning backwards. Ms Lagarde does not believe this third rescue package to be the last one and is convinced that any lasting solution to the Greek crisis needs to include a Great Jubilee, i.e. a (partial) pardoning of debt. In Brussels, the European Commission also argues that without a debt haircut, Greece has little chance – if any – of rekindling economic growth. In this regard, some protagonists candidly referred to the dismal survival rate of snowballs in hell.

Whilst European Commission President JeanClade Juncker and IMF Managing-Director Christine Lagarde may be spot-on in their analysis of the effectiveness of Mr Schäuble’s approach to the Greek debt crisis, neither one of them has to contend with concerned, and quite possibly angry, voters who will ultimately have to foot the bill of any haircut. As a privileged lender, the IMF is always paid in full whereas the European Commission has no skin in the game. It is, of course, a painless exercise to dispense with someone else’s money.

For all his failings, and there are many, Mr Schäuble is held to account by German voters.

Lest he fancies being hounded out of Berlin by pitchfork-wielding taxpayers, the German finance minister must keep the Greek drama going, coming up with new acts to push back the looming climax. As long as Greece stays financially afloat and is able to service its debts, creditor banks may mark their loans to the country as CFI.co | Capital Finance International

performing. However, should Athens be deprived of life-support and default on its debt, the banks will inevitably invoke the guarantees received from the Eurozone member states.

Interestingly enough, the €86bn now earmarked for Greece is not actual money that is disbursed

by Eurozone’s national treasuries – no matter what angry and sceptical lawmakers shout from their parliamentary perches. No cash changes hands. The sum merely represents a rollover of liabilities: an accounting stratagem that keeps everybody reasonably happy and as such constitutes but a third act of the aforementioned drama. In fact, Greece’s latest bailout is likely to prove quite lucrative to the other Eurozone members who charge hefty commissions and fees for underwriting debts and extending guarantees.

So far, Eurozone member states have not lost a single penny on Greece.

However, these happy times end the moment Athens is allowed or forced to default. The loan guarantees would instantly be triggered, draining actual money from treasuries across the Eurozone. The buck stops at the taxpayers of the continent. Real losses would ensue, upsetting the fragile fiscal balance in most, if not all, Eurozone member states.

Mr Schäuble and his fellow finance ministers simply cannot allow the Greek drama to ever reach its climax. However, there is no law or rules that condemn under-performing Eurozone member states to eternal damnation. Raking in untold billions as a result of the crisis in Greece, Germany and the few other more robust creditor nations may wish to show at least a modicum of magnanimity and compassion with the plight of the Greek people.

While a haircut may be politically inconvenient – or suicidal – there are a great many other ways by which the country’s predicament can be improved. However, save for a few vague promises regarding extended grace periods as a reward for exemplary compliance with the measures being imposed upon the country, Greece has been offered no solace at all.

European solidarity seems to have evaporated. In a pot-meet-kettle incident, the German weekly Der Spiegel in August went so far as to accuse the Greek of wilfully and maliciously ignoring the plight of the tens of thousands of boat refugees washing up on its shores. It would appear that Greece simply cannot do right at present and has now become the butt of Europe’s many frustrations at the inadequacies of its faltering union. i

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Continental GT V8 fuel consumption in mpg (l/100 km): Urban 18.4 (15.4); Extra Urban 36.7 (7.7); Combined 26.7 (10.5). CO2 Emissions 246 g/km.

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