RISKAFRICA Magazine 21 by COSA Media

Issue 21足 | 2015 ISSN 1812-5964

New heights New risks CONSTRUCTION AND AVIATION ISSUE

CONTENTS 04

New risks in a changing industry

Big fish in a shrinking pond

Hotel risks ‘under construction’ in africa

Inside the Germanwings airplane disaster

Dear reader

Better is better

Spy vs spy: South Africa’s secret satellite

We are a continent under construction. And with the entire region facing massive infrastructure deficits, it’s unlikely that this will change anytime soon. But who is constructing us? And who is benefitting most from the boom? Where are we missing out?

African insurance in the face of mass events

News

SA: all the potential still there

This issue we take a look at these questions – the trends, the risks, and the opportunities. The issue also carries an aviation theme, delving beneath the horror headlines to examine the real risk of the skies in recent years – and how the right combination of insurance coverage and reputation management skills can steer an airline through such an incident safely. We’re excited that this issue is set to travel with us to the northernmost country on the continent, Tunisia, for the Annual African Insurance Organisation Conference in Tunis at the end of May. See our pre-conference interview with the AIO general secretary Prisca Soares and conference attendees, discussing this year’s theme: African Insurance in the Face of Mass Events. The RISKAFRICA team is hugely excited to be attending the conference for the first time this year and will be tweeting our coverage live as well as filming interviews with key speakers for online distribution. If you’re there, we’d love to see you! Come and say hi and perhaps we chat on camera. Enjoy the read.

Publisher Andy Mark Editor Sarah Bassett Managing Editor Nicky Mark Assistant production editor Gemma Gardner Feature writers Dominic Uys, Frances Bailey, Luka Vracar, Melissa Wentzel Design and layout Herman Dorfling, Mariska Le Roux, Dave Androliakos, Davida Smith

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Ground floor, Manhattan Tower, Esplanade Road Century City, 7441, Cape Town, South Africa Copyright THE RISKAFRICA MAGAZINE PUBLISHER CC 2015. All rights reserved. Opinions expressed in this publication are those of the authors and do not necessarily reflect those of the Publisher, Cosa Communications (Pty) Ltd, COSA Media, and or THE RISKAFRICA MAGAZINE PUBLISHER CC. The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the information contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publishers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or products or the reliance of any information contained in this publication. Cover image: Shutterstock.com

New risks in a changing industry By Dominic Uys

The African construction sector has offered many opportunities for international players still reeling from the economic downturn. The continent has, however, only recently begun to see tighter controls on an industry that has struggled to shed its Wild West image, and some new challenges have arisen along with the old. 4

he global construction industry is set to grow to $10.3 trillion dollars by 2020, up almost $3 trillion from 2010, according to the Construction Intelligence Centerâ&#x20AC;&#x2122;s latest global report. The industry has regained growth momentum, with the pace of expansion accelerating from an annual average of 2.7 per cent in 2011 to 2013, and to 3.1 per cent in 2014. It is forecast to rise 3.8 per cent in 2015, and then an average annual increase of 3.9 per cent between 2016 and 2020. In that same period, the construction industries in emerging markets will record an annual expansion of 5.3 per cent according to the report. Other estimates have put construction growth on the African continent at around 6 per cent, which certainly bodes well for players in this market. With the boom in growth, however, there is also a significant number of new risks emerging for contractors. Among these is the steady rise of legislation in many countries, to cut out fraud and corruption, and keep as much of the money spent on the project inside the countryâ&#x20AC;&#x2122;s borders. One prime example is the announcement made by the Rwanda Public Procurement Authority earlier this year, that all Rwandan construction firms, both local and international, will now be recategorised. Firms will fall into one of six grades, depending on their financial, logistical and human resource capacity, before they can tender for public bids. Rwanda is not the only African country to put more control measures in place. From booming Mozambique to Angola and Nigeria, construction standards and the financial framework behind vital projects have started to mature and become better regulated. While it cannot be argued that increased regulation is a bad thing, it does make the contractor and project ownerâ&#x20AC;&#x2122;s job more onerous, and in spite of the maturing of the industry, some of the uniquely African challenges and risks remain. >

The risks to manage Krush Moodley, East and West Africa engineering risk manager for Munich Re notes that the maturing regulations in many of the countries on the continent have to a large extent mitigated some of the risks associated with corruption. Industry-wide there has also been a drive from the international construction sector to oppose corruption and many international contractors and project managers have taken a vow to refuse to pay the so-called ‘facilitation fees’ that were standard throughout the continent for so many years. That said, Africa still poses some Africansized risks for international contractors and project managers. “In most countries our

biggest risks are weather-related. The projects in Mozambique, where there is a massive construction boom at the moment, are at high risk of flooding. Angola, Nigeria, Kenya, and Congo are all places that are seeing major construction in areas with floodplains,” he says. Contractor-related risks are also high for many insurers and reinsurers. Moodley points out that there are cases where the contractor appointed to construct the project, has little experience in the particular build, or simply does not have a good track record for project delivery. “Of course this affects the risks on our side and it is likely to have an effect on premiums. Jean-Pierre Holmes, Africa engineering and property risk manager for Zurich Insurance, adds to this that fixing a previous contractor’s mistakes also increases project

Nigeria Election and oil price cuts hurt Nigeria Nigeria’s construction industry has been hard hit by political uncertainty after the country’s recent elections, as well as low oil prices which have contributed to falling revenues and resulting layoffs. Construction firms are heavily dependent on government cash and face project freezes, unpaid bills and mass redundancies. Infrastructure projects start for Centenary City in Abuja Abu Dhabi-based developer Eagle Hills wants to start installing the bulk infrastructure and services for its Centenary City development in Abuja.

The most recent developments on the African construction front

Cameroon Port inefficiency has ripple effect

Kenya Mombasa construction sites closed down About 50 construction sites have been forced to close in the city of Mombasa. According to the National Construction Authority, the developers of these commercial and private sites do not adhere to regulations governing housing and safety regulations. Drought halts construction The south-western county of Migori in Kenya is dealing with a prolonged drought, which has increased construction costs owing to the shortage of materials such as sand and bricks. Kenya builds border wall to keep alShabaab out While some countries build cross-border bridges, Kenya has begun work on its own great wall, designed to keep out nefarious elements from Somalia. According to director of Immigration Services, Gordon Kihalangwa, the wall will demarcate the Kenya-Somalia border and secure the country from alShabaab militants.

Uganda Uganda gets Kenyan cement plant The race for greater regional dominance in the cement industry is hotting up in East Africa after National Cement announced its intention to build a $198 million dollar plant in Uganda – its first outside of Kenya.

Zimbabwe

Inefficiency at the Port of Douala is a major constraint to growth for Cameroon and the larger west African region, considering its strategic location, points out the World Bank’s eighth edition of the Cameroon Economic Update. Entitled Revisiting the sources of growth: enhancing the efficiency of the Port of Douala, the study reveals that the port is one of the least efficient in the region and the objective to reduce global time to seven days at the end of the 1990s has not been achieved.

Tanzania Tanzania to float $1 billion dollar Eurobond

New PPC plant set in stone PPC Zimbabwe says its new cement plant construction project in Harare is expected to be completed by March 2016. Speaking at the launch of a new cement product, Surebuild, managing director Njombo Nekula said the environmental impact assessment for the project has been approved and building the $800 million dollar cement plant has begun.

The Tanzanian government is planning to float a $1 billion dollars Eurobond for the 2015/16 fiscal year to fund mega-projects in that country. Key projects earmarked for funding by the Eurobond would be outlined in the next budget, according to reports, but some of the projects initiated by Tanzania include the upcoming Bagamoyo port construction, expected to kick off in July this year.

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“We have a lot of contractors that often ask us for a risk assessment around evacuating people, and often one of the key considerations is how long it takes them to get from site to the nearest port/rail facility that can bring your team to a city for hospital treatment. And even in areas where there are major opportunities for industry or mining I know that the majority of developers/contractors would look at what kind of accessibility the site has before taking a risk on construction,” Holmes continues.

“Existing infrastructure, or more accurately the lack thereof, is also a major factor to take into account. Especially in Southern Africa we’ve seen a lot of infrastructure projects to support mining developments. Roads, railways, power, all of that need to be put in place to support the mine, and more often than not, the first contractors to start in an area have very little in the way of the most basic infrastructure.”

“We saw one case study where a power utility was incredibly interested in setting up operations in Mozambique’s Tete region, where major mining companies like Vale and Rio Tinto is currently operating.The biggest stumbling block, however, was the $2 billion that was needed to set up the required infrastructure in the region. >

Tanzanian road ready for overhaul

Namibia updates building standards

The Tanzania National Roads Agency has invited consulting engineers to tender for the upgrade of the Nyamirembe Port-Katoke road to bitumen standard. The consulting engineer will undertake the feasibility studies, detailed engineering design, environmental and social impact assessments and prepare tender documents.

Namibia’s construction standards are in the spotlight after a meeting between the industry and the Namibian Standards Institution. Riundja Ali Kaakunga, CEO of the agency, which falls in the fold of the Ministry of Trade and Industry, said pre-independence influences on the legal and administrative landscape often C saw different technical regulations being M fragmented and overlapping.

Rwanda Rwanda grades construction companies Rwandan construction companies are to be categorised into six grades before they can tender for public bids, from July. According to officials at the Rwanda Public Procurement Authority, all construction firms, both local and international, are being placed in categories depending on their financial, logistical and human resource capacity. Rwanda to combat deterioration of roads Smec has been appointed by the Rwanda Transport Development Agency (RTDA) to complete a detailed technical study of existing weighbridge stations. The objective of the government funded study is to prevent deterioration of road pavements caused by vehicle overloading, thereby reducing substantial maintenance costs to the RTDA.

Namibia Namibian mass housing project under pressure A number of new Namibian ministers in the ministerial committee steering the troubled mass housing programme are awaiting a project review to help get the programe back on track. Saara Kuugongelwa-Amadhila, former finance minister and now prime minister, was cautious about giving the National Housing Enterprise (NHE) the NAD2-billion bank guarantee to acquire funding from private banks because of questions dogging the project’s implementation.

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Ethiopia China’s part in Ethiopian upliftment

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A Chinese delegation to Ethiopia has revealed that it has finalised pre- CMY investment assessment to build a massive K new textile factory in Addis Ababa worth $500 million dollars.

Egypt Cairo green-lights mixed-use development

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Property developer Abraj Misr wants to start building the infrastructure and services to support a mixed-use development in Cairo, Egypt. The development, known as The Gate, will be located on a 450 000m² area in the Heliopolis district of Cairo. It will comprise 1 000 residential apartments, offices, shopping mall and a five-star hotel.

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Somalia Kuwait helps Somalia fund airport upgrade The state government of Puntland in Somalia is driving a major upgrade of the airport outside Garowe city. The upgrade will be financed from some of the proceeds of a grant from the State of Kuwait, which is being administered by the Kuwait Fund for Arab Economic Development.

2843 TheCheeseHasMoved

costs and risk. “There have been quite a few cases, the construction of Gaborone Airport in Botswana to name but one, where the contractor had been fired, and a new contractor needed to take over. Not only does this add significantly to the cost of the project, but there are also risks that the project will go well past deadline, and that the previous contractor’s work could lead to structural issues down the line,” he says.

2014/11/0

They were only able to source about 30 per cent of that in the end. It goes to show that the world economy does not have soft cash to invest in a lot of these projects, no matter how promising.

that can take a project from concept to completion, and Holmes points out that the company prefers to be involved in every aspect of a project for the sake of coordination and simplicity.

Hansa contends however that this is not a productive model in an industry that needs to evolve and become more sophisticated.

Interestingly, Moodley and Holmes agree that the operating risk that many would suspect to be a major threat, crime and kidnapping, features surprisingly low on the scale of danger to projects and crew.

“Unfortunately many times the insurance relationship is driven by the financiers who may dictate certain terms and bring in different insurer’s packages. But having too many insurers taking part in too many aspects of your project tends to deplete your claims control ability.”

“We realised that there is still a true opportunity for growth in the sector, which is not being met, so Continental Re established the Continental Property and Engineering Risk Services (CPERS). Granted, it is a fairly lengthy name for a company, but we opted for something that exactly described what we do. Our focus is specifically on the engineering insurance side in particular. We have seen that there is still a great need for underwriting skills in the projects that are funded on the continent – especially since the funders in most cases, stipulate that there should be a significant local component to the participation on the project. And because these are fairly sophisticated builds, one needs experienced individuals from the engineering fraternity that know how policies should be structured,” Hansa explains.

Too many cooks One of the new challenges is the insuring and managing of risk, which is also expected to change. Cas Hansa, MD of Continental Re’s Construction, Property, Engineering and Risk Services (CPERS) explains that the majority of African countries have instituted regulations on the insurance industry that stipulate the insurers allowed on any given project. “Insurance makes up a significant part of the capital on a project and it is in any African country’s best interests to keep as much of that premium in the country. So most countries now stipulate that a set percentage of a project’s cover must be placed with insurers that are either based in that country or that have a physical presence within that country,” he starts. Major international insurers, like Zurich, have many mature disciplines in-house

“Granted, many projects are simply too big for one insurer to carry and the project needs to be handled by a network of insurers and reinsurers. In that case, the sooner you establish those relationships, claims control is much easier to manage. But if you try to do that later on, or in phases, you not only stand the risk to not be insured for actual risk on the ground, but also risk creating huge gaps in your cover,” Holmes says. There are many cases where cover for certain aspects of a project is placed with local insurers, as part of a contract. “We have had cases where Zurich was appointed as the main insurer for a project, but certain parts of the project had to be placed with local insurers that didn’t necessarily have the capacity or skills to fully underwrite the risks. We have, on these occasions, stepped in and provided those skills from our side,” says Holmes.

Skills to grow the industry

“Facilitating with underwriting is really the core reasoning of securing a development with CPERS. Then in order to make sure that the local market is fairly and adequately able to deal with these kinds of sophisticated classes of projects, we try to retain those skills on the continent, so the training component is very important as well,” he continues. Hansa notes that not many of the local insurers on the continent have the required stability rating to participate in major projects, however. “There is that dynamic where local legislation and regulators are trying to stem the tide of premium exiting the country, because they have to be able to grow the capital to pay for the loan from the World Bank, or whichever entity granted the loan for the project. On the other hand, the funders need to have some sense of safety and that they have their capital insured with stable insurers. Which means that the vast majority of these projects still end up with the large multinational insurers and premiums still leave the country,” Hansa says. “The truth is that if we continue not to do anything but talk about it – as is the case now – we will still be sitting with the same situation in twenty years’ time. This is why we are now working towards setting up the mechanisms to develop the know-how, and integrate them with the established insurance institutions,” Hansa says. The other key areas that CPERS focuses on are risk and advisory services, and claims handling services. The opportunities from the continent with one of the fastest growing economies on the planet are far from over. While the many real risks associated with trying to complete a project, can and do stall major builds almost every day, new sites are constantly being readied for construction. It is just a matter of picking the project with the best chances of success.

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Big fish in a

shrinking By Dominic Uys

pond

There is no doubt that South Africaâ&#x20AC;&#x2122;s construction sector is not yielding many opportunities for industry players. But while growth has slowed, the industry is far from stagnant, and some areas may yet sustain the industry players and their insurers until the slump is over.

outh Africa’s construction sector has endured hard times for several years now. The global economic collapse in 2008 was a death knell for scores of international companies that had up to that point relied on opportunities in the first-world. Spain, Portugal, France, and even Germany saw an almost complete halt in industry growth. By rights, South Africa’s world-class construction industry players should have been threatened by the same dead stop in profitable work. Construction’s only saving grace at that point were the projects for the 2010 World Cup Soccer. This buffer, however, did not last long, and by 2010 the veterans like Stefanutti Stocks and Basil Read were forced to venture outside of South Africa to sustain themselves.

some sizeable developments of late, with the construction of the mixed-use residential and commercial hub, Steyn City in Johannesburg, and the establishment of the new Menlyn Maine Precinct in Pretoria to name but two. Urban renewal has also been a buzzword of late, with projects like Johannesburg’s inner city renewal project and the ongoing Johannesburg General Hospital project grabbing a lot of media attention.

Opportunities to underwrite Right off the bat, Juan-Pierre Holmes, Africa head of engineering risk at Zurich dispels the notion that the well-publicised urban renewal schemes offer up too much in the way of opportunities. “We are involved in one or two urban renewal projects, but on a segregated basis. So we only insure some of the contractors who pick up a portion of the work. Our larger clients do participate in these kinds of projects, but it is mostly smaller types of work. We cover these clients through an annual construction portfolio. Under that we will pick up any contract up to R500 million.

It is hardly surprising since South Africa’s construction sector growth has become one of the lowest on the continent. Africa’s average sector growth at this stage is six per cent, while South Africa now dwindles at around one per cent. Still, Gauteng province has seen

If, on occasion the project is over R500 million, the contractor can get project-specific cover, which he declares separately. We do pick up some of that, but we haven’t seen as much opportunity to underwrite major participants in urban development projects,” he starts.

KINGJAMES 27075

The news wasn’t all bad, as one Botswanabased project manager notes, “We have so many new infrastructure projects in the country at the moment, but until 2010 a lot of them just couldn’t get past tender phase. We would open a dam project or a road to tenders, but none of the large South African contractors would be available. Now we usually have more applications than we bargained for.”

As such, greenfield developments still offer up significant opportunities, and residential developments such as Waterfall Estate in the north of Johannesburg, or the aforementioned Steyn City have offered the country’s massive contractors chance to monopolise as much of the construction work on a single project as possible. One of the major risks with such projects relates to investment, according to Douw Steyn, developer of Steyn City. He contends that selling empty plots and unbuilt houses puts the contractor at risk of running out of steam as capital for the project trickles in. Steyn opted to completely fund his project and then to sell off the houses upon completion of the entire project, eliminating at least some of the project delivery risks. That said, not all developers have R50 billion to put down before the start of each construction phase.

New projects and new techniques Over the last five years there has been a major drive in the construction sector in South Africa to move towards more sustainable practices and construction materials. A case in point is the green star rated Nedbank Phase 2 in Sandton. Power- and water-saving technology installed in the building, for example, were estimated to be able to save up to 30 per cent on electricity costs and around 60 per cent on water. >

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The construction techniques on this building were also very different from the usual. Materials such as reinforcing steel had to be sourced locally and be composed of a high percentage of recycled steel. Bricks and rubble were either recycled off-site or used in other applications on-site. Fly-ash was added to the concrete used on the project, in order to attain a 30 per cent reduction in cement use. However, all of these measures came at a price, as well as some increased risk to project delivery. Concrete containing higher levels of fly-ash can take up to 50 per cent longer to cure, and locally sourcing some materials sometimes, and counter-intuitively, tended to take longer. Difficulties notwithstanding, the Menlyn Maine precinct currently underway is also seeing many of its projects being constructed with these sustainable best practices. For one, contractors on-site are expected to incorporate the rubble from the houses that were demolished on the property, into the new buildings. The drive towards greener building may be noble, but one wonders whether the industry is opening itself up to unforeseen risks due to untested materials. Cas Hansa, MD of Continental Re’s Construction, Property, Engineering and Risk Services (CPERS) does not seem to think so. “The South African construction sector has produced quite a few world-class contractors and consultants, so the possibility of the sector adopting new practices or materials before all the risks are fully understood, are relatively slim,” he says.

still contractor related. “There are instances where the client appoints a contractor that we wouldn’t necessarily advise. These are contractors who either have a poor track record where project delivery is concerned, or contractors that don’t have experience in the type of project or new construction technique that is being implemented. Where green building is concerned, especially, we would look at whether the contractor has the specialised skills to work with new materials within his company,” he says. “In those cases we tend to take contractor risk into our underwriting and we may make recommendations to the contractor. As a major participant in many of the large projects, our recommendations usually carry a lot of weight with the project financiers,” Moodley adds. “If the question is whether there are any major challenges that the construction sector and construction insurance companies face at the moment, I would say that once a project in South Africa makes it past feasibility phase, there is very little stopping a successful project from completion,” Hansa says. “One important thing is that insurers are on the forefront of technology development to ensure that if the engineering fraternity pushes the development frontier, the insurance industry is ready to quickly position itself and determine what is insurable and what isn’t. That is the beauty of having engineers in your insurance company,” Hansa says.

The Chinese connection

“Certainly we have all been made aware of some building collapses here and there over the past few years, due to bad construction or low-grade materials, but these are completely in the minority and construction in this country carries very low risk relative to most other areas,” Hansa continues.

In conclusion, a trend that has been the norm all throughout Africa has, in recent years, also become part of the South African construction scene. Over the past few years, Chinese contractors have gained an increased foothold in the country, with a number of key projects already having been awarded.

Krush Moodley, East and West Africa engineering risk manager for Munich Re, notes that some of the most significant risks in South Africa, from an insurance perspective, are

Among these is Maboneng City in Gauteng, which follows the trademark method of a Chinese project in Africa. The financing for the development is

being put forward by a Chinese bank, Chinese contractors are completing the project and steel and raw materials for the build has been sourced from China. Having gained a dubious reputation for poor work, Chinese contractors have experienced a lot of animosity from the rest of the sector. Moodley notes, however, that again, the risk varies from contractor to contractor. “We actually haven’t seen contractor risk go up or down based on the region that they are from. It is still very much up to the client to vet the individual contractor,” he says. Holmes points to a different risk for the insurer. “We had been called in to underwrite and consult on one of the Chinese-run projects taking place a while ago. As soon as our own consulting and underwriting process was completed, we found ourselves replaced by a Chinese insurance company, who went on to provide the cover for the project,” he says. As it stands, South Africa’s construction sector is still not expected to break the 1 per cent growth mark over the coming year. With international players now also encroaching on a severely truncated market, competition is heating up even more for contractors and insurers alike. Hansa reiterates that the insurance community’s priority is to stay ahead of the curve as far as knowledge and skills are concerned, and lastly, to wait. “When the insurance companies have developed themselves and their balance sheets, they will have the ability to meet the demands of the sector as the economy inevitably recovers over the coming years.

Hotel

risks under construction in africa

Africa is currently the least developed continent in the world – but things are changing. As the world’s eyes turn to Africa as the final frontier for growth, resources and exciting returns, multinational companies in the mining, oil and gas, ICT and services sectors, in particular, are in a race to acquire contracts and business partners across Africa – and they all need a place to stay… Mark Martinovic, CEO of Hotel Spec, tells us about hotel risks in Africa.

Pitfalls in hotel development in Africa In order to succeed in the development of a hotel project, one needs to understand the various risks associated with hotel developments in Africa. The most common of these concerns should focus primarily on: •

•

frica and its growing cities are still wracked by challenges – electricity is intermittent, corruption soaks up development funding, political instability and tyrannical governments undermine confidence, and kidnapping of foreigners is rife. Or, at least that’s been the stereotypical image of African countries until recently for many foreign investors. Analysts say the rate of return on foreign investment in Africa is higher than in any other developing region. According to the IMF World Economic Outlook, 10 out of 20 of the world’s fastest growing economies (highest projected compounded annual growth rate (CAGR) from 2013 to 2017), are in sub-Saharan Africa.

•

As a result, Africa now has the fastestgrowing middle class in the world. Some 313 million people, 34 per cent of Africa’s population, spend US$2.20 a day, a 100 per cent rise in less than 20 years, according to the African Development Bank. Along with this ‘rush’ to Africa, comes the need for new hotels. Traditionally, Africa has come off a very low base, and international hotel chains and brands have set Africa, as a continent in general, as a high-value destination for their brands. •

Registration of land ownership and title deeds Land ownership in many African countries is still an issue, and unless clear and unencumbered title to the property can be proved, no financial institution will consider providing any funding for the project. Capacity of the professional team Having stayed in many hotels around the world does not qualify an owner or a designer of being a hotel expert. Employing the design and consultant team with relevant experience and capacity to execute the project are of the utmost importance. Availability of resources for the construction as well as long-lead items such as plant and equipment Availability of construction materials locally will impact on the overall cost of the project, but skilled labour is equally important. Consideration prior to construction should be given to all plant and equipment that needs to be imported. Some countries have particularly prohibitive importation procedures that will have a direct bearing on cost and time while ports, rail and road networks are mostly underdeveloped. Availability and cost of funding Debt funding for hotel projects, while still being available, is not easy to secure. Most financial institutions do not like the cyclical and uncertain nature of projecting hotel revenues and profit. This ultimately results in the cost of finance sometimes being unaffordable in the project’s business plan. Experience, capacity and ability of the contractor to complete the project Too often, clients tend to consider the cheapest tender for the construction works, and this can lead to disaster. Prospective hotel developers should inspect the contractor’s previous relevant projects as well as do a full background due diligence on their contractor. The form of contract to be entered into should be appropriate to the project and provide sufficient security to the client with regard to performance guarantee, advance payment, insurance, retentions, completion and defects liability. Contract documentation The form of contract to be entered into is vitally important as that is the document that states the required performance and expectation of the completed project, while dealing with all aspects of the design, construction and completion

•

of the project. It also clearly sets out the timing for the project, all payments, insurances, allocation of risk and remedies in the event of any default by either party. Infrastructure One of the biggest challenges in Africa is the availability of electricity, portable water and sewage insofar as hotel developments are concerned. Hotels consume a large amount of electricity and water and produce a huge amount of sewage and wastewater. As opposed to their Western counterparts, hotels built in many African countries have to provide all of this themselves, in the form of diesel generators, boreholes and water treatment plants, sewage treatment plants, etc. This all adds to the cost of construction, additional equipment and then the cost of running and maintenance.

Hotel brand Each hotel brand has its own set of guidelines and brand standards as well as detailed requirements for the finishes, facilities (both front and back of house), Fire and Life Safety (FLS), amongst others. More International Management Agreements than not, have specific clauses requiring the owner/developer to comply with all of the Brand Standards for the specific hotel brand they have selected. This is a contractual requirement (in terms of a signed management contract), whereby the owner has to produce a fully equipped and furnished hotel to the standards required by the operator. Where a hotel developer has decided to go ahead with his development prior to appointing a hotel operator and then selects an operator and brand during construction, there is a very high risk of having to make a number of changes to the design, specification of plant, equipment or furnishing, or spatial planning. For example, an operator may require more than one service elevator for a hotel larger than 100 rooms and if only one was planned for, then structurally and architecturally, this will have major implications to the cost. In addition, there will be time delays for the design work to be completed and then additional works to be affected on site. The result of this would be the contractor being able to submit an extension of time claim, there will be additional costs for design and then the purchase of the additional elevator, which in itself is a long lead and expensive item in any building. Along with the extension of time claim from the contractor, he will be permitted to add P&G (overhead) costs to each day of extension and will be entitled to reasonable profit on the addition to his scope of work. Even in a fixed price, lump sum contract, this late adjustment to the design and/or the addition of equipment or built-up area, will result in additional cost and time to the employer. >

Hospitality projects, by their nature, carry a higher financial risk than most other types of developments. So creating designs that are not too extravagant is important. Architects and designers should understand that the design needs to be appealing, while reinforcing the brand identity, providing safety and security and should maximise the revenue potential of the hotel.

employed, this may put financial pressure on the contractor and inhibit his ability to perform according to the contract. In addition to the interest charges, the contractor may suspend works due to non-payment or he may have to delay ordering certain equipment that requires upfront payment from him, thereby delaying the contract to which he would be entitled to a claim for extension of time.

Client/employer

Change in legislation

The employer needs to ensure that they have secured funding for the entire project as delays in payment to the contractor can have a severe impact on the project. A contract for construction will require an advance payment, normally 50 per cent of the total contract value.

Where certain changes have come about as a result of a change in import procedures or delays by authorities and the contractor can prove that he had diligently followed the procedures laid down by the relevant legally constituted public authority in the country of the project, then again, the client will suffer cost and time implications.

Thereafter, there are monthly payments to be made. Some clients are under the impression that once 50 per cent of the contract sum has been advanced, that they do not need to pay again until the development is 50 per cent completed. This is not the case, and the contractor will submit regular claims according to an agreed schedule of payments. These payments will have deducted from them: the retention amount as well as 50 per cent of each claim (the amount of the advance payment), however, they will still have amounts owing to the contractor which must be paid. Failure to pay the contractor on time will entitle the contractor to compound interest on the outstanding amount. The risks here are the increased interest charged by the contractor to the employer, adding to the project costs but also, where a smaller contractor has been

Client supplied items In many hotel projects in Africa with private individual owners, the owner elects to procure and supply certain items to the contractor. Alternatively, the parties could negotiate that the client will select the supplier of a product and the contractor will have to import the specified product from that supplier at his cost, which will be itemised in the bill. The biggest risk here is that many hotel developers in Africa believe that they can procure items cheaper from China. In most cases, the client is not a specialist in that particular product and since it is a client supplied item, the contractor will not accept

responsibility for the performance of those items and will not cover the warranty. A further risk is the ability of the employer to ensure that all free issue materials are delivered to site on time in accordance with the programme of works. If the delivery is late, partial, or items are damaged, causing a delay to the programme, the contractor will be entitled to claim for extension of time. Where the items arrive too early, they will need to be securely stored in an environmentally appropriate (rain, humidity, dust) warehouse, of which cost should be considered.

Long lead items Unfortunately in Africa, most plant and machinery items are long lead items, meaning it takes a long time to get them to site. Before they can be ordered, they must also be designed, specified and agreed to by the hotel operator. The ordering, supply, logistics and local clearing and delivery to site must be carefully coordinated in order not to cause any delays to the projectâ&#x20AC;&#x2122;s programme. Other issues could be problems in port, international exchange rate exposure, customs procedures, availability of transport vehicles, and the state of the roads and infrastructure. In addition, availability of local specialist installers and availability of spare parts and service personnel. Hotel Spec are hotel development experts with experience of more than 80 hotel projects in 21 African countries.

Shaping unique

solutions that Shine

Emerald Risk Transfer is currently the largest Corporate Property and affiliated Engineering Underwriter in South Africa, and underwrites business throughout the African Continent. The solution orientated approach of the Emerald team to create sustainable, quality products is part of their culture. This flexible approach, coupled with the support of their excellent Reinsurer panel, allows Emerald to be truly innovative.

For more information on how Emerald can assist your Corporate clients, visit our website or call us. t +27 11 658 8200 W www.emeraldsa.co.za E info@emeraldsa.co.za Find us on Facebook www.facebook.com/emeraldrisktransfer Or follow us on Twitter www.twitter.com/emeraldrisk Emerald Risk Transfer (Pty) Ltd (Reg. No. 1998/025512/07) is an authorised financial services provider (FSP No. 13893)

The aim of the company is not to be the cheapest by cutting corners, but rather to be the best by offering expertise and skill. Emerald Risk Transfer is a wholly owned subsidiary of the Santam group. Santam Limited is a level 3 BBBEE company, and has a Standard & Poorâ&#x20AC;&#x2122;s international rating of BBB+ and a national rating of AA+, with a stable outlook.

AF R ICA

Continental Re introduces a

specialist construction, property and engineering subsidiary Continental Reinsurance Plc, Africa’s largest private reinsurer outside of South Africa, has announced the launch of its new specialist subsidiary, Continental Property and Engineering Risk Services (CPERS). By Sarah Bassett

PERS has been established to meet the growing demand for specialist engineeringinsurance risk advisory services currently driven by Africa’s infrastructure and construction boom, all across sub-Saharan Africa.

Lawrence Nazare, executive director of Continental Reinsurance

“Our view is that there is an existing property opportunity in Africa, particularly in the mega risk areas such as mining, manufacturing and a significant new real estate – new hotels, massive investments in new cities in countries such as Kenya and Nigeria. And the opportunity here is for the development of more advanced underwriting. We believe there is currently some exposure for us as a reinsurer to the gradual deterioration of underwriting standards,” says Lawrence Nazare, executive director of Continental Reinsurance.

“It is imperative for Africa’s development, for African reinsurance companies to provide the required specialist insurance skills and expertise to support efforts to bolster the retention of African reinsurance premiums in the continent,” says Nazare. “For this reason, we have strengthened our core engineering capability by enhancing our existing offering,” he adds. Historically, foreign reinsurance companies have provided the requisite engineeringinsurance advisory skills and benefitted from premiums generated in Africa. “The time has come for Africans to support Africa’s growth by utilising local engineering-insurance skills as well as fast-tracking the transfer of knowledge and training for insurance companies across the continent to ensure that Africa strengthens its capability to support its own growth,” says Nazare.

Four key functions Cassim Hansa, a professional civil engineer and MBA graduate, with over 20 years experience in both the engineering and insurance industries in the USA and South Africa has been appointed the managing director of CPERS. According to Hansa, CPERS will focus on four core focus offerings: underwriting of engineering and construction risks in Africa, risk and advisory services, claims handling services, and training to the insurance companies. He notes that there are significant and critical areas for development and learning in all of these areas – each as important as the other. “Proper engineering knowledge at claims stage, for instance, can be the difference between sustainability and not in the longterm.

“If you’re assessing a major flood loss, for example, which has washed away a section of road infrastructure – if you’re out on your measurement of the damaged section of road by even a few kilometres, the unnecessary cost implications could be significant.” “Insurance professionals in Africa are hungry for training and unless we step in and fill the urgent need for knowledge transfer in the insurance sector, Africa is at risk of losing the opportunity to foreign firms by not developing its own capabilities,” says Hansa, adding that he has been amazed already at the level of interest from youth in Lagos and Addis Ababa where training has begun. “There is huge hunger for training in these specialist classes and great recognition of the opportunity they present. This is enormously exciting for me,” says Hansa.

CPERS is committed to facilitating skills transfer and training to develop a stronger specialist engineeringinsurance sector on the continent by delivering training sessions in fastdeveloping regions in Africa. In 2015, CPERS will conduct training in Gaborone, Harare, Lagos, Lusaka, Maputo and Nairobi. CPERS is registered in South Africa and will also do some work in South Africa through underwriting management agencies in the country. Over 200 delegates from insurance companies have already attended training sessions delivered by Continental Reinsurance on engineering and property risk services in 2014, in key regions across Africa, including Addis Ababa, Harare and Lagos.

Inside the Germanwings

airplane disaster By Sven Hugo

Another 150 dead in the latest in a spate of disasters for the aviation industry. Although the Germanwings tragedy has been classified by prosecutors as a homicide rather than an accident, the slew of headlines over the last 15 months could leave anyone questioning the safety of the skies.

he human tragedy of these incidents is colossal and makes for heartwrenching and dramatic news. For airlines, knock on impacts are considerable, and the massive recovery and investigation efforts are just the beginning of a long journey to get back on track. RISKAFRICA delves into the real state of risk in the aviation sector and unpacks how thorough coverage can mitigate the multiple impacts of such a loss.

Flight 4U9525 On 24 March 2015, first officer Andreas Lubitz and captain Patrick Sondheimer steered the nose of a Germanwings Airbus AB320-200 northeast towards Düsseldorf, Germany, after departing from Barcelona in Spain. Germanwings Flight 4U9525 – carrying 144 passengers and six crewmembers – never made it across the French Alps. It crashed 100km northwest of Nice, killing

all on board. Shock permeated the media and headlines left the general public reeling from the news of another major loss following what seemed to be one of the worst years for aviation in decades. It wasn’t until investigators retrieved the data captured by the cockpit voice recorder and the flight data recorder, or the so-called black box from inside the plane, that baffling evidence emerged. It appeared that somewhere above the Alps one of the pilots manipulated the auto-pilot settings to put the plane into a steady descent to 100 feet with repeated accelerations in the last eight minutes before crashing at 6 000 feet above sea-level. In doing so, he was able to override the auto-security presets that would otherwise have sounded the excessive-speed alarm. A French prosecutor said this evidence, coupled with recordings on the voice recorder, confirms that Lubitz had locked captain Sondheimer from the cockpit and, while breathing easily as evidenced by the recording, proceeded with his plan. >

It is important to note that at present there are two ongoing investigations into the Germanwings crash: that of the French Investigation Bureau (BEA) investigating the immediate evidence of the accident, alongside a criminal investigation by the state, galvanised by the loss of human life. The notoriously secretive BEA is yet to release a final report while the French prosecutor has already publicly stated that Lubitz was directly responsible for the crash; a statement many experts criticised as being pre-emptive. The fact is, however, that another airplane has gone down after the aviation industry last year recorded the highest loss of life in aircraft crashes in three decades, as shown in a report released by the Air Transport Association (IATA). One could be forgiven for thinking that it is time to switch to boat travel but this statistic is misleading as the occurrence of accidents for airlines with IATA membership has actually steadily declined year on year from 0.89 accidents per million flights in 2009 to 0.12 in 2014.

“Given the circumstances it is highly unlikely that Germanwings will try and defend claims on the grounds that it was in no way negligent or responsible for the actions of the employee.”

An aircraft disaster is, by nature, a highly dramatised event, and the sound statistics of the exponentially higher risk of being killed in a bicycle accident or being fatally struck by lightning than in an airplane crash will not dampen the initial outcry. The Malaysian Airlines flight that went missing in the Pacific and a flight of the same airline that was shot down occurred within months of each other and still loom heavily. A disaster like this is traumatic, but it need not spell the end for the airline involved. Experts agree – and history has shown – that if an airline has a comprehensive insurance policy, and a crisis communication plan in place, it can mitigate and recover from a disaster of the magnitude such as the Germanwings crash.

The long road to payouts In a BEA report, Genesis of a Feedback System Based on Human Factors for the Prevention of Accidents in General Aviation, the bureau warns of the lengthy and intricate procedures that follow a plane crash. “In the realm of public air transport, technical investigations into accidents and serious incidents may become extremely complex, since organisations are highly structured, the parties involved are clearly identified, and procedures are standardised,” the report notes. The longtail nature of these investigations has a direct bearing on liability claims, and a crash of this magnitude involves the gamut of players in the insurance industry. James Godden, head of aviation at Santam, says claims involving aviation liability litigation can be particularly lengthy due to the individual terms of each passenger and the varying time required for legal matters to run their course. “The complexity of an aviation claim will also add to the timeframe due to the fact that [input from] various experts will be needed,” Godden says. In a statement released by Allianz Global Corporate and Security (AGCS), a division of Allianz responsible for underwriting the Germanwings claim, the insurer says a

preliminary reserve of approximately $300 billion was set up to cover all initial claims and costs, including compensation payments to the next of kin, accident support and investigation services of the crash, legal support, as well as the hull value of the aircraft. The liability for the hull is handled by a separate consortium of ‘hull war’ insurers. War-risk insurance covers loss or damages and liabilities arising from war liabilities, including hi-jacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including any attempt at such seizure or control) made by any person on board the aircraft acting without the consent of the insured. Dave Rintjes, director at Airspace Africa, a division of Natsure Insurance, says he believes the cover of the hull may be settled under AVS103, where the hull and war underwriters have agreed to each cover 50 per cent of the claim until the cause of the accident is legally determined. An initial reserve is set up by aviation insurers and is likely to vary from this amount ($300 billion) pending an investigation. “The reserve figures will be adjusted as full information is confirmed, reflecting the compensation for all affected under these policies, which will be met fully and fairly in line with the

45 The percentage of global aviation fatalities in Africa alone in 2012. 88 Percentage of global aviation fatalities in Africa and Asia. 50 + Percentage of second generation aircraft at carriers in Africa. 41 Percentage of effective implementation rate of the ICAO Safety Oversight Audit Program (USOAP) in African countries. In 2012 African carriers lost 5.3 aircraft per million departures compared to 3.2 worldwide. In 2012 Africa accounted for only 5 % of the acccidents but was accountable for 45 % of global fatalities at 167 of 372. Global Aviation Safety Study (2014)

arising from accidental loss as well as liability losses that arise out of a deliberate act or omission (war liabilities),” he says. “Should this be deemed to have been a deliberate act, arguments will be put forward that may have a further impact on the application of the Montreal Convention, should it apply, with regard to the definition of wilful misconduct.” applicable law,” AGCS says. “Every claim will be fully honoured on an individual basis. In such difficult circumstances, the process of fully analysing and assessing each case is likely to take some time. This is why Lufthansa Group, with support from its insurers, is offering an immediate interim payment of 50 000 EUR on behalf of Germanwings to next of kin to address immediate financial needs.” Understandably, Allianz is not able to provide the minutiae of the liability claim as investigations are currently at a sensitive stage. Rintjes says that there are still many missing pieces to the puzzle, and the final aspects of liability are still to be determined. “We presume that the flight was carried out under The Montreal Convention (more formally known as the Convention for the Unification of Certain Rules for International Carriage by Air), a multilateral treaty adopted by a diplomatic meeting of International Civil Aviation Organisation (ICAO) member states in 1999,” he says. “It’s this Convention that will regulate compensation to the deceased passengers’ dependants.” Rintjes says each passenger’s legal liability will be determined following the outcome of the investigation into whether it is a war claim or not. “The passenger liability cover is underwritten in the aviation market both with regard to liabilities

Graham Speller, director at Dennis Jankelow and Associates, a leading aviation insurer in South Africa, explains that under the Montreal Convention a carrier is strictly liable – without proof of negligence – to the equivalent of 114 100 Special Drawing Rights (SDRs), a currency that consists of a ‘basket’ of currencies, as Speller explains, that include the euro, sterling, yen and US dollar. The SDR is currently valued at approximately $1.37 which translates to a strict liability sum of up to $156 000 per individual. However, in the event of demonstrable carrier negligence the applicable limit is no longer relevant, and the carrier is liable to a potentially unlimited sum per individual, says Speller. “Given the circumstances it is highly unlikely that Germanwings will try and defend claims on the grounds that it was in no way negligent or responsible for the actions of the employee.” The €50 000 ($53 966) that Germanwings has paid to the next of kin has no bearing on the above liabilities as set out by the Montreal Convention and is an initial payment to deal with immediate financial responsibilities. If the court concludes that it was wilful misconduct on the part of Germanwings the next of kin of each passenger is liable to further claims from the insurer which is settled by individual legal proceedings.

Speller says the insurance claims will invoke hull war risks for the destruction of the aircraft through an act of sabotage to the approximate value of $6 500 000, third-party liability for the ‘clean-up’ costs for which there is no estimate available at present, and passenger/ cargo liability for claims arising from the death of passengers and destruction of baggage and cargo, for which the current industry estimate stands at $300 000 000. At present the Montreal Convention (also known as MC99) only applies to airlines in countries where the Convention has been ratified and countries such as Indonesia, the Philippines, Thailand and Vietnam have yet to sign up. Even a global superpower like Russia is yet to ratify the Convention. According to the IATA policy document, the global ratification of the Montreal Convention is top-priority. “MC99 gives consumers better protection and compensation and facilitates faster air cargo shipments while airlines enjoy greater certainty about the rules affecting their liability,” the organisation says in a report. A major loss like this requires a huge amount of work for insurers, legal representatives and everyone involved in the placement of insurance, together with reinsurers and other parties in order to achieve an efficient and smooth settlement. It may take years to finalise, says Speller. “Depending on the circumstances, claims, especially those arising from death or serious injury, may take many years to finalise, particularly where minor dependents (children) are involved, since their right to claim may only become extinguished (by prescription) once they have reached adulthood.” >

Ratings and the risk of long-tail One of the major risks facing a carrier in a long-tail claim is an insurer failing to pay or becoming insolvent before it has settled its liabilities, leaving the policyholder with the liability and no effective insurance coverage, says Speller. “This is why the selection of insurers is so important and why most insurance brokers and risk managers will require that coverage is effected only with insurers who have demonstrable financial security,” he says. “Ratings agencies such as Standard & Poor’s and AM Best specialise in analysing insurance companies and it applies these ratings to those insurers. It can provide a useful guide to the relative financial strength of one Insurer compared with another,” says Speller.

Reputation fallout At the moment, there is no specialist consequential loss insurance for the aviation market that would cover business loss as a direct result of an accident, says Speller, but the best way for an airline to contain reputational damage is in the way it handles the disaster. “If it handles the situation carefully and professionally, the travelling public will usually ‘forgive’ fairly quickly,” he says. “Many airlines and major non-airline aviation operators will retain the services of emergency response consultants that specialise in

handling the external aspects of an aviation disaster, be it dealing with the press, setting up call centres, arranging for identification and repatriation of mortal remains and so forth. These specialist companies will often be the difference between a substantial level of ‘reputational damage’ and an airline that is able to survive the consequences of a disaster and return to normal service and profitability within a relatively short period.”

Travel insurance When Germanwings Flight 4U9525 crashed, a flurry of actions were set in motion. The media reacted with expected headlines, the airline sympathetically replied and the investigation and insurance processes kicked into high gear. In the frenzy of activity and multiple priorities, some of the underlying issues, such as repatriation, often fall by the wayside. Anriëth Symon, head of travel at Zurich Insurance in South Africa, says all of Zurich’s policies cover repatriation of the body as well as the logistical processes involved. Had there been any survivors, all of the insured’s needs would have been taken care of, says Symon. “If there are survivors, which is very rarely the case in accidents like these, the insured will be taken by ambulance to a hospital in contract with the insurance company. Employees from the company will liaise with medical personnel and family members of the insured and help

with arranging return flights as soon as the passenger is fit to fly,” she says. “In case of death, death benefits included in the contract are paid out in full regardless of other policies under the insured’s name.” No specialist insurance is necessary as all policies include cover for accidents of this nature that fall under the same category as terrorist attacks. As with other liabilities, it may take some time to sort through the logistics of the claim. “In the case of death, we need to get finality from the pathology department in the country where the accident took place before we can proceed with repatriation arrangements,” says Symon. “Then we have to find a carrier that will agree to transport the remains, which some airlines or flight captains won’t easily agree to.” In cases like the Germanwings accident, the death benefits part of the claim would actually be easier to conclude as the cause of death is obvious, says Symon. “The company will pay out the moment it receives the necessary documents and the death certificate of the deceased.”

Managing public perception The pressures of an aviation disaster are manifold, says Linden Birns, a partner at BHK Consulting, specialists in crisis communication in the airline industry. The pace at which the public seeks answers is at odds with the pace of proceedings such as a criminal investigation

or various legal processes, says Birns. “The public expectation is that an airline should have the answers instantly available,” he says. “If we can see things happen in real-time, we want the answers in real-time.” Even with the information at hand, airlines are often legally obliged to withhold that information due to legal and regulatory protocols. A responsible organisation with good leadership should firstly do its utmost to mitigate the traumatic experience for victims and families of the victims, says Birns. “What an airline can’t do is start speculating about the causes of the accident or offer one set of ideas in order to divert from another,” he says. “That’s illegal.” The organisation must identify gaps in the framework that led to the accident and try to ensure that it doesn’t happen again. It is an ordeal for a company, but if the company and its employees have a solid and well-exercised crisis communication plan that is regularly updated, it can emerge with its reputation intact, says Birns. The trajectory of public and investor opinion is often reflected in the airline’s share price following an accident – if it’s a listed company of course. “You’ll see a dip in the share price immediately following news of an accident and depending on how they handle it, you’ll see the perceived value of the share price of the company fluctuate,” he says. “The share price is all about perception.” Birns says he’s not aware of any existing insurance policies that would cover potential business loss resulting from an airline accident. “Companies are, however, able to get discounted insurance if they pass the International Aviation Safety Assessments (IASA) safety audit.” One of the prerequisites of the bi-yearly audit is that an airline has

a comprehensive emergency plan in place including a crisis communication plan; a plan Lufthansa seems to firmly have in place. A quick perusal of their site shows press releases and updates almost every couple of days. The airline offers flights and transport to and from Marseille near the crash site for next of kin of the deceased to pay their respects, and Thomas Winkelmann, Germanwings CEO, shares his condolences in a video on the site.

procedures at the airline following the Germanwings incident. In the interim, the airline has introduced preliminary safety precautions. “Pilots will minimise their requirement to leave the flight deck as far as possible. If a cockpit crewmember does indeed require leaving the cockpit, a cabin attendant will move into the cockpit for the duration of the cockpit crewmember’s absence,” a statement from the airline says.

Regarding remedial measures, Birns says that considerable political pressure is often applied to an airline in the event of a sensitive accident of this nature, as was evident with the introduction of the armoured doors in the cockpit that immediately followed 9/11. “Neither the manufacturer, airline nor pilot wanted the doors to be installed as it was going to create more problems than solutions, but the political opinion at the time was that the cockpit needs to be fortified to keep the bad guys out,” says Birns. The ‘bad guys’ should, however, be stopped at airport security, he says. “When they’re on the plane it’s too late.”

Comair’s operations director, captain Martin Lowe, says pilots that fly with Comair receive adequate training and rest as well as undergo extensive psychometric assessments before they are employed. “Our pilots are trained to recognise and deal with abnormal behaviour on the flight deck and are encouraged to report abnormal behaviour immediately,” he says. “Pilots are monitored by their fleet management team to ensure mental fitness as far as possible.” The company also has a programme in place to support pilots in managing their emotional wellbeing. “In partnership with the Independent Counselling and Advisory Services (ICAS) which provides a 24 hour a day, 365 days a year personal support, the company invests in an employeewellbeing programme to ensure its pilots, as well as its other employees, have access to the assistance and support they might need in managing their overall well-being, including their psychological and emotional wellbeing,” says Lowe.

On local soil Comair, who operates under low-cost airline, Kulula, as well as British Airways, is in discussion with the South African Civil Aviation Authority (SACAA) and other regulators about possible changes to safety

Looking forward In its 2014 report, Allianz says that even though exposure or potential loss has increased by more than 50 per cent since 2000 due to an increase in flights, the improved safety environment is reflected in the premiums for aviation insurance, which were at their lowest prior to the increase in airplane losses in 2014. “Exposure’s increased from $576 billion in 2000 to $896 billion. This means that if exposure growth continues at the same rate, we can expect it to break through the $1 trillion barrier within the next five years and possibly even earlier,” the insurer says. Godden at Sanlam Aviation says the most recent crash will probably not have a massive impact on insurance premiums in the aviation market. “Despite some big claims of late there is still a great deal of insurance capacity available,” he says. Rintjes agrees and doesn’t foresee any impact on underwriting in the aviation industry. In the meantime, the safest and quickest way of travelling remains thousands of feet off the ground in a metal capsule hurtling along at hundreds of kilometres per hour. However unsafe that sounds, the odds of dying while riding a bicycle are 100 times greater than flying, odds that any betting man would back, especially if his life depended on it.

Better is

better By Sarah Bassett

Working for a large aviation management company in Switzerland for four years, Sean Raath saw an opportunity when he noticed that many African insurance providers lacked the specialist knowledge required to place aviation cover.

- Sean Raath -

n 2010, SRM Aerospace was born, a specialist aviation insurance brokerage which facilitates the placement of aviation cover for general insurance brokers across the continent. “The opportunity was in providing the ability for general brokers and insurers to place aviation insurance, where previously they might not have had the expertise. We facilitate the placement for them.” Starting the company as a consultancy (SRM International) in Switzerland on his own, Raath returned to South Africa and launched SRM Aerospace. The business has gone from strength to strength since then, with a network of partners extending across the continent and significant premium growth, reaching over half the size of their biggest

competitor on premium income in just four years. “We’ve been very lucky. Last year alone we grew 70 per cent on what was a fairly reasonable base.” The team now consists of six based in the Johannesburg office and three based overseas. “Roughly 75 per cent of our business is from outside of South Africa. We do a lot of business in Botswana, Kenya, Namibia and Tanzania and are now seeing good growth in North and West Africa,” Raath explains.

Crazy things to make it work Raath foresees opportunity in developing trust in wholesale broking on the continent

– the heart of the SRM model. “There’s huge opportunity in that because we can deal with a few brokers and have access to many more clients than we would by going directly to clients. This model enables us to remain small and efficient but have access to a huge amount of premium income,” he explains. “The local broker often has a better relationship and knowledge of the client than we would be able to create in a few meetings. We can’t take a Tanzanian client out to dinner and lunch every single week, whereas they can.” Nonetheless, there’s no running the business from a desk in Johannesburg for this team. “We are in planes a lot. I travel every week – I’ll go to three different countries in a month, and things can change quickly day to day. I’ve started a day at 8am thinking I wasn’t travelling, and by 11am ended up in

Windhoek. On one occasion, I waited for three days in Uganda to get to see one client for 20 minutes.” “If you’re going to take a big risk and start a business like this, you have to pull out all the stops and do some crazy things to make it work.” It seems this aspect of the business is unlikely to change anytime soon. As a specialist broker, Raath says it is unlikely that SRM will ever need local offices in countries. “As a business, a big challenge for us is just the sheer size and diversity of the African continent – each country has a different outlook and way of doing things, I cannot see how, as a niche provider we can better our network or manage the sheer diversity. South Africans for instance don’t always have a good name in some countries. In other instances some

markets are very brand conscious and like to deal with London brokers directly due to past history or culture. Trust levels vary, so each one is different and balancing this is key to success on the continent. The difficulty going forward will be maintaining the growth but still keeping the service levels and the interaction with our clients the same. That would be my biggest issue at the moment, to try and maintain the relationships and grow the business. African brokers and insurers don’t want to deal with five different people, particularly in aviation. They want to be able to give you something and you must ‘sort it out’. They don’t want to go to five different specialists. They want a solution to all their aviation problems and that’s what we have to provide if we want to maintain the relationship.” >

A Swiss experience Raath began his career in South Africa in a long-term insurance brokerage, focusing on pilot-specific life insurance. He later bought out the brokerage with a vision to offer clients aircraft insurance, as well as life cover – enabling more regular client engagement and a fuller service offering. He later sold the business and moved to Switzerland in 2006. During his four years in Switzerland, Raath worked for a large aircraft fleet management company. Gaining invaluable experience and wide global connections, he then spent a couple of years consulting to major banks, handling repossessions and insurance of aircraft. He then returned to broking and it was here that he noticed the regular requests for aviation placement from other brokers – particularly African brokers and brokers from other high risk areas of the world. His time in the Swiss market enabled valuable exposure to the professionalism and formalised approach of the Swiss and other developed European markets as well as the chance to develop global relationships and networks. This coupled with his African market ability to think more creatively and make a plan to match whatever is required or whatever goes wrong makes for a powerful combination.

Clients, risks and placements In the majority, SRM’s clients are charter companies and general aviation operators

doing regional flights with aircraft generally ranging from five-seaters up to 30. There are some airline clients, with aircraft up to around 150 - 250 passengers kind of size, but this, says Raath, is currently not the business’s bread and butter – although they have seen robust growth in this area. From an insurance providers perspective, due to the size and diversity of the African continent, one of the greatest risks is that a small incident leads to a big loss, notes Raath. “You might have an aircraft in Equatorial Guinea with a damaged nose gear, which itself is not a huge loss, but the costs of retrieving it and getting it back to a place where it can be repaired are huge. This is probably an insurers biggest exposure – it’s very difficult to manage the cost. We’ve had aircraft written off for relatively small damage, simply because there is an inability to access maintenance facilities and repairers in that area.” Placements in the aviation market are diverse too, with only two or three reputable South African insurers accepting aviation business from the rest of the continent, so most of SRM’s business is placed in the London market. “A lot will go to the Lloyd’s market, but we’ve placed business as far as China and Russia. We’ve also placed business into the US, Middle East and Europe.

Possibilities for growth The aviation industry is under pressure, with low rates and excess capacity driving competition while clients battle for growth. Even across Africa, in the South African market particularly, there is opportunity for consolidation – with the same few players

having been in it for long periods of time, with a few new entrants in recent years, and one or two others having reached growth maturity, says Raath. “The bigger multinationals are buying up smaller brokerages and for me that just creates an opportunity – because the more they pursue that strategy, the more opportunity there is to differentiate. I think the industry is going to change substantially in the next five years – we know that consolidation will come – and if we just keep doing what we’re doing, doing things differently and bringing new ideas, we are well positioned for growth.” Raath remains open to the possibility that such growth could be helped along through consolidation for SRM too. “I always think that one and one is three – I’ve seen it at SRM already – I was doing it all on my own for a while and then brought one quality person on board and business grew exponentially. Every broker has something to offer otherwise SRM would have 100 per cent market share and vice versa. So you put the right two together and there’s no question that more opportunities are created – we’ve always been open to partnerships.”

A message to the risk manager Ultimately, says Raath, your broker partner is important. “It’s got to be about the people. When it comes to delivery, bigger is not better – better is better. Our clients can call at any time of the day or night – Saturdays, Sundays, it doesn’t matter – people often only notice the value of that personlised service when they don’t have it. We encourage our clients to talk to each other and share information because there is simply nothing to hide and if someone has bad feedback on us we take it on the chin and work to put it right.”

Spy vs Spy South Africaâ&#x20AC;&#x2122;s secret satellite By Luka Vracar

On 25 February, the spy cables information released by a collaboration between the Al Jazeera news network and the UKâ&#x20AC;&#x2122;s Guardian, confirmed what many have assumed for almost a decade: South Africa has a new Russian-made spy satellite.

arly January 2014, the Sunday Times reported that in 2006, the country’s Ministry of Defence awarded a contract to a Russian company, NPO Mashinostroyenia (NPO Mash), to develop a spy satellite. The project was dubbed ‘Flute’ and would see NPO Mash build, launch, and operate a satellite that could provide all-weather, day-and-night radar imagery for the South African military. However, at that stage the report could not confirm whether the satellite existed. Then, in October 2014, Secretary of Defence, Dr Sam Gulube, made the first public confirmation of the project’s existence, telling the parliamentary defence committee, on which Democratice Alliance (DA) MP and shadow Minister of Defence, David Maynier, serves, that the contract to develop a military satellite had been reinstated and was on track. Maynier, who has been the

most ardent critic of the satellite’s secrecy and investigated missing funds that may have been attributed to the project, called the confirmation a breakthrough. “The public, who may have sunk up to R1.4 billion into the Defence Intelligence’s bungled Russian Kondor-E spy satellite project, have a right to know,” Maynier told the media shortly after. “It is highly likely that given the large amount of fruitless and wasteful expenditure, which ranges between R110 414 000 and R2 314 000 a year, that the contract for the military had been reinstated at a higher contract price,” Maynier said. Now, for the first time in the public domain, the spy cables have revealed a classified South African State Security Agency (SSA) report, dated 28 August 2012, which exposes th e

extensive cooperation between Russia and the South African military regarding the development and operation of the secret satellite surveillance system. The leaked report confirms that Russia and South Africa were cooperating on a secret satellite surveillance programme called Project Condor, and that the satellite launched by the Russians was to be used for strategic military purposes. Additionally, the collaboration’s aim was to eventually integrate the Russian and South African satellite surveillance programmes to provide wider coverage. “The reference to the launch of a satellite almost certainly refers to Defence Intelligence’s R1.4 billion Kondor-E Synthetic Aperture Radar satellite, which was launched on or about 19 December 2014, under the codename Project Flute,” Maynier said in a statement after the spy cables leak.

statements that show expenditure from 2010 to 2014. The DA and various news outlets report that in 2007 the South African government put a hold on the project when it realised that it does not have the capabilities for full control of the satellite. The risks associated with this fact meant that the data the satellite collected would be relayed to South Africa by its Russian operators and South Africa would depend entirely on NPO Mash for operation. This means that there would be a delay in regular operation and transfer of data, reducing the value of the satellites imaging for the military which needs up to the minute updates – not to mention whether the information would be complete.

“Bizarrely, the state Security Agency appears to have been collecting intelligence about a satellite surveillance programme being implemented by Defence Intelligence,” says Maynier.

NPO Mash subsequently threatened legal action and, in order to address the problem, an agreement was made that the NPO was to develop a ground station in South Africa that could take control of all operations. NPO would also train South African personnel. However, there has been no evidence in the public domain to suggest that such a ground station has been or is being constructed.

Control risks

Need to know

While the clandestine nature of the satellites objectives and operations means that the South African government remains tight-lipped, citing national security concerns, it has released annual financial

“We need to know the purpose of the Kondor-E satellite and whether it actually works. We also need to know if the satellite will be replaced and at what cost at the end of its five-year lifespan,” said Maynier.

However, Maynier maintains that the questions regarding the spy satellite are not about its operations, but rather procurement irregularities. While Maynier’s investigations have revealed much about the history and financial expenditure of the spy satellite, he has not been able to get any answers regarding accountability for the more than R200 million in expenditure for the satellite over the past five years. “We are reading the tea leaves and we have to ask why was it necessary to procure the satellite when satellite images are available commercially. Even if it was justified, should it be a priority? Because the Defence Force is spending more than a billion rand when the deployed soldiers in the DRC, for example, do not even have the boots to complete the mission,” Maynier said. Russian media reports that earlier this year Kondor-E successfully delivered its first images. Sources claim that despite initial difficulties, the images were returned much quicker than had been expected. The reports claim that initial technical difficulties were traced to programming errors and quickly resolved. While there are also claims by Russian media that the South African government is considering ordering two more satellites, even with objections from the United States, the secret nature of the project means that few things can be confirmed.

Presents

New Tech For New Africa; 23 July, IDC, Sandton, JHB Themes to be addressed: • Technologies from Africa for Africa: How New Tech Firms are Catering for Frontier and Emerging Markets • Is There Angel and Venture Capital for Tech Startups in Africa? • How Technology is Changing the Way Africans are Educated • Can Technology Leapfrog Africa’s Development Gaps? • Tech Firms’ Africa Strategies Speakers include: • Aidan Baigrie; Client Partner - Sub Saharan Africa, Facebook • Brett Loubser; Head: Africa, WeChat • Dion Chang; Flux Trends • Aki Anastasiou; TechBusters • Murray Legg; Co-Founder, Webfluential • Dr Martyn Davies; CEO, Frontier Advisory • Stephan Lamprecht; Innovation Management & Commercialisation, Venture Solutions

For more information contact: frontierforum@frontieradvisory.com 011 447 8038 www.frontieradvisory.com 33

African insurance in the By Frances Bailey

RISKAFRICA speaks to the secretary general on the scope and content of the 42nd Conference and Annual General Assembly of the African Insurance Organisation (AIO) taking place from 24 to 27 May 2015 at the Carthage Thalasso Resort Hotel in Gammarth, and invites comment and discussion from attendees.

frica is under siege. On the political map, we have Al Shabaab in the east, Boko Haram in the west and xenophobia in the south over and above the perennial political challenges in Sudan , Burundi and the great lakes region. Ebola, HIV and possibly swine flu remain a dreadful reality, turning many African lives upside down. Drought, floods and the associated social drawbacks that follow are yet another ugly reality facing our continent. It is thus increasingly important to bring Africans from various regions together to share ideas on these traumatic events and how best we can indemnify our fellow citizens to mitigate or avoid these events. These poignant words, spoken by Kholisani Dlodlo vice president of Guy Carpenter

Africa, were in response to RISKAFRICAâ&#x20AC;&#x2122;s question on what African Insurance in the Face of Mass Events, the powerful and chilling theme for the event, really means to attendees.

What to expect Bringing together insurance and reinsurance industry leaders across the continent, the conference examines the magnitude of African risk in 2015. Various meetings and talks around the implications of these risks for the industry are planned, in particular to look at political violence, natural disasters, infectious threats, Internet and security risks and other topical areas of discussion, according to the AIO.

â&#x20AC;&#x153;I am anticipating that the upcoming speakers will look at macroeconomic or region-wide challenges that may impact our insurance sectors. In more specific terms, we expect to hear about challenges facing the continent, from examining the growing geopolitical and religious fracture in various regions and developing sustainable and renewable energy for the continent to addressing the impact of changing weather patterns and how the sector can contribute to sustainable agriculture and drought management,â&#x20AC;? says Trevor Blackstock, territory head of Africa, Israel and Turkey at Santam Re, and an attendee at the conference. Blackstock adds that Santam Re is hopeful that the theme will extend to how the continent and its insurance and reinsurance sectors and players can become more competitive within

face of

mass events

the greater global market and also offer practical advice and communication on how the sector is able to respond to these continent-specific challenges. “With the increasing occurrence of mass events on the continent, it would be interesting to see how these events (such as terrorism, natural catastrophes, infectious diseases, increasing cyber-crime and political violence) are impacting the African insurance industry and what solutions, if any, are being suggested to address these challenges and ensure the sustainability of the industry,” says Lelo Ntshalintshali, general manager of stakeholder relations and communication at the South African Insurance Association (SAIA), echoing Blackstock and Dlodlo’s sentiments.

Prisca Soares, secretary general of the AIO explains that attendees can indeed expect to touch on the aforementioned topics. “The idea is that in recent times, these happenings have affected many people, either in concentrated areas or across the continent: this could affect the insurance landscape. For example political violence is prevalent all over the world and is becoming increasingly so in Africa,” says Soares. “Where natural disasters are concerned, Africa is lucky to some extent in that we don’t suffer to the degree that people in Asia do, with regard to earthquakes, but there are a number of countries in East Africa, for example, that are prone to floods and cyclones. A few years ago, floods swept across as many as 12 countries.”

“Another critical aspect at the conference is the risk of infectious diseases. We’re most readily reminded of Ebola, but there are also infectious diseases presenting a threat which should already be a thing of the past such, as polio,” adds Soares. “Lastly we will look at a potential threat because the ‘mass’ element is not present yet in Africa. This is the threat of cyber risk which could have very expensive and damaging consequences to businesses across the continent.” Soares adds that in examining a mass event, they will look at the potential implications it will have on the insurance industry as well as the opportunities it will present. Specifically with regard to natural disasters, the AIO has been working on

the possibility of establishing an insurance pool for natural catastrophe risks, which will make it an important discussion point at the conference. Furthermore, they don’t want to wait for cyber risk to strike on a large scale before they take action, making this another key area for discussion.

Industry risk engagement “This year’s theme is so relevant and aptly captures the current events of our times. What I am looking forward to most are the discussions with industry partners,” says Ntshalintshali. Dlodlo further examines the importance of intellectual discussion around these risks. “I am keen to know what the continental brains in insurance and reinsurance have to offer within the ambits of the conference theme and possibly beyond. It is important to note that this is the generation than can either unleash Africa’s potential and pass a better-shaped insurance industry to the next generation or contain and seal it and pass it on in its current form with limited social impact and very low penetration across the continent.” Blackstock similarly explains how this conference provides a platform to facilitate information sharing among key industry players “Africa has such diverse and vibrant insurance and reinsurance markets and it is a challenge to keep connected to the

entire goings on across the continent. The conference affords us an opportunity to consolidate much of our understanding, views and strategic intent regarding our business activities in Africa and to discuss these with a diverse panel of partners and clients from across the African continent and other markets as well.”

Soares elaborates that an important aspect of the conference is the exchange of ideas on how to handle each risk. “Networking is a major part of the event and it is important because we will have over 800 participants present from across the globe. This presents an incredible opportunity to exchange ideas,” she says.

“I would, ideally, like to see some input and involvement from the greater South African insurance sector. Many South African companies are expanding their operations and investments into the continent at large and we have a lot to learn in these markets but must seek to contribute positively to the continent’s insurance challenges wherever we can.”

“The AIO offers a huge networking opportunity to any player who is keen to operate in the African financial services space and our institution has not been an exception this. We have utilised the obvious opportunity to meet new people and pick their brains on various aspects of the markets they operate in. The market intelligence we gather through the AIO is invaluable.

Ntshalintshali from SAIA adds another South Africa perspective on why cross-border engagement remains so important: “There exists an ongoing need to grow the insurance industry in Africa as a whole as well as to foster an enabling environment to do business on the continent and we hope to be included on discussions around this.”

Networking opportunities In addition to the educational and professional development opportunities offered by the formal discussions, more informal networking opportunities offer a way to share knowledge and form partnerships.

“The visibility of our brand in such events says a million words about our commitment to Africa as an institution,” says Guy Carpenter’s Dlodlo. However, he adds that at the conference, Guy Carpenter would like to help others succeed in the face of mass events, as well as expand their own knowledge base. “All players are equally important and we welcome all of them to interact and work with us. “We are equally keen to know every participant’s views and listen attentively to their future plans with a view to being of help through our immense investment

in catastrophe modeling and reinsurance optimisation software, for example, and therefore part of their success story.” Blackstock says that from Santam Re’s perspective, at the conference they would like to engage with large institutional investors in Africa’s insurance and reinsurance sectors, especially those “looking at large infrastructure project and mining.” He says that they are particularly interested in hearing their views on what they are looking for from a risk management and insurance product perspective, and to understand what their expectations and market forecasts are. “Undoubtedly meeting new people, uniting with old colleagues and clients, and gaining insight and commentary from other market participants is always of value to us,” he says, and explains in closing that an AIO membership provides more ongoing networking opportunities. “Very simply put, it provides us with the ability to connect to the right people at the right time, when we need the right input on an issue. There is a lot of data and information available about the continent’s various markets, but we gain real insight and wisdom through our interaction and exchanges we have with other AIO members and partners. The really practical knowledge comes from talking to the right people, and not just from analysing market data.” “What is important to SAIA is to harness networking opportunities where we can gain the most value for the benefit of our member companies as well as the South African short-term insurance industry at large,” adds Ntshalintshali. In fact, being a member of the AIO has played an important role in helping the SAIA to build strong and constructive relationships on behalf of its members, with key stakeholders on the continent. “Through these relationships, we have been able to learn from our counterparts as well as share information with regard to challenges and opportunities in our different markets.”

About the AIO The AIO is a non-governmental organisation established in 1972 and recognised by many African governments. Consisting of 370 members from 47 African countries as well as a number of foreign associate members, its objectives are to develop a healthy insurance and reinsurance industry in Africa and furthermore to promote inter-African co-operation in insurance. The 2015 conference is jointly hosted by the Fédération Tunisiennes des Sociétés d’Assurances (FTUSA) and Société Tunisienne de Réassurance (TUNIS RE). Going forward, the AIO will focus on strengthening existing relationships with industry partners, specifically the World Bank, the International Labour Organisation’s Microinsurance innovation facility and the International Association of Insurance Supervisors to name a few. According to Soares, key areas of focus include capacity building in the field of microinsurance regulation and enterprise risk management for specialised goods such as oil and gas.

RISKAFRICA will be reporting on the outcome of the 2015 conference in the next issue. Sarah Bassett will be available at the conference for comment.

Sustaining

the future Continental RE CEO Summit

RISKAFRICA was privileged to join the continent’s insurance leaders and regulators at the Continental Re CEO Summit 2015, held at the Legends Golf Estate in Limpopo Province, South Africa. This year’s summit carried the theme “Changes and challenges – Shaping the context of the African insurance landscape” and drew delegates from every region across the continent. By Sarah Bassett

38 38

“Many of the key environmental and sustainability challenges facing the world are the same risks and challenges that face insurers,” Bacani noted, adding that it was for this reason that sustainable insurance made fundamental business sense for the industry. Insurers, he said, had the greatest influence over their own company, first and foremost, by embedding sustainable principles into every aspect of their business including investment, underwriting and claims.

Africa rising or Africa arrived? “As insurers, risk management should be as important to us as risk taking. We need to shift our role towards this management. Though insurance remains in its infancy on the continent – as evident in the low penetration levels – but the potential for us to have impact and play a developmental role within the growing African economy is immense,” he stated. Setting the tone for the discussions ahead, Dr Oyetunji asked: “Why do we have such low penetration levels? And how do we annex this demographic dividend for the benefit of Africa? How do we build institutions that will lead the world? How do we attract doctors, actuaries, engineers? These are some of the topics of the conference this year, and the issues which need to be urgently addressed as an industry,” he said. Keynote speaker, Butch Bacani, programme leader for the United Nations Environment Programme’s principles for sustainable insurance initiative, echoed this need for African insurers to increase their risk management role and influence. He highlighted also the critical need for insurers to improve their trust and reputation ratings across all markets – reminding delegates that they require a social license as well as a legal one – and that it is this trust and reputation that enables their power to influence risk management and practice.

ontinental Re group CEO Dr Femi Oyetunji welcomed delegates and opened the summit with a reminder that the reinsurance and insurance sectors have a central role to play in the continent’s development, adding that there is a critical shift needed for insurers to elevate the emphasis on risk management and not only provide a focus on risk transfer. He emphasised Continental Re’s commitment to advancing the insurance sector of Africa and stressed that this role as pre-emptive risk manager a key one in the sustainable development of the continent.

“The United Nations agrees that the insurance industry’s role as risk manager beyond just risk carrier is critical and needs to be extended down the entire value chain. Many are less aware of another source of powerful influence from insurers – the role of insurance as institutional investor. By making risk conscious investment decisions, insurers have the opportunity for significant influence on the future of risk and their own claims down the line.” He explained that sustainable insurance is a strategic approach where all activities in the insurance value chain, including interactions with stakeholders, are done with the future in mind – by identifying, assessing, managing and monitoring risks and opportunities associated with environmental, social and governance issues.

Addressing the question of whether Africa is still rising or has in fact arrived, Eyesus Zafu, chairman of United Insurance Ethiopia, noted that though the end of the commodities super cycle creates headwinds for many African states at present, the World Bank forecast remains as 4.6 per cent for the continent in 2015 and growth continues. Encouragingly, in places such as Madagascar and Togo, growth is happening faster for the bottom 40 per cent of the population than for those at the top, he said. Nonetheless, failed states and violent militancy will be drags on the continent’s growth, with capital flight a major risk to watch, which could threaten the growth of recent years. Several countries in sub-Saharan Africa are beset by dwindling revenue and debt, with repayments becoming difficult – also presenting a challenge to continued growth. In tackling these concerns, Zafu suggested that inclusive growth, which uplifts and enables those at the lowest rungs to participate in their economies was critical. To build on recent gains, increased agricultural productivity would be a powerful tool he suggested, along with a broader drive to develop and grow the oft-neglected private sector across the continent – with much of the development and investment of the past having been focused on the public sector to the detriment of the development of a thriving and growing private sector. This, he warned, was something to watch closely going forward. Most important was that the region kept reaching and working and did not become tempted to sit on recent gains and successes without striving further. Also on the Summit agenda were discussions on the development of business leadership in the continent in order to make the most of cross-border and demographic opportunities, Africa’s brain drain and the need to draw talent home, as well as the role of the media in promoting (or damaging) Brand Africa and perception of the insurance industry within this. Regulators shared government and policy insights on these topics while broker and insurer panelists also took a look at the role of the media in shaping perceptions of the continent internationally.

NEWS Drug-resistant malaria

poses serious risks for South Africa

Nort

Northern Cape

The emergence of drug-resistant malaria in parts of Southeast Asia remains a great concern, according to Dr Jaishree Raman from the National Institute for Communicable Diseases (NICD). Raman told Health24 that genetic studies have shown that antimalarial drug resistant parasites have spread outwards from Southeast Asia through the Indian sub-continent into Africa, causing high levels of malaria-related morbidity and mortality in the recent past. “To ensure South Africa does not experience artemisinin-resistant malaria epidemic, the routine surveillance for molecular markers thought to be associated with artemisinin resistance is conducted by the NICD. It is hoped that this surveillance will facilitate a timely drug policy in the event artemisinin resistance is detected,” Raman said.

According to David Lashbrook, head of Africa investment strategies at Momentum GIM, the launch of the Momentum Africa Real Estate Fund is in response to client demand to capitalise on Africa’s growing need for quality retail, office and industrial real estate.

Momentum Raises $50 million for African Real Estate Fund Momentum GIM, in conjunction with Eris Property Group, has successfully closed the first tranche of its African Real Estate Fund with $50 million of institutional, family office and HNW investor capital. The fund will focus on the development of retail, commercial and light industrial real estate in sub-Saharan Africa outside South Africa, offering investors access to Africa’s strong economic growth and its emerging consumer. The fund is aimed at longterm institutional investors and it has a $250m fundraising target for its final close on 30 June this year.

“We believe that investing in the development of commercial real estate is an exciting way for investors to support and participate in the rise of the African consumer. The fund seeks to mitigate the key risks of property development prior to commencing construction and it targets a minimum internal rate of return of 18 per cent in USD net of all fees over its eight year life.” Warren Schultze, CEO of Eris Property Group, a property services and development company focused on sub-Saharan African markets, said that in the recent months they have been working on developing relationships in countries such as Ghana, Mozambique and Rwanda in anticipation of the launch of the fund. Projects earmarked for development include an office complex in Accra, Ghana; a retail centre in Maputo, Mozambique, and an office/hotel in Kigali, Rwanda. The plans for the Kigali project include the use of plant life as organic air conditioning that will reduce environmental impact and running costs.

Rand Merchant Bank tackles the risk game RMB Structured Insurance has announced the creation of a new Risk Finance Division, focused on providing risk finance and risk retention solutions to support the wide range of insurance structures currently offered by RMBSI. The new division is dedicated to meet the increasing demand for alternative risk transfer mechanisms for small and medium enterprises as well as within the corporate market. With this customer-centric approach, RMBSI will develop a focused and dedicated approach necessary to help grow its customer base and expand its broker and referrers network.

th West

Free State

Atlas Mara to be Rwanda’s largest bank If its acquisition of Banque Populaire du Rwanda (BPR) goes as planned, the rapidly growing pan-African investment vehicle, Atlas Mara, will be Rwanda’s largest bank in terms of number of branches, reports Ventures Africa. Atlas Mara has said it intends to purchase 45 per cent of BPR for $22.5 million. In addition to the purchase, it plans to buy shares from other shareholders to raise its stake to over 70 per cent. The firm says its end goal is to merge BPR with BRD Commercial bank, which it bought last year. This merger would also make the bank the second largest in terms of assets, with combined assets of approximately $305 million.

Alexander Forbes eyes Ghana and Tanzania Alexander Forbes, South Africa’s largest retirement fund administrator, has announced that it intends making an acquisition in Ghana within a year. If a deal in Ghana is successful, it will increase Alexander Forbes’ footprint to seven Africa countries. Business Day reports that the expansion would also be in line with the company’s plans to leverage off the pension reforms in countries such as Ghana and Tanzania. “Tanzania is probably in the short to medium term. Ghana is more short-term. The idea is to buy businesses that are small and leverage them with the brand and technology as well as the skills and grow that,” said Luendran Pillay, Alexander Forbes Afrinet MD.

China agrees on $2 billion infrastructure deal with Equatorial Guinea China’s biggest lender by assets, Industrial and Commercial Bank of China (ICBC), has confirmed it has signed an infrastructure pact worth $2 billion with the oil-rich West African nation of Equatorial Guinea, reports Reuters. The deal will include providing financial support to Equatorial Guinea’s government as well as Chinese enterprises there, the ICBC said in a statement. China has sought to broaden financial support for its companies involved abroad as part of a policy drive known as ‘going out’. ICBC called Africa the “strategic and developmental heart of ‘going out’ for firms the bank supports.”

Chinese economy lowest in over two decades Slow growth is expected for China in 2015 as a result of 2014 having been recorded as the country’s slowest annual growth period in 24 years, due to property prices decreasing and companies and local governments not being able to cope with their debt. Consequently, the government has chosen to rely on a ‘more consumptionbased growth model’, according to Olivier Blanchard, chief economist of the International Monetary Fund (IMF). The IMF has predicted a 6.8 per cent increase in the Chinese economy in 2015.

INTERNATIONAL

NEWS Global Nepal earthquake losses could top $2 billion According to disaster-modeling firm Kinetic Analysis Corp, the earthquake that struck Nepal caused about $2 billion in economic losses for the country, and only a fraction of the cost will be incurred by insurers. Damage in India could cost an additional $800 million, yet less than one per cent of the losses are covered by insurance.

RMS study identifies

Mediterranean as high tsunami threat

Around 20 subduction zones at risk of generating giant earthquakes and tsunamis, like the one that rocked Tohoku, Japan in 2011, have been identified by catastrophe risk management firm, RMS, in a recent global tsunami risk study. According to Insurance Journal, the new study, which uses the newly-released RMS Global Tsunami Scenario Catalog, reveals many coastal populations, industrial clusters, ports and holiday resorts at risk from this underestimated tsunami threat. “While the Cyprus Arc subduction zone and Puerto Rico Trench, among others, are dormant, RMS analysis reveals they are capable of generating tsunami waves similar in scale to those produced along the Japan Trench in 2011, and with it unprecedented devastation,” said Dr. Robert Muir-Wood, chief research officer at RMS. He continues, “Future mega-tsunamis should no longer be considered black swan events, as we now know where these events can occur. While these events have very low occurrence rates, communities and businesses on the coastlines at frontline risk of these events should assess the risk accordingly.” The RMS study illustrates that a M9.0 earthquake on the Cyprus Arc could trigger a tsunami across the eastern Mediterranean Sea, impacting up to 12 countries including Cyprus, Israel, Lebanon and Turkey.

“I suspect this tragic event will perpetuate the fact that preparedness, let alone insurance penetration, was woefully low,” said Julian Roberts, lead partner at the strategic risk consulting practice at Willis Group Holdings, said in a statement. “We’ll probably find that there was more issuance carried by the tourists and expat community out there than all the Nepalese combined.” The Insurance Information Institute said in a statement that Nepal’s insurers collected premiums of about $277 million in 2013, with most of those funds for life coverage. Spending on propertycasualty coverage, such as auto and home insurance, is less that $4 per capita annually in Nepal, compared with almost $2 300 in the US, said the statement.

Users open the door to cybercrime A new report from Verizon Communications found that more than two-thirds of the 290 electronic espionage cases it learned about in 2014 involved phishing. Phishing is the security industry’s term for trick e-mails, meaning that computer users are allowing cybercriminals entry by clicking on corrupt links or attachments they receive in e-mails. Verizon found that sending phishing e-mails to just 10 employees will get hackers inside a corporate network 90 per cent of the time.

$35 Billion anti-crisis plan for Russia Russia has announced its $35 billion ‘anti-crisis’ spending plan to assist its economy and bail out banks and big companies. This comes after Russia’s economy was negatively affected by Western sanctions as well as the decline in the oil price. The plan is said to cut ‘the majority’ of its planned expenditures by 10 per cent in 2015, except for defence, social spending and debt repayments, with a view to balancing the budget by 2017.

“There is an overarching pattern. Attackers use phishing to install malware and steal credentials from employees, and then they use those credentials to roam through networks and eves programs and files,” said Verizon scientist Bob Rudis. Fin24 reports that another annual cyber report, released by Symantec, found that statesponsored spies also used phishing techniques because they are so effective and because the less-sophisticated approach drew less scrutiny from defenders. Once inside a system, the spies would become high-tech, writing customised software to evade detection by whatever security programs the target has installed.

Globalisation increases food contamination risk In April, the World Health Organisation (WHO) issued the first findings from an ongoing analysis of the global burden of food-borne diseases. Some of the important results so far have been related to enteric infections caused by viruses, bacteria and protozoa that enter the body by ingestion of contaminated food. The initial findings show that there were an estimated 582 million cases of 22 different foodborne enteric diseases and 351 000 associated deaths in 2010. The disease agents

responsible for most deaths were Salmonella, E. coli, and norovirus – which causes viral gastroenteritis. Africa recorded the highest disease burden for enteric foodborne disease and over 40 per cent of people suffering from diseases caused by contaminated food were under the age of five. The complete report will be available in October. “Food production has been industrialised, and its trade and distribution have been globalised. These changes introduce multiple new opportunities for food to become contaminated with harmful bacteria, viruses, parasites or chemicals,” said Dr Margaret Chan, WHO general director.

SA: all the potential still there By Sarah Bassett

The mood in South Africa is sombre. But this is the result of isolated, local conditions, and not the country’s regional or global positions, which are both, in fact, favourable. This is according to Goldman Sachs International MD, Colin Coleman, giving the keynote address at the recent Frontier and Emerging Markets Forum, held by Frontier Advisory in Johannesburg, South Africa. Colin Coleman, Goldman Sachs International MD

ultiple geo-political and economic challenges mean that globally, this is a rough period for many emerging markets, leaving South Africa in a comparatively strong position on this macro scale. “India is really the only emerging market economy where expectations of growth are improving. China’s economy has decelerated; Latin America is at 0.5 per cent growth, and Brazil is receding by 6 per cent this year and is predicted to grow at 1.4 per cent next year. These economies make South Africa look quite healthy.” Goldman Sachs predicts better growth for the country than the Treasury’s 2 per cent projection if certain of the local constraints can be lifted. “South Africa should be growing at at least 3.5 per cent given its basic capacity, and if we just got the basics right we should be at 5 per cent. If we really excel and produce a perfect performance we would have capacity above that – more like 10 per cent, in my view,” said Coleman.

The global case for SA In the world of emerging market funds, Turkey is difficult right now because of local politics and its proximity to the Middle East. Russia is almost untouchable to investors due to the combination of sanctions and the political makeup and the impact that is having on investment. Brazil and Latin America are unattractive destinations for institutional investors in the short term. So, for global emerging market fund managers where do you look? “Well, the fact is, South Africa,” says Coleman. “Our local problems notwithstanding, South Africa has the deepest capital market in the region, and excellent market capital to GDP ratio, reflecting the liquidity and sophistication of the market – making our stock exchange a hugely useful and attractive instrument to investors.” He noted that part of the attraction was in the ability to access shares which provide a proxy to African growth – MTN, Shoprite, Standard Bank and the like – and that the strength of South Africa’s positioning rested on two phenomena: the scarcity of real growth available and the plentiful availability

of well managed and governed stocks. “When we look at South Africa right now, we actually occupy an interesting place in the world (and in a world that’s not actually in too bad a position) it’s not in a great position. The Eurozone is still struggling and the US too, although it is doing better. China is struggling but is doing well, and then there are places where the wheels have come off and the engines aren’t firing.” For South Africa, this is not the case says Coleman – but the country is slowed and stumped by ‘self-inflicted wounds’. He noted the strength and resilience of the well run South African corporate sector as another area of favour in South Africa’s global positioning and investor appeal – along with the broader sub-Saharan Africa story, which is also critically important for the country. He noted Nigeria’s recent success in their peaceful elections as a major win for the entire region, and not just Nigeria, as it served to reinforce the Africa Rising story. “The successful Nigerian elections are one of the most important events for South Africa recently.” >

Self-inflicted wounds On the topic of South Africa’s self-inflicted wounds, which slow and threaten the potential of the country tremendously, Coleman notes skewed labour balance, poorly run and under-performing stateowned enterprises and social unrest and conflict as the three critical culprits in urgent need of remedy. Labour “The current labour situation and balance and situation is skewed in a number of ways. At the macro view, the country has eight million people who are unemployed and 15 million people employed. Three million of the 15 are unionised – 2.2 of the three million are Congress of South African Trade Unions (COSATU) members, now facing major internal conflict and split, likely to leave the federation with around 1.6 to 1.7, with the possibility of further splits and losses. Without the National Union of Metalworkers of South Africa (NUMSA) members, 70 per cent of the COSATU members left are public sector workers, making the largest constituency of COSATU membership today effectively having the ANC as their employer – making for interesting wage negotiations in the coming seasons.” The unemployed population, at eight million, is critical to accommodate, noted Coleman. Seventy per cent are under the age of 35, and 50 per cent don’t have matric. The reality, he said, has been that on the historic 20-year view, unionised workers have received average increases at 3 per cent real return while non-unionised workers increases were flat. “Unions have done their job well and negotiated well for their members, but at the expense of employment – leading to a dramatic imbalance in the labour environment.

Ultimately, South African business no longer has a reliable business union partner and that balance needs to be restored in order for us to have a better linkage between productivity and wages.” He suggests that a system offering a base salary and bonuses based on performance could be a solution to use to rectify this imbalance. State-owned enterprises The clear elephant in the room in this area is Eskom, of course. “The situation is now an unacceptable state of affairs for what was one of the best run electricity facilities around the world. The impact on finance, productivity, small business and so on is well established.” He suggested that South Africa could learn a great deal from the strategies employed within the Chinese economy

to create and maintain strong and efficient state-owned enterprises – noting that the Chinese Communist Party has been hugely successful in building a developmental state that has been nimble and flexible enough to incorporate capital markets, list state-owned enterprises and enable a distance between the political machinery and the boards and management of the state-owned enterprises and the balance of their ownership While the system is not perfect in all ways, he noted that it was a highly productive state – and that while businesses may not prefer a developmental state model, but the country can afford to have a developmental state that is functional, but cannot afford to have a developmental state that is corrupt and unproductive with infrastructure crumbling. That combination is lethal. Social unease South Africa faces what seems to be growing social issues and unease – playing out in violence and xenophobia within the communities and showing through in a despondency and lack of faith in the country’s leadership. All of this serves to tarnish our internal confidence and external brand, but, says Coleman, these are self-inflicted wounds, and with this comes the possibility for change and internal transformation. “If we fix these problems, then we are in a good position – we need to get back to work and develop a ‘Team SA’ approach. I think we’ve become fixated on the need to change one person, the sense that we can’t do anything unless we change the one person who is running the country. But the fact is that this is not about one person, and these are not one person problems; this is about the people running Eskom, people running schools, hospitals and government administration. It’s about all sides getting their act together and getting back to work to put things right.”

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