International Finance Magazine Apr - Jun 2016 Mining Special by International Finance

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pg.26-66

April - June 2016

Volume II Issue 3

UK £4 | Europe €5.35 | USA $6

MINING SPECIAL: WHY YOU SHOULD BET ON COPPER & VANADIUM

pg.08

HOW OIL COMPANIES SURVIVED THE FALL IN PRICES

pg.80

MASDAR CITY: THE CITY OF THE FUTURE

pg.34

‘DEMAND WILL COME FROM ASIA AND AFRICA’

Note FROM EDITOR

ot surprisingly, the business world is obsessing about oil and mining. This is likely to be the trend in 2016. Saudi Arabia, Qatar, Venezuela and Russia gave everyone a surprise with their effort to rein in production levels. As of now, there is no change in the ground situation. Even if production levels are frozen, demand is yet to catch up. Besides, the existing stock has to be cleared. So, the chances of prices rising dramatically this year appear slim. Some oil-driven economies are being forced to cut spending and also their budgets. This is a new era for such nations, which is likely to usher changes and spur innovation. The move towards diversifying their economies will gain further momentum and this crisis will make the process irreversible. It opens up the possibility of new opportunities in the Middle East. In fact, innovation and a thrust on improving efficiency are the reasons we have not heard of any major oil company folding up. Most have simply shuttered the more expensive operations and are waiting for prices to pick up. This has led to job cuts, but the companies survive. The mining industry is seeing a lot of operations being wound up. This is

Dhiraj Shetty Editor editor@ifinancemag.com

likely to continue till production matches lower demand levels. While many companies are counting on India to fill the large gap created by reduced demand from China, the view gaining ground is that the South Asian giant will simply not be able to match its larger neighbour’s appetite. The direct impact of the slowdown in these two sectors is felt by the shipping industry. How they are coping is another story. Elsewhere, fintech companies are coming up with ways to tap the large unbanked population of Africa. Their diagnosis: data is the biggest stumbling block. They are trying to fill the gap. The outcome of their work is likely to benefit banks. But while banks wait for data, some entrepreneurs have begun to offer alternatives to Africans even in the existing circumstances. We have covered these very interesting issues in two stories Solving data equation of Africa’s unbanked population and Why alternative currencies are a hit in Kenya. Banks must keep tabs on these developments or risk being left out of an emerging and largely untapped market. It is becoming important for members of the financial world to be up to date with the latest developments — in finance and technology — or risk chasing the front-runners. The game of catching up is a very expensive one. In these circumstances, the benefit of being the first to sight a trend or sense an opportunity is invaluable. At IFM, we try to bring the best stories in the world of business and keep you informed of emerging trends and opportunities. We hope you enjoy reading this issue and look forward to your feedback on our stories.

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller, Karan Belani Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Suparna Goswami Bhattacharya Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Ashton Ray, Tanya Jones, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Ashish Shenoy, Sid Jain Accounts Angela Mathews Head of Events Basant Das Registered office INTERNATIONAL FINANCE MAGAZINE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact press@ifinancemag.com Design & Layout Rahil Shaikh Miya

Apr - Jun 2016 International Finance Magazine

INDEX April - June 2016

Volume II Issue 3

Minefield of social media

Should you spend on Blockchain?

Solving the data equation

International Finance Magazine Apr - Jun 2016

Saket Modi The key challenge with adoption of IFRS

Real-time payments

Economy: The US versus Europe

SPECIAL FOCUS

Mining special

P26-66

Why you should bet on copper & vanadium

Christoph Tutsch Are we running out of cash?

Nick Nesbitt Create a winning enterprise budgeting and planning process

Nigel Purse Donâ&#x20AC;&#x2122;t just email, TALK

Why alternative currencies are a hit in Kenya pg.92

OUT OF OFFICE

Healthcare in Egypt: Turning a problem into an opportunity

I LIKE THE SHIFT FROM SPACECRAFT TO WOODWORKING

Apr - Jun 2016 International Finance Magazine

Minefield of

social media Why the selfie generation is a threat to your companyâ&#x20AC;&#x2122;s security 4 Tim Ring

International Finance Magazine Apr - Jun 2016

byte by byte

Example of a work from home scam Source Symantec

t the start of the popular US TV series ‘CSI: Cyber’, Patricia Arquette’s lead character explains why she hates hackers: “My name is Avery Ryan. I was a victim of cyber crime. Like you, I posted on social media, checked my bank account online and even kept confidential files of my psychological practice on my computer. Then I was hacked. And as a result one of my patients was murdered.” Her warning about the risks of online banking and openly storing confidential data on your computer will make instant sense to most people. But posting on social media? How exactly is sharing photos on Facebook of a night out giving cyber criminals the chance to target you and even your employer? Yet, security experts say hackers are increasingly active on sites like Facebook, Twitter, Instagram and LinkedIn precisely because of their ‘social’ nature – users are off-guard, relaxed about approaches from new people, and careless about locking down their privacy settings, and so are ripe to being ripped off. But the really bad news for corporates is some hackers are targeting individuals

on social media simply to get a ‘backdoor’ route into their employer’s computers – so it’s not just personal privacy at risk, but corporate data as well. And when you consider how many people check their social media accounts at work, or at home using laptops, phones or tablets supplied by their employer – then the alarm bells should be ringing for businesses. Magnitude of the threat So how are the hackers getting in? How big a threat is this and what can companies do about it? Should they even ban staff from using social media at work? New data from cybersecurity firm Kaspersky shows around 30% of social network users share their posts and personal details with everybody who is online – not just their friends. And with 1.5 billion people

actively using Facebook alone every month, that puts hundreds of millions of people at risk worldwide. There’s a similar story on ‘business social’ sites like LinkedIn: many executives see it as their professional duty to network on such sites, but how many properly check the identity of their new connections? “It is leaving the door wide open for cyber criminals to attack, as users remain unaware of just how public their private information can be on these channels,” Kaspersky says. Hackers are exploiting this laxity in different ways. Sometimes it’s through a direct attack, like the fake ‘Mom makes $8,000/ month’ link doing the rounds on Facebook in 2014 (now removed). Anyone clicking on it unknowingly loaded up the ‘Nuclear’ malware kit, which allowed hackers to take control of

Social media is a very real threat – every business should treat it as a serious attack vector. It’s relatively easy to access your online information and create some history mixed in with real-life past events, that may be used to befriend you with a view to send malware through email or even direct as the end result. Mark James, security specialist at ESET

People keen to share their photos and experiences on social networking sites, like Facebook and Instagram, may be inadvertently letting hackers into their employer’s computer networks, warn cyber experts

Apr - Jun 2016 International Finance Magazine

byte by byte

New data from cyber-security firm Kaspersky shows around 30% of social network users share their posts and personal details with everybody who is online – not just their friends

and their corporate network might be as well. “Over the last year, we have seen a growing number of incidents involving fake LinkedIn accounts targeting members of the businessoriented social networking service,” says Symantec senior security response manager Satnam Narang. “Users of LinkedIn should be very sceptical of who they add to their network. If you’ve never met the person before, don’t just add them. We weren’t surprised to learn that these fake LinkedIn accounts received endorsements from real users.” And it’s not just Facebook or LinkedIn. On Skype, hackers were caught recently exploiting its popularity among companies to infect their employees with ‘T9000’ malware, which can record their Skype calls, take screenshots of their

apps and capture encrypted data. On Twitter and other social media, scammers have set up thousands of fake accounts for malware distribution and other frauds. And in the past year, there has been an influx of fake profiles on Instagram, and fake email notifications on the social networking site Google+. ‘Me, me, me’ generation Experts warn that all these attacks have been helped by people’s lax attitude to their personal privacy, which can contribute to their own (and their employer’s) downfall. Ondrej Kubovič, a security specialist at ESET, calls it a problem of ‘over-sharing’ by the ‘selfie generation’. In a recent blog to mark Data Privacy Day, he wrote: “Found a new girlfriend or boyfriend? Share. Had a

Fake LinkedIn account for a recruitment manager. Source: Symantec

their computer. But more often the attack is indirect, like the fake LinkedIn profiles that antihacking firm Symantec exposed just before Christmas. Here, the criminals posed as recruiters, usually glamorous women, complete with photos stolen from real professionals or lifted from stock image sites. They also used keywords to make themselves more visible to LinkedIn’s 400 million-plus users. The hackers were able to gather ‘connections’ and those people’s personal details, like their email addresses and phone numbers. They could then use this information to craft ‘spearphishing’ emails, Symantec says – messages so personalised using the victim’s own data that they don’t realise it is a fake. Once they reply to the email, they are in the hands of the hackers,

International Finance Magazine Apr - Jun 2016

“

Over the last few years, we have seen a 70% increase in scams distributed via social media. Social media remains a critical threat vector for consumers and businesses James Hanlon, EMEA security strategist at Symantec

byte by byte

More often, the attack is indirect, like the fake LinkedIn profiles that anti-hacking firm Symantec exposed just before Christmas blast on vacation? Share. Got a new passport? Share. Share. Share. Is this routine familiar to you? If so, be very careful: you might well be over-sharing. This behaviour is typical of young people who have grown up with computers and emerging social networks. Thanks to their urge to share every detail of their lives, they’ve been dubbed the ‘Selfie’ or ‘Me, me, me’ generation. “However, many don’t realise that giving away too much information online – their date of birth, phone number, exact address or name of their dog, which was coincidentally also the password for about half their online accounts – can have serious consequences.” Mark James, security specialist at ESET, is clear: “Social media is a very real

threat – every business should treat it as a serious attack vector. It’s relatively easy to access your online information and create some history mixed in with real-life past events, that may be used to befriend you with a view to send malware through email or even direct as the end result.” James Hanlon, EMEA security strategist at Symantec, says: “Over the last few years, we have seen a 70% increase in scams distributed via social media. Social media remains a critical threat vector for consumers and businesses.” What should companies do? One extreme solution is to ban social sites at work, but no one we spoke to knew of a substantial business

that has done this: after all, platforms like Facebook, Twitter, LinkedIn and YouTube are now a vital way for companies to promote their brand, talk with customers and motivate their own staff. But ‘do nothing’ isn’t an option either, say the experts. Mark James advises: “For effective security, policies and boundaries need to be established on what is or is not acceptable to use or post on social media sites during working hours on hardware owned by the company. Employers need to have a clear procedure for data monitoring and intrusion detection. Staff also need to be educated on the types of attacks that are currently or have recently made the rounds.

“Make sure any passwords are changed often for social network sites. If possible use two-factor authentication for added security and limit the personnel who are allowed access to corporate social networking applications. Also make sure that each piece of software used for social networking is configured with the optimal security settings.” Social media is a doubleedged sword: a great way for businesses to communicate, but also a hunting ground for hackers where hundreds of millions of individuals and employees are open to attack. And the 70% rise in social media criminal exploits shows the ‘black hats’ have well and truly caught on to that fact. IFM editor@ifinancemag.com

Some key actions suggested by Kaspersky Lab and ESET for individual employees •

Be careful who you befriend and trust on social sites. If in doubt, don’t accept a friend request or click on a link you are not expecting.

•

Make sure the privacy settings on social network accounts are at their highest, so you are sharing only with your real friends.

•

Never send sensitive data, such as credit card details, passwords, phone numbers or ID numbers, via messenger apps or by email.

•

Create strong passwords and change them frequently. If you struggle to remember them all, use a reliable password manager.

Apr - Jun 2016 International Finance Magazine

Oil & Gas

How oil companies survived

the fall in prices

They have simply got much better at their business, but the financial pain is undeniable

Tom Groenfeldt

merican oil producers, from the majors like Exxon Mobile to independent shale drillers, have proven remarkably resilient in the face of plunging oil prices. “There is financial pain,” says Richard Swann, Platts Editorial Director, Americas Oil Market in Houston. “If you look at all companies,

the bottom lines of even the top majors, they are bleeding, but bankruptcies have been few and far between so far and mostly confined to smaller companies. It is remarkable how an oil industry founded on the back of $100 oil has done as the price dropped to $30.” The oil companies have done it by getting much better at their business, with

International Finance Magazine Apr - Jun 2016

significant improvements even over the last year. “Every year, companies get better. They can drill the wells more quickly and can bring them online faster and make them more productive. The number of wells that used to require three rigs can now be drilled with one or two. They are doing more with less. The time it takes them to drill into the productive zone, turn on the well and reach the production rate keeps getting shorter, and then the rig is free to go drill another well.” Although prices have stayed low, production has stayed about the same,

partly because drillers have limited choices. Thirty dollar oil is unprofitable for deep water rigs and unconventional (shale) producers but they keep pumping. On the big platforms, shutting down is very expensive, so they continue operating. Shale producers have debt to service. “If you have debt repayments based on cash flow, to service your debt you need to pump.” Swann said the consensus forecast from market watchers is that fundamentals (supply and demand) should begin to come back into balance towards the

Oil & Gas

end of this year, although that doesn’t necessarily mean prices will rise. “The industry is on tenterhooks looking for any sign that Saudi Arabia is changing course. A political movement to cut supply could be more important than any corporate action.” He doesn’t expect any sudden changes in Saudi pumping. “The Saudis don’t do short termism. They may have been surprised at the scale of the price fall, but directionally they knew what they were getting into. They took the decision that the responsibility for balancing the market should not fall solely to them, and while their budget doesn’t look like it normally does, they are still a pretty wealthy country. They see that the market needs to rebalance and they aren’t cutting the supply. I don’t think the Saudis want to cut production to make room for rivals. Their view is they have the cheapest oil so why should they be the ones to cut — the cuts should come from the

marginal barrels.” Those would be producers in the North Sea, deep water wells in the Gulf of Mexico and off Angola and drillers operating in Norway and Russia. “These are expensive places to operate. OPEC doesn’t really work on a cost basis. The OPEC countries have a fiscal break-even point — what oil prices do they need to balance their budgets. What’s the surplus over the cost of production that they need to meet their budgets. If I were OPEC, I could be concerned that I am cutting production to benefit the US.” That rebalancing will take time, especially because China’s huge demand has slacked off. Oil inventories around the globe are high and they continue to build. “Iran looks to come back, and no one knows how much oil they will add to the market. Iraq is still growing, and if any kind of stability can be brought back to Libya, there is a large volume that could come back into the market.”

Meanwhile, although the US is now exporting oil, it remains the world’s largest net importer of oil — 7 million barrels a day. Although most oil producers were surviving, if not thriving, over the winter Chesapeake Energy was engulfed in bankruptcy rumours. The oil field service companies, like Halliburton and Schlumberger, have taken big hits in revenue and employment, in part because the oil companies have become more efficient and as a result are using fewer rigs. “The service companies were hit pretty hard by the downturn. They have cut back a lot of jobs; it is a very competitive landscape in the US.” Banks appear to be weathering the downturn well, or at least the stock price of banks that are oil field lenders don’t appear to be in trouble, he added. IFM editor@ifinancemag.com

The industry is on tenterhooks looking for any sign that Saudi Arabia is changing course. A political movement to cut supply could be more important than any corporate action Richard Swann, Platts Editorial Director, Americas Oil Market in Houston

Apr - Jun 2016 International Finance Magazine

Why Blockchain Spending on projects is expected to exceed $1 billion next year Tim Evershed

International Finance Magazine Apr - Jun 2016

BANKING

ust a couple of short years ago, the Blockchain market did not even exist. Now, it is a multi-billion dollar concern. Such is the impact technology is having on financial services and the capital markets. The Blockchain concept, which is best known as the technology that underpins the bitcoin crypto-currency, is now generating a huge amount of interest from all types of financial institutions. Spending on projects is expected to exceed $1 billion next year. Blockchain offers a different approach to data management and sharing that is being proposed as a solution to many of the inefficiencies afflicting the industry. It offers a new architecture, where all participants work

from common datasets, in near real time, and where supporting operations are either streamlined or made redundant. London-based technology consultancy Z/Yen first worked on the de-centralised electronic ledgers that were the prototype of Blockchain 20 years ago. The idea was to create a shared database to provide an indelible and tamper-proof record of who had spoken to who and when. Michael Mainelli, Executive Chairman of Z/Yen, says, “To be candid, bitcoin has made this popular. It’s back to the future for us.” Blockchain is a digital ledger on which parties can log transactions. No one group has control over another. Being de-centralised, it eliminates the need for in-

termediaries, such as in the case of transferring money instantly without a central clearing house. Mainelli continues, “They are going to be like databases, doing different things. No one owns the data except the person with the key, the individual whose data it is.” New methods and applications of encryption technologies can enable the security and anonymity of highly sensitive data in a shared access environment. They can allow users to reveal information selectively to others as needed. Mutual consensus verification protocols allow a network to agree updates to the database collectively, with a certainty that the overall dataset remains correct at all times without the

“

They are going to be like databases, doing different things. No one owns the data except the person with the key, the individual whose data it is Michael Mainelli, Executive Chairman of Z/Yen

Apr - Jun 2016 International Finance Magazine

BANKING

need for a central governing authority. There are a number of different approaches to consensus protocols, but a common requirement is that there are adequate safeguards to prevent malicious manipulation and ensure that no single point of failure exists. Blockchain technology creates data efficiencies through universal data sources, richer datasets and distributed records. The many benefits of this include transparent real time data, more efficient settlement of transactions and speedier processing. A recent white paper entitled ‘Blockchain and the Capital Markets: The Prize and the Journey’ was published by management consultants Oliver Wyman. It said: “Adoption

of Blockchain technology will be reliant upon aligning industry standards for the process, data terms, contractual documentation and so on. Regardless of technological innovation, this standardisation can improve settlement times and cut costs even using existing market practices and infrastructure.” There are additional benefits to Blockchain that are not feasible with existing technology. Having all participants operating from their own local version of the golden source reduces system duplication, with the associated cost and risk of errors. There is no mass demand placed on any central authority, reducing the risk of it being overloaded. Counterparties can bilaterally reveal information to

each other without querying the centre. As there is no central authority, there is no single point of failure. Entries into the Blockchain are irrevocable once agreed, so there is a reduced risk of manipulation — to change an entry, one needs to change all subsequent versions of the ledger. Distributed ledger functionality also allows more sophisticated smart contracts to be used, and the full benefits to be realised. Direct savings from Blockchain would come from the decommissioning of redundant or duplicative systems, reduced operational overheads and cost sharing across institutions. Reducing firms’ financial resource requirements may also help to drive down economic costs of business.

A common barrier cited for some innovations is how to agree on a lead provider to hold central responsibility and power in an essentially monopolistic position. Perhaps, the only way for the industry as a whole to agree who should develop such solutions is if they all collectively develop and own it together as in the case of Blockchain Ben Shepherd, partner in Oliver Wyman’s Strategic IT and Service Operations Practice

International Finance Magazine Apr - Jun 2016

BANKING

Blockchain is a digital ledger on which parties can log transactions. No one group has control over another. Being de-centralised, it eliminates the need for intermediaries, such as in the case of transferring money instantly without a central clearing house

In addition, activity around Blockchain technology is creating energy for further improvements to the system. Ben Shepherd, partner in Oliver Wyman’s Strategic IT and Service Operations Practice, said, “The prize on offer is a world where all capital market participants work from common datasets, in near real time and where supporting operations are either streamlined or made redundant. If we started from a blank sheet of paper today, with access to efficient, well-architected Blockchain technologies, we would expect the market structure and processes to look very different. The record of each security would be held on a flat accounting basis — that is, with multiple levels of beneficial ownership in a single ledger. There would be no need to operate data normalisation, reconcile internal systems, or agree exposures and obligations. We would have standardised processes and services, shared reference data, standardised processing capabilities, such as reconciliations, near real-time data and improved understanding of counterparty worthiness. For privileged participants

such as regulators, we would have transparent data on holdings, among many other improvements.” Blockchain could have a major impact on a number of areas within the financial markets, including securities transactions, derivative transactions and asset servicing. However, first it must clear a number of hurdles such as achieving scalability, regulatory and legal clearance, developing common standards to operational risks and managing anonymity in the system. Shepherd says, “A common barrier cited for some innovations is how to agree on a lead provider to hold central responsibility and power in an essentially monopolistic position. Perhaps, the only way for the industry as a whole to agree who should develop such solutions is if they all collectively develop and own it together as in the case of Blockchain.” The Oliver Wyman paper concludes that it is up to major established players in the market to work with innovators to develop standards while preserving the existing strengths of the ecosystem, and navigating the complex worlds of regulation and legal oversight.

Angus Scott, Head of Innovation, Euroclear, who co-authored the report, said, “In order to work together to shape a new future, the industry needs to take a collective view on the potential of the technology, which was the intention of this study. The market must embrace this potential, show patience with this development and invest in various innovative solutions to bring it to reality.” IFM editor@ifinancemag.com

“

In order to work together to shape a new future, the industry needs to take a collective view on the potential of the technology, which was the intention of this study. The market must embrace this potential, show patience with this development and invest in various innovative solutions to bring it to reality Angus Scott, Head of Innovation, Euroclear

Apr - Jun 2016 International Finance Magazine

BANKING

Solving the data

equation Inadequate information on Africaâ&#x20AC;&#x2122;s unbanked population is at the heart of the lack of financial services in rural areas Tom Jackson

International Finance Magazine Apr - Jun 2016

BANKING

ignificant progress has been made, both by the success of mobile money in some African countries and the increasing presence of global banks, such as Barclays and Citi, on the continent. Yet, these developments have had limited impact in providing those at the bottom of the pyramid, especially poor individuals in rural areas, access to financial services. The agency model employed by mobile money service operators means it is simply not sustainable for agents to cater to those earning less than $2 per day, with the result being the average M-Pesa transaction is close to $30. Banks too have made limited impact in providing services to inaccessible people. KPMG says banks have largely, but not exclusively, focused on high margin businesses.

“While this has undoubtedly been instrumental in boosting a number of fast-expanding economies’ growth potential, it has largely excluded development of products aimed at the lower income and unbanked sectors of economies,” the company said. At the root of the problem when it comes to providing financial services to poorer people in inaccessible, rural areas is that the service providers know little or nothing about these people. They don’t know who they are, how they spend their money or what they want. They have none of the necessary data in order to make informed decisions and provide financial services. This has given rise to some opportunities. Dr Abdigani Diriye is cofounder of Kenyan company SuperFluid Labs, which offers personal financial tracking solutions to con-

sumers, and a data aggregation and analytics platform to financial institutions to enable them to understand consumer financial behaviour and attributes. “Data is at the heart of all financial decisions — whether it’s to open account, because there is sufficient amount of data to do an adequate KYC, to financial data giving an indicator to an individual’s credit worthiness, or spending behaviour to identify the right products to recommend,” he says. The idea of data being critical to providing financial services is confirmed by Andrew Watkins-Ball, chief executive officer of JUMO. Launched last year, JUMO collects data on an individual’s mobile phone usage, such as calls made, texts sent, and the amount of money passing through their mobile money wallet, to assess their creditworthi-

Data is everything. It will become the currency of the user. Each person’s data becomes their own value. If I’m a good person behaving responsibly, the data will show that Andrew Watkins-Ball, chief executive officer, JUMO

Dr Abdigani Diriye, co-founder, SuperFluid Labs. The company offers personal financial tracking solutions to consumers, and a data aggregation and analytics platform to financial institutions to enable them to understand consumer financial behaviour and attributes

Apr - Jun 2016 International Finance Magazine

BANKING

ness and offers loans and insurance solutions via mobile. “Data is everything. It will become the currency of the user. Each person’s data becomes their own value. If I’m a good person behaving responsibly, the data will show that,” he said. The inability to understand - and trust - potential customers as a result of the lack of information available to them is at the heart of the lack of financial services in rural areas. To financial institutions, these people are an unknown entity, and risky to lend to. Roland Claussen is chief product officer of Ugandan company awamo, which has designed an ‘out of the box’ biometric, mobile microfi-

nance management solution for microfinance institutions, essentially acting as a credit bureau. He says once adequate data is made available to financial institutions, it will trigger a chain reaction that will benefit all stakeholders. “Microfinance institutions can lower their defaults, increase their profits and lower interest rates at the same time,” he said. “This means that loans become more affordable for borrowers who can invest in and grow their SMEs, which stimulates local economies in a sustainable way. Additionally, the microfinance business becomes more attractive, so that existing lenders can expand their operations, which also creates

new local jobs and even new lenders in the market.” But to start this chain reaction, more reliable credit information is needed, something that has been lacking in Africa for years. Only a few African countries have credit bureaus, and their scope is very limited, covering only small parts of the population. The result is what Claussen calls ‘asymmetric information’, meaning lenders only have very limited knowledge about a borrower’s ability and willingness to repay a loan, whereas the borrower himself has much more knowledge about both. “This gap in information is one of the main reasons for defaulting loans and stimulates fraudulent

This gap in information is one of the main reasons for defaulting loans and stimulates fraudulent behavior. This leads to a situation where lenders lose trust in borrowers and compensate their mistrust by increasing interest rates – up to a level where taking out a loan is not an option anymore for many people Roland Claussen, chief product officer of Ugandan company awamo

Only a few African countries have credit bureaus, and their scope is very limited, covering only small parts of the population

International Finance Magazine Apr - Jun 2016

BANKING

behavior. This leads to a situation where lenders lose trust in borrowers and compensate their mistrust by increasing interest rates – up to a level where taking out a loan is not an option anymore for many people,” he said. The solutions are being developed, however. JUMO’s innovative way of providing people with something akin to a credit rating has been adopted by

operators such as Tigo and MTN in a number of African countries. SuperFluid works in a similar way, tapping into data sources sitting on people’s phones, such as social media, mobile money transactions, telephony behaviour, and psychometrics to understand a consumer’s financial footprint. awamo, meanwhile, collects a borrower’s most relevant credit data and uses advanced algorithms

to calculate reliable credit scores, predicting a borrower’s individual probability of default. “Lenders can then adopt their interest rates to the individual lending risk, which leads to increased profits and at the same time lower interest rates for good borrowers,” Claussen said. Tech solutions are, therefore, now increasingly available to fulfill the role of credit bureaus and provide financial solutions with data on previously inaccessible people on the continent, primarily by using the ubiquitous mobile phone. Yet, challenges remain. “You need a translation mechanism and infrastructure to deliver the choice. Don’t get me wrong, it is really hard,” said WatkinsBall, who also highlighted

a shortage of skills in the data-related field in Africa. “People don’t know what to do with the data and they don’t know how to find the people to deal with it,” he said. Yet, these challenges will be overcome, given the huge potential of data to provide financial services to the unbanked and offer new revenue streams for financial institutions. “We believe this is infrastructure that needs to be built for everyone,” Watkins-Ball said. “We don’t discern, the data should decide by itself. Don’t presuppose people.” IFM editor@ifinancemag.com

Apr - Jun 2016 International Finance Magazine

OPINION

Saket Modi

Advantage International Financial Reporting Standards The key challenge with adoption of IFRS is it is a moving goal post

International Finance Magazine Apr - Jun 2016

OPINION

magine you are playing the final of the Wimbledon Lawn Tennis Championships. It is the final set and you have a break point, a great opportunity to win the game, and later possibly the set and match to lift that coveted trophy. It is Advantage you, but the next point is crucial. You have worked very hard for this day, hours of practice every day over the last few years, faced challenges, but you have improved your game, and here you are on the centre court, with the world watching you. You want to reach that milestone of winning

the Championships and there are thoughts flowing through your mind. “Will I be able to break serve and take the Game? What do I need to do to win it from here?” The journey of International Financial Reporting Standards (IFRS) can be compared to the Wimbledon final – years of hard work, challenges, small and big defeats and wins to get where we are today. The key challenge with adoption of IFRS is it is a moving goal post. Key existing standards like Financial Instruments, Revenue and Leases are being replaced in the near future with new standards, and some standards are

being updated as part of the improvements project. For a corporate that has adopted IFRS or is planning to do so this decade, every year is similar to Wimbledon. Just like you see new and improved players, there are new and improved standards to deal with.

This requires a well-trained team, effective planning and implementation. Let’s look at the key IFRS milestones that corporates would look to achieve over the next three years.

IFRS 9 Financial Instruments (effective January 1, 2018) Whether you are a CFO, accountant, auditor, regulator or analyst, the new accounting standard on financial Instruments is likely to significantly affect what you do. IFRS 9 Financial Instruments introduces improvements to accounting for financial instruments that could affect the way corporates manage their financial assets, price products and implement risk management. It replaces IAS 39 Financial Instruments: Recognition and Measurement. The key changes in IFRS 9 are as follows: • Principles-based approach to measurement of financial assets based on the business model and nature of cash flows. • Forward looking impairment model, which requires earlier and more timely recognition, and ongoing assessment of credit losses. • Principles-based hedge accounting model, which is more aligned to common risk management practices.

The implementation of IFRS 9 represents a fundamental change in approach and requires re-engineering of the financial reporting systems and processes. For example, the new impairment model requires recognition of expected losses on the day a debt instrument like a loan or corporate bond is originated. In addition, it also requires an overlay of forward looking macro-economic data (in addition to historical data adjusted for current conditions) in estimation of loss allowance. Whilst the exact impact of transition is difficult to predict, a recent Deloitte survey has indicated that banks expect loss allowance to increase by up to 50% on transition to IFRS 9/FASB impairment models. Though many of the changes will have the biggest impact on financial services sector, corporates in other sectors, which hold financial assets e.g. trade receivables, bonds etc. could also be significantly affected. There are also more opportunities for corporates to use hedging to manage risk.

Apr - Jun 2016 International Finance Magazine

OPINION

IFRS 15 Revenue from Contracts with Customers (effective January 1, 2018) Revenue is a crucial number for any business and IFRS 15 is an attempt to bring about consistencies in how revenue is recognised. It is one of the success stories of the convergence project between IASB and FASB. IFRS 15 replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. It provides a five-step comprehensive framework for recognition and measurement of revenue. • Identify the contract(s) with customer; • Identify the performance obligations in the contract; • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract; and • Recognise revenue as and when a performance obligation is satisfied. The standard affects recognition of revenue from contracts with multiple services i.e. performance obligations.

A telecoms company with one contract to provide a bundle of services like land line rental, broadband, free anti-virus software and technical updates would be affected by IFRS 15. The revenue from each of these services must be based on their stand-alone selling prices and recognised as the performance obligations are met. So, revenue must be allocated to anti-virus software even though it is termed as “free”. A mining company may have to evaluate whether contracts fall within the scope of IFRS 15, and if so consider when control passes to customer, account for variable considerations and ensure there are processes and systems in place to not just measure and recognise the revenue figure, but also meet the enhanced disclosure requirements of IFRS 15. The transition to IFRS 15 may have a significant impact on corporates in certain sectors, but only a limited impact on others.

IFRS 16 Leases (effective January 1, 2019)

In less than three years, there is going to be approximately $3 trillion of assets and liabilities added to balance sheets of corporates globally. This comes about from the new IFRS 16 published in January 2016 and the equivalent FASB standard. Both IASB and FASB agree it is sensible to have operating lease commitments on the balance sheet, since these arrangements give the lessee the right to use the asset and create an obligation to pay rentals over the term of the lease. The key advantage of IFRS 16 is that it would aid in comparability of financial statements of corporates using leased assets. It affects accounting for operating leases by the lessee, and in particular, retail, hotel and airline companies, which lease property and planes over a long period. There are exemptions for small value and short-term assets.

The key issues in application of the new standard are: • Is the contract a lease or a contract for services? • What is the lease term, in particular for contracts with options to extend? • What is the treatment of variable lease payments and residual value guarantees? • What is the discount rate to be used to determine the lease liability and when are the revisions to those rates required? IFRS 16 may lead to breach of banking covenants for some corporates. An impact analysis is essential for current operating lease commitments or if there are plans to enter into operating leases in the future.

IFRS adoption IFRSs play an important role in bringing transparency, accountability and efficiency to the world economy, reducing the cost of capital and cost of reporting. IFRS was adopted by the European Union (EU) in 2005, followed by over 100 countries in the last decade. More than two-thirds of the G20 countries now use IFRS.

A robust understanding of the standards is useful to both preparers of financial statements and the users who evaluate and analyse the information. Though IFRS is a moving goalpost, it is a match that can be won with a well-trained team, effective planning and implementation.

Saket Modi, CFA has spent considerable time working, advising and training on IFRS, in particular financial instruments. He has worked with delegates from over 30 countries in Europe, Africa, Middle East and Asia, and has been invited

by the International Auditing and Assurance Standards Board® (IAASB®) to make a presentation on IFRS 9 at their board meeting in New York. He is a qualified accountant and CFA® charter-holder

International Finance Magazine Apr - Jun 2016

Payment Systems

ÂŁ

Fast, fasterâ&#x20AC;Ś

even faster World moves toward real-time payments Tom Groenfeldt

International Finance Magazine Apr - Jun 2016

Payment Systems

Banks are facing a perfect storm of conditions that threaten to disintermediate them from their traditional roles — James Wester, research director, IDC Financial Insights

ayments are a pretty common part of finance — they have been around as long as money has — but the next year or two may see unprecedented change in personal, banking and national payment systems. More than 35 countries around the world either have developed or are developing faster settlement networks for consumer payments, according to James Wester, research director for global payments at IDC

Financial Insights. In Singapore, DBS FAST allows instant movement of up to $10,000 between accounts at participating banks. A mobile application in Singapore lets small businesses pay for deliveries with a mobile phone, which links the payment to an invoice. The payment is immediate and records generated automatically. In Australia, home buyers no longer need to bring bank cheques to the closing; the money to purchase a house can be moved in real

time when the title is transferred. Some businesses in the UK have been using Faster Payments to improve their working capital. “By using Faster Payments, they can order more frequently, reducing their inventory,” said Zilvinas Bareisis, a senior analyst within Celent’s banking group. It was an unanticipated use of the country’s real-time payments network, he added. “Businesses think it is phenomenal,” said David Yates, CEO of VocaLink. “Employers with regular payroll for irregular amounts can pay employees on time without having to submit their payments days in advance, which is very important. The UK government can provide emergency funding for people who are in trouble and deliver the money instantly, and that matters.” The government is the largest user of the UK payment system. As new national real-time payment systems roll out, they will require banks to modify or replace their own payments systems, moving to what Wester in a December whitepaper called nextgen payment infrastructure, which will reduce costs and has the agility to create new products and services based on data analysis that shows what customers want. “Banks are facing a per-

As payments become increasingly embedded within other services, we will see a shift in the relationship between buyer, merchant and payment service provider, with banks facing ever stiffer competition to keep hold of the precious customer relationship Michael Laven, CEO of Currency Cloud

Apr - Jun 2016 International Finance Magazine

Payment Systems

James Wester, research director, IDC Financial Insights

fect storm of conditions that threaten to disintermediate them from their traditional roles,” noted Wester. “Investment levels in payments have been high in recent years,” noted Gilles Ubaghs, senior analyst within Ovum’s Financial Services Technology team, in a year-end report. “It’s driven by the need to deploy new payment services, cope with the overall rise in electronic transaction volumes, and replace aging legacy infrastructure. 2016 will see an increase in this trend.” The roles of non-bank financial technology (fintech) firms and banks is the subject of lively debate — will banks be supplanted or replaced by fintech firms specialising in single lines of business such as payments, lending or mortgages? Will banks buy the fintech

firms? Will they find a way to offer the same services, or will customers stick with banks because they like the convenience of one-stop shopping? Michael Laven, CEO of Currency Cloud which allows merchants and suppliers to make high-volume, low-value payments around the world at low cost, thinks individuals and corporations will work with a main bank because it is more convenient than working with five separate suppliers. This from someone whose web site warns: “As payments become increasingly embedded within other services, we will see a shift in the relationship between buyer, merchant and payment service provider, with banks facing ever stiffer competition to keep hold of the precious customer

International Finance Magazine Apr - Jun 2016

relationship.” Consultants who think banks will eventually find a way to offer these services better have even devised a name for this — re-aggregation. Fintech firms have carved out their business because banks, with their legacy systems, are too expensive, too slow, and have to set high pricing that covers their expensive overhead. Payments is a hot area for fintech firms. AngelList which shows startups in multiple industries, shows more than 1,400 companies in mobile payments. Bruce Wallace, chief digital officer of Silicon Valley Bank, told Finextra that payments companies and alternative or marketplace lenders account for about two-thirds of the Valley’s unicorns, firms valued at $1 billion or more. “The size of the market is simply massive. Global financial services are a multi-trillion dollar market. The rapid virtualisation of these services through technology is having a profound effect. In the not-so-distant future, seeing consumers going to online P2P marketplace platforms for their credit needs and leveraging robo-advisor software for investment advice might become the norm instead of visiting a local branch.” In the 2015 FinTech 100 published by H2 Ventures and KPMG in December, nearly a quarter of the companies listed in the top 100 are disrupting payments. However, Pascal Bouvier, a venture partner with Santander Innoventures fintech venture fund,

Banks take far fewer risks naturally and because they are regulated, their due diligence on who they give you access to means a far safer harbour than downloading an app from iTunes where you know nothing of the firm and can’t get in touch with it if someone goes wrong Gareth Lodge, a senior analyst at Celent covering payments

Payment Systems

sounded a note of caution. Many ‘me too’ payments startups will close shop, he predicted. Gareth Lodge, a senior analyst at Celent covering payments, thinks the banks and fintech firms need each other. The fintech firms have agility and can create really interesting services by harnessing technology. “But that means other players can do the same thing. At no point does one of these fintechs have an absolute monopoly. For every fintech, there are 101 competitors. Square has more than 300 globally, over 100 in the US alone,” he added. “Square has only become successful because their investors have very deep pockets and it has scale. For every Currency Cloud, who through skill, luck or timing has made it, there are 99 who haven’t. I think fintechs will look for a stable route to

market, and who has a stable, sticky customer base? Banks. I think banks will become an agora of services.” Lodge also said he wouldn’t be surprised if a major fintech firm blows up in 2016. “This coming year we will see one of these fintechs have a serious problems like Mt. Gox (the bitcoin exchange that went into bankruptcy). These players aren’t regulated and many don’t have either the long-term experience or the backing to survive.” If that happens, it could shift many of the fintech firms into banking alliances, perhaps offering their innovations through APIs. “If you go through a bank you have the bank protection and knowledge,” Lodge explained. “Banks take far fewer risks naturally and because they are regulated, their due diligence on who

they give you access to means a far safer harbour than downloading an app from iTunes where you know nothing of the firm and can’t get in touch with it if someone goes wrong.” Over the last six months real-time payments and APIs have been hot topics, he added. “Any bank doing anything with their infrastructure need as API strategy, particularly the transaction banks.” IFM editor@ifinancemag.com

‘Don’t tell me the Americans can’t do this’ The United States is lagging in moving to faster payments “A lot of the challenges are related to first of all, it is not mandated, it is not a regulation,” said Sandra Horn, director, marketing line leader at ACI Worldwide. “Then, the cost benefit, the ROI model, has been difficult for the banks to get their head around. Banks have a hard time getting a business model to justify it.” The value to consumers is they will be able to pay bills at the last minute without driving to a utility office or having their power turned off while they wait for a payment to clear. Businesses will also benefit if the delay in payment processing is eliminated. Paul Thomalla, senior vice-president at ACI Worldwide, agrees that real-time in payments doesn’t necessarily make a business case — for banks. “But there is a business case for the country or the region and that is why regulators, central banks and central clearing firms are saying this is the way we need to go,” he explained. “Whether in Australia, Finland or the UK, for that matter, what you see is there are good business reasons from a commercial point of view, and the regulator is siding with the consumers and saying there is a need for faster payments.” The complexity of the US banking environment is sometimes cited as a reason for slow progress but Gene Neyer, global product manager at D+H, formerly Fundtech, doesn’t buy it. “True, the US has about 12,000 banks and credit unions, but Europe has a similar number of financial institutions, and it instituted SEPA.” The business case in the US has been all about banks; he thinks the business case should be heard for merchants and consumers as well. “Don’t tell me the US can’t do this, because it has been done by smaller, less sophisticated countries.”

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

Why you should bet on

copper & vanadium

The mining industry is counting on the renewable energy sector to keep it going Miriam Mannak

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

t was relatively quiet at February’s Mining Indaba in Cape Town, South Africa. Short of 7,000 delegates attended this year’s edition of one of the world’s largest mining and investment conferences. “Well, it is fairly understandable. Things aren’t going too well after all,” says Claire McMaster of Women in Mining in South Africa, one of the exhibitors. She referred to how mining has fared over the past yearand-a-half, particularly 2015. Once expected to be a turnaround year for mining, last year was anything but that. Take coal. Prices have plummeted over the past year or so, among other things due to declined demand from China. Recently released figures show how China imported 35% less coal than the previous year. Because of this lower

demand from one of the largest coal consumers in the world, coal prices have dropped from $140 per metric tonne in January 2011 to $43 earlier this year. “Two of China’s major coal partners, Indonesia and South Africa, saw a 50 million tonne export decline,” said dry bulk and energy commodity strategist Fabio Gabrieli during the Mining Indaba. “Last year, there were no South African coal exports to China.” Coal is not lost Fortune Mojapelo, CEO of South African coal and vanadium mining company Bushveld Minerals, agrees that these are tough times for producers, particularly those who rely on exports to China. That doesn’t mean the sector is lost, he says. “If you mine coal with the idea of exporting it to China, you will struggle. But if you

mine coal for power generation in Africa, you will do well,” he says, referring to Africa’s energy shortage. One in four households in sub-Saharan Africa does not have access to electricity. It is estimated that the cost to address the gap in power infrastructure is $10bn per year. “Renewables can help fill the gap, but they not suitable yet for base load. Coal is great for that.” Sheila Khama, Director of the African Natural Resources Centre at the African Development Bank (AfDB), agrees with Mojapelo and says that coal will continue to be a significant player in Africa’s mining sector. “If you look at investments in coal, in Africa and elsewhere, everything says that we are unlikely to – in the short term at least – lose coal,” she explains, referring to a recent announcement by Coal India, a state-owned

“

If you mine coal with the idea of exporting it to China, you will struggle. But if you mine coal for power generation in Africa, you will do well Fortune Mojapelo, CEO of South African coal and vanadium mining company Bushveld Minerals

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

“

28 company, with regards to acquiring various South African coal mines. Another mining subsector that isn’t doing too well, particularly from an export perspective, is West Africa’s iron ore industry, which went from boom to bust in less than a year. Declining prices, which between January 2015 and January 2016 dropped from $67 per mt to around $39, are again the main culprit, as well as shifted production locations. “The industry in West Africa will never be fully developed. It is too expensive to operate,” says Andrew Lapping, head of the Africa Equity Fund at investment management firm Allan Gray. “It is easier and cheaper to add brownfield capacity in Australia

and Brazil. Then there is India, the world’s next big iron ore country.” Not just China When asked about the future of Africa’s overall mining sector in general, Tony Zoghby, mining analyst at Deloitte, says that 2016 will be tougher than 2015 has been. He notes that China’s declined demand for natural resources, resulting in lowered African exports and dropping prices, is not the only factor that needs to be taken in consideration. “The Chinese demand has dropped, sure, but is has done so from a very high base. The country’s off-take is still significant. The main problem, in my view, is that there is a lot of product like iron ore in the market

International Finance Magazine Apr - Jun 2016

whilst the demand is low,” he says. “In the meantime, companies continue to add product to the market. This is keeping the prices low.” Zoghby adds that it is difficult to say when the next mining cycle will start. “People are exceptionally bad at predicting metal prices, in the short term and long term,” he says, adding that mining companies which are investing in innovation will recover faster than others. “The future of Africa’s mining industry depends on innovation. Investment now is necessary so that one can benefit when the cycle turns. The problem is that innovation costs money and it is difficult to determine when the cycle will turn. This means that 2016 will be a tough year.”

The Chinese demand has dropped, sure, but is has done so from a very high base. The country’s offtake is still significant. The main problem, in my view, is that there is a lot of product like iron ore in the market whilst the demand is low Tony Zoghby, mining analyst at Deloitte

Renewables to the rescue

espite some pessimistic prognoses, it is not all doom and gloom. The growing renewable energy sector is an important factor. A report released by Bloomberg New Energy Finance shows that investment in renewables such as wind, solar, hydro and geothermal amounted a record $329 billion in 2015, compared $82 billion in 2004. Alternative energy investments were the highest in China (17% increase since 2014), followed by the United States. However, new markets ran the show last year, Bloomberg’s “Clean Energy Investment By the Numbers – End of Year 2015” suggests. These include South Africa, with $4.5bn committed investment, up 329% from 2014, and Morocco ($2bn, up from almost zero in 2014). One of the commodities Lapping is most positive about in that regard is copper. “Copper is used a lot

in the technology for solar and wind. The long term demand for copper is good, particularly for Zambia, one of the world’s largest copper producers,” Lapping says. Mojapelo adds that more commodities are expected to benefit from the renewables boom too, including vanadium. The global resource of this metal, mainly used to strengthen steel, is estimated at 63 million mt, of which a quarter is found in South Africa. “Vanadium, which we mine, is also increasingly used in energy storage technology,” he says. “We have found that energy storage is at a tipping point. Thanks to the aggressive adoption of renewables over the last years, energy as a requirement has grown in leaps and bounds. It will continue to grow. That is encouraging.” IFM editor@ifinancemag.com

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

Where will

the demand come from?

Everyone is looking at India, but experts warn it is not another China Tim Evershed

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

he early weeks of 2016 have seen stock markets around the world slump with shares in mining and metal firms hit particularly hard. Slowing growth in the Chinese economy, a big consumer of commodities of recent years, means the outlook remains largely negative for the global economy with companies engaged in locating, mining and producing raw materials amongst those worst hit. International giants Anglo American, Rio Tinto, Antofagasta and Glencore have all seen their share prices buffeted by the storm. Underlying this is the drop in demand from China and the consequences for commodities prices. The Bloomberg Commodity Index (BCOM), a measure of investor returns in raw materials, tumbled 25% in 2015, a fifth straight annual loss and the longest slide since the data was first collected in 1991.

Since the onset of the credit crunch, it was China’s boom that has fuelled demand and kept many commodities’ prices high. At the beginning of 2009 with the Chinese economy beginning to move into gear, gold stood at $837.90 an ounce while copper cost £1.43 per pound and uranium was $40 per pound. By 2011, those prices had risen exponentially, along with Chinese growth, to peaks of $1884.20, $4.33 and $70 respectively. By January this year, gold had slipped to $1080.60 while copper had fallen to $1.43 and uranium was under $40 per lb. All this leaves mining companies with questions to answer. First and foremost, where will demand come from? Jasper Lawler, market analyst at CMC Markets, believes that firms asking that question will be in for a shock. “The demand won’t come from anywhere. It’s

supply that has to come down to meet a new-normal of lower demand. This means mining companies reducing capacity and likely cutting dividends as Anglo American have already done. “India is a rising powerhouse but it’s unlikely to match the demand create by China’s command economy because the Chinese government misallocated capital towards commodity-intensive works projects. The misuse of commodities in China went into the likes of ‘ghost cities’ where sprawls of shopping centres and blocks of luxury flats are empty. “The China story is centred on industrial metals and to some extent oil. Gold will reflect expected inflation in the US and to some extent act as a safe-haven. Agricultural commodities will respond more to seasonal weather patterns but meat products will probably continue a pattern of

India is a rising powerhouse but it’s unlikely to match the demand create by China’s command economy because the Chinese government misallocated capital towards commodityintensive works projects. The misuse of commodities in China went into the likes of ‘ghost cities’ where sprawls of shopping centres and blocks of luxury flats are empty Jasper Lawler, market analyst at CMC Markets

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

Almost 70% of nickel producers are making a loss at current prices. In aluminium, a third are losing money, and in copper, the figure is about 22%, according to Australian investment bank Macquarie

broadly stronger demand as China’s rising middle class include more meat in their diet.” Although down from its peak, it looks as if gold has the most potential amongst metals, largely as it is regarded as something of a safe haven whilst quantitative easing programmes continue to suppress currency values. The value of the precious metal does not erode in quite the same way as US dollars and the two price charts tend to move inversely. Alistair Hewitt, Head of Market Intelligence at the World Gold Council, says, “Gold is different because

it is bought by consumers in China. Chinese consumers have a cultural affinity with gold and events such as weddings or Chinese New Year all see a lot of gold given as gifts. “In 2013, India was the world’s largest gold consuming country and it is similar factors that have driven its demand there in cultural affinity and rising incomes. Other factors that have changed the market are the growth in exchangetraded funds - they didn’t exist at the start of the millennium – and central bank demand. Gold is a fantastic reserve asset and they can use it to protect a nation’s

wealth. Until 2010, central banks were net sellers but since the financial crisis, they have been net buyers.” Historically, the problem with gold miners is that when their commodity is booming, they over expand while failing to keep a brake on staff and production costs. This leaves them exposed to large losses and asset writedowns in the event of a slump in prices. In a note to investors issued in January, Swiss bank UBS said, “Assuming the gold industry does not revert to pursuing growth over returns, maintains strong cost discipline and price increases, we believe the

Gold is different because it is bought by consumers in China. Chinese consumers have a cultural affinity with gold and events such as weddings or Chinese New Year all see a lot of gold given as gifts Alistair Hewitt, Head of Market Intelligence at the World Gold Council

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

At the beginning of 2009 with the Chinese economy beginning to move into gear, gold stood at $837.90 an ounce while copper cost £1.43 per pound and uranium was $40 per pound

sector could be in a strong position to offer what, arguably, it should have offered during the 2000s - expanding margins, increasing FCF [free cash flow] and genuine leverage to gold price upside.” At the other end of the scale is nickel, as prices for the metal used in stainless steel plumb their lowest level since 2003 making it the worst performing metal of last year. “How much longer do you think we’re going to see some of this production remain around before it’s forced to be taken out of the market?” said Evy Hambro, CIO at BlackRock’s Natural Resources Team. In fact, this is already happening as Brazilian miner Votorantim Metals

suspended two nickel operations in the country while in Australia Clive Palmer’s Queensland Nickel, whose slogan is ‘nickel for the future’, said it would go into voluntary administration, laying off 240 workers at its refinery near Townsville. Almost 70% of nickel producers are making a loss at current prices. In aluminium, a third are losing money, and in copper, the figure is about 22%, according to Australian investment bank Macquarie. The Australian natural resources sector - that includes precious metals, base metals, coal and gas - was one of the main beneficiaries of Chinese demand and now must look elsewhere. Like many others, Australian mining concerns are in-

creasingly looking towards India and hoping growth in that economy will take up the slack. However, energy information providers Platts, warn it is not another China. In a report, it said, “There’s a huge amount of interest in India. Everyone is talking about it, from big commodities companies to banks and investors. And India has great aspirations, especially in infrastructure. It wants to triple its crude steel production to over 300,000 tonnes a year and that’s very ambitious. India will never be China, but especially on the coking coal side, it does offer some bright points for Australian suppliers.” IFM

“

How much longer do you think we’re going to see some of this production remain around before it’s forced to be taken out of the market? Evy Hambro, CIO at BlackRock’s Natural Resources Team

editor@ifinancemag.com

Apr - Jun 2016 International Finance Magazine

INTERVIEW MINING SPECIAL INTERVIEW

Wang Xinyu, Vice-President, China Nonferrous Metal Industryâ&#x20AC;&#x2122;s Foreign Engineering and Construction Co., Ltd.

International Finance Magazine Apr - Jun 2016

MINING INTERVIEW SPECIAL

‘Demand will come

from Asia and Africa’ Wang Xinyu, Vice-President, China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd. tells IFM that the mining industry is anything but finished Suparna Goswami Bhattacharya

If the prices of metals are close to their production costs, does it not mean that demand has almost dried up and the world is headed for a recession? Yes. Definitely, the low price and closing production cost reflect the situation of weak demand and economic recession. Because of low prices, many mines run in losses. In fact, in recent years, quite a few of them have shut down or have reduced their product output. Having said that, we see the

issue from a different perspective — mines closure and production reduction also means decrease of supply, which will have a positive effect on price. Even if there is a boom in the mining industry in the next 2-3 years, will it match the demand generated by China? China will still be the main consumer for the next 10 years and even beyond. However, the point to note

here is the demand will not be stronger than what it was 30 years ago. So I think that the global mineral products can meet the demand of China, irrespective of bust or boom in the mining industry. Which other nation or region can generate that kind of demand? I think the Asia region, especially India and Indonesia, and African countries, will enter into a rapid development stage and generate most demand

Apr - Jun 2016 International Finance Magazine

INTERVIEW MINING SPECIAL INTERVIEW

for mineral products. Isn’t it inevitable that the mining industry will have to scale down? As I have mentioned before, there are many mining companies who have shut their projects. For instance, in recent years, many development-stage mining projects have stopped. Even big names, like Glencore and BHP, have closed down their mines and divested their assets from mining to other industries. So, it is true that the mining industry is down now, but soon it will be up.

How far is the Going Out strategy feasible in view of the fall in prices? Going Out strategy, also named as ‘Internationalisation Strategy’, was officially put forward in the third meeting of the Ninth National People’s Congress in 2000. It essentially means that Chinese enterprises have to make most use of the markets and resources at home and abroad via outward direct investment, engineering contracts and other ways to participate in international competition. So far, the strategy has played a very important role in promoting and improving Chinese economy. It will continue to be a long-term strategy for Chinese companies and China, no matter whether it is a boom or a bust period. Is reviving the Silk Road enough to stimulate the mining industry? Not enough, though reviving the Silk Road will be one

of the impetuses to stimulate the mining industry.

low value items but promote high-tech manufacturing.

What is the Belt and Road plan? ‘Belt and Road’ is a development initiative started by the Chinese government in 2013. It refers to the New Silk Road Economic Belt, which will link China with Europe through Central and Western Asia, and the 21st Century Maritime Silk Road, which will connect China with Southeast Asian countries, Africa and Europe. Geographically speaking, neither the belt nor the road follow any clear line; they serve more as a roadmap of how China wants to further integrate itself into the world economy and strengthen its influence in these regions. Many of the countries mentioned have traditionally had close trade and investment relations with China, which says they should deepen cooperation, especially in terms of building infrastructure and other development projects.

Would it be correct to say that the coastal areas have developed faster than the interiors resulting in significant income disparity? In which case, is there more scope for growth in China that will cushion the slowdown? At the same time, do the interior regions have the same potential for growth as the coastal areas? Yes, you are right in saying that coastal areas are more developed than interiors. During the 1980s, China started the reform process and opened itself to the world from coastal areas. However, the government has realised this and has put in place reforms to develop the interiors as well. The interiors have huge land area, are rich in resources. Hence, they have great potential and space for growth, which will be of significant support to the Chinese economy. IFM

There is a view that to maintain momentum, China will move from manufacturing to services industry. Do you see this happening? Currently, the Chinese economy is in a transition period of growth model from investment and overseas exports to domestic consumption. The government here is encouraging the services industry, but not at the cost of manufacturing. We cannot move away from manufacturing at one go. The process needs to be slow where we slowly decrease the production of

International Finance Magazine Apr - Jun 2016

editor@ifinancemag.com

The government here is encouraging the services industry, but not at the cost of manufacturing Wang Xinyu, Vice-President, China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd

‘Mining is probably the most regulated industry on the planet’ IFM speaks to David Fennell, the man who has seen it all Tom Groenfeldt

International Finance Magazine Apr - Jun 2016

avid Fennell has had a long a successful career in mining, starting with founding Golden Star Resources Ltd. in 1983. As president and CEO, he led it to become one of the largest and most successful exploration companies and a listing on the Toronto Stock Exchange where it was a TSE 300 company. In 1998, he became chairman and CEO of Cambiex Explorations Ltd, which through mergers and acquisitions became part of Newmont Mining Corporation in January 2008. He is currently senior executive officer or director or both of a number of publicly-traded resource companies, including Avala Resources Ltd., Reunion Gold Corp. Major Drilling Group International Inc., Sabina Gold & Silver Corp. and Torex Gold Resources Ltd. In a recent phone interview, he described the mining business today: “Technology has changed the way the world works, and mining is no

MINING SPECIAL

exception. Exploring and determining whether an area holds sufficient deposits to make a mine worthwhile now starts with satellites. This is followed by a wide variety of geophysical techniques then moving on to surface sampling, mapping and finally they start drilling to get sample cores and begin creating a three dimensional model of the deposit. “Historically, resource definition was labour intensive and slow, using polygons and slide rules. About 30 years ago, a new way of estimating resources was developed with the advent of computer ‘Kriging’. It has continuously been refined and developed to the point now that what used to take a geological team months to calculate can be accomplished in hours by a geologist working with a powerful laptop. The revolution of communication has funda-

mentally changed resource exploration, development and operations. Fennell had recently returned from visiting a gold mine the company operates in the rain forest of Suriname. “We were sitting in the middle of the Amazon rain forest mine in Surinam and a mechanic technician was having a problem with one of the Caterpillar trucks, which can carry 150 to 240 tonnes. He had his iPad out and was talking to the guy in Peoria (Illinois, the Caterpillar headquarters) and showing him the problem. It’s staggering to me, the technological innovations that have occurred. “Truck drivers use GPS on a heads-up display to navigate the mine. It will tell him to proceed to Loading Station 4 and that will take 4.5 minutes. It’s much more efficient than radio. Computers record details such as fuel consumption, speed, how much time in

each gear and condition of the oil, a staggering around of information that makes things more efficient.” Google driverless may get the most media coverage, but robotic trucks were introduced to Western Australia mines in 2008, although the numbers have expanded only slowly. Robotic trucks can put in more hours, improve productivity and reduce gas consumption. Asian demand for commodities, copper, zinc, iron and coal establishes base prices. Asian consumption is the most significant influence on price. As China, India and the other Asian countries continue to develop their need for the metals that make development possible will continue to increase thereby increasing the competition for those resources. IFM

Mines are not the prettiest things to look at, but in terms of wealth creation, they are probably the most effective instruments of creating new wealth in this world David Fennell, founder, Golden Star Resources Ltd

editor@ifinancemag.com

Mines create wealth “Mines are not the prettiest things to look at, but in terms of wealth creation, they are probably the most effective instruments of creating new wealth in this world.” “Mining is probably the most regulated industry on the planet. In addition to state and national laws, mining companies which finance their development through banks must agree to comply with the Equator Principles as part of the loan agreement. These principles are a comprehensive set of best practice rules governing the

development of the mine and its operations, and the operators are monitored and must report annually to ensure compliance.” He expects the demand for mines — or more accurately the products like wired homes, televisions, laptops, cookers and washing machines that use the copper and steel that ultimately come from mines — will continue to grow. “The world has 4 billion people who are still aspirational. A North American goes through 22 pounds of copper in a year while an Asian uses two pounds.

“If he wants your lifestyle, he will be up over 20 pounds too — how long will it take to get there? If you want electricity in every house in Asia how many miles of copper cable do you need? If he wants a Tesla instead of a Lada, that’s another 150 pounds of copper, and it has to come from miners.” “The companies that can supply that demand efficiently, which take advantage of technology to operate efficiently, and which operate in a responsible manner will succeed and continue to grow.”

Apr - Jun 2016 International Finance Magazine

â&#x20AC;&#x2DC;Sustainability has become a business imperativeâ&#x20AC;&#x2122;

Facing allegations of toxic spills and human disasters to poor working conditions, the extractive sector is trying to improve its reputation

Miriam Mannak

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

ast year was a bad one for mining, and not just in terms of plummeting commodity prices and declining demand for natural resources. Between January and December 2015, various mining related accidents hit the headlines. In September 2015, following a pipe valve failure, over a million liters of cyanide solution leaked from an Argentinian goldmine near San Juan into nearby rivers. Two months later, two tailings dams in central Brazil collapsed, releasing 62 million cubic meters and engulfing various villages in toxic sludge. Dozens of people lost their lives. It is events like these that have given the extractive industry a bad reputation. Then there is the issue of mineworker fatalities and poor working conditions. South Africa made

headlines last year after the launch of a class action suit on behalf of thousands of gold mineworkers suffering from silicosis, an incurable lung disease caused by prolonged exposure to dust in mines. It causes scarring of the lung tissue, making it difficult to breathe and increasing the risk of contracting tuberculosis. The miners want 32 gold companies to pay damages for what they allege was a failure to adequately prevent their illnesses, for instance by providing them with protecting clothing and equipment. Reducing worker fatalities The issue of worker safety and better working conditions was once again discussed at this year’s Mining Indaba, a large mining and investment conference which took place in South

Africa in February. Like last year, the agenda featured over two dozen sessions and workshops around various sustainability issues, from the sector’s environmental impact and water management to labour rights, community empowerment, and workers’ safety including the need to minimise fatalities. “We have made great strides in fighting fatalities in the workplace, hence our lowest statistics in 2015,” Mosebenzi Joseph Zwane, South Africa’s Minister of Mineral Resources, said in his keynote address. He referred to recently released data which showed that South Africa reduced the number of mining fatalities from 84 in 2014 to 77 last year. That doesn’t mean extractive companies with operations in South Africa should sit back and relax. The

More needs to be done for the sector to reach its target of zero harm whilst reducing the number of injuries Mosebenzi Joseph Zwane, South Africa’s Minister of Mineral Resources

Workers wearing safety clothing and gear at Mogalakwena North Concentrator (South Africa). Photo Anglo American

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

minister said, “More needs to be done for the sector to reach its target of zero harm whilst reducing the number of injuries.” Zwane’s speech came three days after an accident at the Lily Gold Mine, in South Africa’s Mpumalanga province. On February 5, the mine’s crown pillar collapsed, trapping 100 workers.

Adding value to people Mark Cutifani, CEO of Anglo American, confessed that the sector is not where it should be in terms of worker safety and preventing fatalities. A solution, he said, requires collaboration and cooperation of all stakeholders. “We have seen time and time again that collaboration between governments, labour and private sector is the only way to find lasting solutions,” he said. “Whilst we had our moments, we have come together: South Africa has reduced its fatality rate by 90% over the last 20 years.” The Mining Indaba’s emphasis on working conditions and safety made sense, says Tony Zoghby, mining analyst at Deloitte. “Sustainability in mining used to be all about the environment, rivers, water and air pollution. Whilst this is still important, the focus has shifted somewhat to people,” he explains, adding that dignity and respect for workers is not only good for mining employees, it is also good for employers as it leads to increased levels of productivity. “In my view, sustainability should be about investment, not just

in your infrastructure but in your people and the communities you operate in.” Tendai Laxton Biti, Zimbabwe’s former minister of finance and leader of the People’s Democratic Party, concurs. “We need to ensure that the mining industry moves from being a high-value and low-impact industry to a high-value and high-impact sector,” he says. “If you look at many African mining countries, including Zimbabwe, you will see that mining has remained a small enclave, which has hardly touched local communities.” A good example of how things should not be done, he notes, is the situation in the Marange diamond fields in eastern Zimbabwe. “Various mining companies have been involved in that region, including Chinese and local firms. They have produced over 2 million tonnes of diamonds since 2006, when diamonds were discovered in the region,” he says. “Returns to government and communities have been minimal. When you go to Marange, you will see poverty and underdevelopment. In terms of the human development indicators, Marange is one of the most underdeveloped parts of Zimbabwe.” “However, when you travel 400km and visit Ngezi, things are different,” he says. “Zimplats has invested over $2 billion in their mine. The number of employees has risen to 500 and a new village has been built. Zimplats is a good example of a high-value company with a high-impact on mining communities.”

International Finance Magazine Apr - Jun 2016

Good for people and business Sheila Khama, Director of the African Natural Resources Centre at the African Development Bank (AfDB) and former CEO of De Beers Botswana, says that sustainability from a human development angle is crucial. It is no longer a nice-to-have or a token, she says. “Any mining company with a little self-respect has a sustainability strategy, because governments and shareholders demand it, and because fund managers demand it,” she says. “If you are shopping around for funding and investment, which is scarce at the moment, the robustness of your sustainability strategy could very well be the difference between whether or not you procure finance.” Zoghby concurs. “If you don’t have the support of workers and communities, and if they feel they don’t have a fair part of the deal, they will be disruptive. This will impact your productivity. Sustainability in mining from a human perspective, has therefore become a business imperative.” IFM editor@ifinancemag.com

We have seen time and time again that collaboration between governments, labour and private sector is the only way to find lasting solutions Mark Cutifani, CEO of Anglo American

Weight of debt At the end of 2014, mining and large metal companies were facing $690 billion of net debt Peter Taberner

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

n a bearish commodity market, mining companies are struggling to overcome spiraling debt, according to Deloitte’s mining trends report for this year. At the end of 2014, mining and large metal companies were facing an arrears mountain of $690 billion of net debt. The vast majority of the debt is held via traditional sources, such as banks and bond holders. Deloitte said that this figure amounted to a significant 64% of their total market value, highlighting the difficulties facing the mining industry. The response to control the liabilities has been

varied. Glencore decided to create share options worth $2.5 billion. Barrick Gold believed that aggressively reducing capital spending and selling assets, amounting to $3billion, was the answer. And recently, BHP Billiton has written down in the region of $7.2 billion worth of oil & gas assets. Paul Barnett, a director in Deloitte’s Metals and Mining practice, said, “As has already been seen over the past 12 months across the industry, mining companies are cutting back on capital expenditure, through stringent capital allocation exercises, and cutting or suspending dividend pay-

ments. In many ways, these are the easiest or the most straight forward of options. The next option is more wider cost cutting exercises that includes restructuring of operations.” Other alternatives Barnett alluded to is the wider restructuring of a company’s portfolio. And asset selling, although currently the market favours the purchaser, with mining companies looking to reduce debt. The question is whether a price, which the seller of assets believes to be a fair one, can be negotiated. Moody’s have now placed BHP Billiton, Rio Tinto, Anglo American and Vale,

“

As has already been seen over the past 12 months across the industry, mining companies are cutting back on capital expenditure, through stringent capital allocation exercises, and cutting or suspending dividend payments. In many ways, these are the easiest or the most straight forward of options. The next option is more wider cost cutting exercises that includes restructuring of operations Paul Barnett, director in Deloitte’s Metals and Mining practice

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

At the end of 2014, mining and large metal companies were facing an arrears mountain of $690 billion of net debt. The vast majority of the debt is held via traditional sources, such as banks and bond holders

amongst many other mining companies, on credit review downgrade list. A comprehensive reduction in the credit rating of mining companies would do little to entice asset buyers, or potential investors. If a mining company was to collapse, this can lead to devastating economic effects, particularly in developing countries, where bankruptcies would vastly reduce the amount of taxes collected from companies and employees. “Although the banks themselves may have a level of security over any debt finance they have provided, they, the other creditors and certainly the shareholders will likely lose the money they have invested.” Barnett

concluded. Subsequently, banks are often willing to renegotiate the terms of previously agreed financial arrangements. Either by increasing the coupon rate, but stretching the length of bond agreements to try to ensure that there is the highest possible chance of having their initial investment repaid. Investec’s mining analyst, Jeremy Wrathall, says, “A lot of the debt figure in the Deloitte report must be held by Chinese companies, given that they built a large production base in steel, aluminium and coal in recent years. In our view, there is likely to be some sort of agreement with lenders whether that be

International Finance Magazine Apr - Jun 2016

banks or bond holders, for example debt equity swaps. We believe that many debt holders are in denial, share prices are reflective of how the companies’ earnings have fallen.” The amount of debt cannot be dismissed, but is unlikely to be a cause of a 2008 style financial crash. Although debt default, particularly in China, could have serious repercussions. Especially considering the knock on effects in global markets; for example, China is the European Union’s second largest export market. IFM editor@ifinancemag.com

“

A lot of the debt figure in the Deloitte report must be held by Chinese companies, given that they built a large production base in steel, aluminium and coal in recent years. In our view, there is likely to be some sort of agreement with lenders whether that be banks or bond holders, for example debt equity swaps. We believe that many debt holders are in denial, share prices are reflective of how the companies’ earnings have fallen Jeremy Wrathall, Investec’s mining analyst

MINING SPECIAL

Global industry price multiple comparisons This graph highlights the current difficulties in the mining industry by comparing the price to earnings ratio to the valuation of the industry’s stock via the price to cash flow.

P/E

P/Cash Flow

0 Mining

Industrials

Oil & Gas

Healthcare

Retail

Telecoms

Banks

Source: Deloitte

Traditional vs. new financing options* Example: $1B capex (company with $75M market cap)

This graph outlines the difference in financing models, and how patterns have changed from the traditional investment routes. *USD ‘’Old’’

$600M

$400M

‘‘Project finance’’

‘‘New’’

$100M

Bridge loan/ WC loan Source: Deloitte Canada

$250M

Project finance

Corporate equity issuance

$100M

Offtake

EPCM contract

$50M

Equipment finance

$150M

Stream

$200M

$50M

PE investment (aggregate)

Corporate equity issuance

Apr - Jun 2016 International Finance Magazine

Focus on cost control

Price Waterhouse Coopersâ&#x20AC;&#x2122; Mine report for 2015 reveals the industryâ&#x20AC;&#x2122;s dwindling fortunes Peter Taberner

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

ining companies are having to focus on cost control in an environment of low commodity prices, reduced investment and uneven global economic recovery. Figures from Price Waterhouse Coopers’ (PwC) Mine report for 2015, which reviews the financial performance of the top 40 mining companies, revealed the industry’s dwindling fortunes. Commodity prices have fallen by 6% in 2014. Divergent monetary policies were blamed for causing downward pressure on value. Additionally, prices have been pushed further down due to increased supply and weaker demand growth, particularly from China.

All commodities suffered a cut in capital expenditure. PwC concluded that the level of cuts differed in various regions. The top 40 mining companies in the OECD decreased capital expenditure by 23%. In contrast, the decline was 9% in the BRIC countries. Investment in property, plant and equipment was $103 billion in 2014 compared to $129 billion in 2013. Also, PwC said that the top 40 companies had lowered their exploration spending by 53% to a derisory $4.9 billion in 2014. In 2013, the allocation was $6.3 billion and $12 billion in 2012. Jason Burkitt, PwC’s UK mining leader, explained, “Strategies have now changed, a few years

ago it was about producing the most volume. Now, this has changed and it’s more about efficiency and trying to find the right level to maximise returns. Over the 12 months, prices have generally collapsed. At a point, the prices are very deep in to the cost curve. For example, two thirds of nickel producers are not making any money.” Anglo American is one of the largest mining companies in the world, and from their latest results released at the end of last year, their focus on cost control is clear. Operating costs were reduced by a significant 30%, which amounted to $3.7 billion in savings since 2013. At the same time, overheads and other indirect costs were being streamlined. A sum of $2.9

“

Strategies have now changed, a few years ago it was about producing the most volume. Now, this has changed and it’s more about efficiency and trying to find the right level to maximise returns. Over the 12 months, prices have generally collapsed. At a point, the prices are very deep in to the cost curve. For example, two thirds of nickel producers are not making any money Jason Burkitt, PwC’s UK mining leader

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

Actual and projected capital spend by commodity ($ billion) 80 70 60 50 40 30 20 10 0

Diversified

Copper

Coal

2013

Iron ore

2014

Gold

Potash

Other

2015

Source: PwC analysis Source: PwC analysis

billion has been taken out of their total capital spending. As the number of assets in their portfolio has been reduced, so has the number of employees, one of many examples of how the current climate has had an effect on labour relations. The relationship with workers in the mining industry varies by some distance, not only by a country’s labour regulations,

but also by the social value attached to a commodity. If the product is gold, copper or coal, the mines are likely to be valued more by local communities, as they are large employers. “The main trend on employees is that it’s the contractors whose numbers are being reduced.” Burkitt continued. “It’s about optimization. Can contracts be brought in-house with the

existing workforce?” From an investment perspective, Aberdeen Asset Management has mining companies as part of their portfolio, purchasing stock for their clients. “The approach from most mining companies has been to ensure they are controlling those factors over which they have the ability to, namely the cost of production,” Ian Hewett, invest-

ment manager at Aberdeen Asset Management, opined. “Most have targets in this area and notably the large producers — Rio Tinto and BHP Billiton — have been steadily improving their cash costs of extraction.” The asset managers also indicated that several companies are growing production of their low-cost assets to improve efficiency. Whilst all are putting pressure on their suppliers to drive costs down, at a time when demand for mining equipment has waned. IFM editor@ifinancemag.com

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

9.0

.025

7.8 6.7

.020

5.6 4.5

.015

3.3 2.2

.010

1.1 0

2011

2012

Secondary offer

IPO

2013 Convertible notes

2014

Average proceeds per issue

Use of proceeds on exploration

Use of proceeds on exploration activities ($ billion)

.05

Capital Velocity

Source: PwC analysis using Thomson Reuters information

Top 40 exploration expenditure by BRICS compared to OECD

5 4

3 2

1 0 2013

2014 OECD

Source: PwC analysis

BRICS

Source: PwC analysis Revenue by commodity ($ billion) 140 120 100 80 60 40 20 0

Copper

Coal

Iron ore 2013

Gold

Nickel

Aluminium

Zinc

Diamonds

Platinum

Other metals

2014

Note: Chart excludes Glencoreâ&#x20AC;&#x2122;s marketing and trading revenues, and certain other companiesâ&#x20AC;&#x2122; non-mining revenues

Apr - Jun 2016 International Finance Magazine

Turning to technology

Opportunities range from improvements in health and safety to increasing the use of data equipment for more efficiency Peter Taberner

he mining industry may be facing bleak market conditions, but that has not stopped technological innovations to take excavation businesses forward. More developments in technology will be necessary, as the pressure has intensified to find ways to achieve higher profitability, as the sectorâ&#x20AC;&#x2122;s profits have begun to spiral downwards in recent years.

International Finance Magazine Apr - Jun 2016

Opportunities to advance the mining sector can range from improvements in health and safety to increasing the use of data equipment for more efficiency. Hiran Bhadra, Mining Leader, KPMG in the US, said, â&#x20AC;&#x153;The technologies that are already available today, and possible areas that could benefit from include breaking down process and organisational silos from pit to port. This is designed to optimise total delivered profitability leading

MINING SPECIAL

to dynamic and integrated production planning. Viewing asset conditions, and the needs of proactive asset management at different stages of its lifecycle in near real time, may be an advantageous area. And improved understanding of risks to safety and labour welfare, as well as the associated needs of management for decision making.” Bhadra also believes in the mobilisation of data, so that it can be leveraged in real time. Companies need to create capabilities to extract and analyse large volumes of data, on a near real-time basis in a cost effective manner. They then must be able to generate powerful insights that are relevant to the business, creating opportunities for value optimisation. In a recent report, KPMG also highlighted how mergers and acquisition in the mining industry are now increasingly being driven by breaking ground in technology, as opposed to growth.

Private Equity houses, such as North Americanbased Resource Capital Finance, whose Jolimont technology fund invests in high growth mining equipment, are now entering the frame. Jolimont have bought a majority stake in Blast Movement Technologies, who created an approach to accurately locate ore and waste zones after blasting, helping mines to minimise the valuable ore that they discard. Polymetal International is a leading producer of precious metals, in the rich areas of Russia and Kazakhstan. An impressive portfolio in extracting gold and silver has enabled their presence on the FTSE 250. “Today, the key trend in the gold mining industry is processing refractory gold ores, which are ores where it is difficult to extract gold using conventional methods,” explained Valery Tsyplakov, managing director, Polymetal Engineering.

“The reason why it is so difficult to extract gold from refractory gold ores is generally because the gold in these ores is in the form of microns encapsulated in sulfide particles (iron pyrite and arsenic pyrite).” In the meantime, Polymetal said that techniques over oxidation, the combination of a substance with metal, are being developed. These involve pressure oxidation high temperatures (POX) and bacterial oxidation technology (BIOX). Of these two technologies, POX is the more universal, and is not particularly dependent on the variability of the ore material. This technology makes it possible for businesses to make the best use of the energy generated, in the pressure oxidation process. And therefore reduces the amount of energy needed for production. Polymetal is currently using this technology at its Amursk facility. IFM

“

Today, the key trend in the gold mining industry is processing refractory gold ores, which are ores where it is difficult to extract gold using conventional methods Valery Tsyplakov, managing director, Polymetal Engineering

editor@ifinancemag.com

Apr - Jun 2016 International Finance Magazine

Iran looks

beyond oil Stands to make an estimated $700 billion from mineral reserves Suparna Goswami Bhattacharya

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

ran is poised to benefit a lot in the coming years, thanks to lifting of sanctions. But contrary to popular belief, the country’s profit potential goes far beyond oil. After years of isolation, Iran stands to make an estimated $700 billion from its mineral reserves. According to Iranian Mines & Mining Industries Development & Renovation Organization (IMIDRO), the country has 37 billion tonnes of proven mineral reserves that is 7% of global reserves. It is ranked as the 15th most mineral-rich country in the world.

if it improves the mining industry value chain. The government too, on its part, has invested heavily over the last decade in incentives to engage in downstream value-add processing, such as providing low cost energy, assistance in obtaining the required permits such as FIPPA (Foreign Investment Promotion and Protection Act), tax exemptions and share option arrangements in mines, which can be vested after exploration, plus risk insurance from the government. Says Ali Mirmohammad, Senior Consultant and Business Development Manager, Iran, Frost & Sullivan, “There is a lot of scope. If Iran can invest approximately $60-80 billion to develop the much required infrastructure and improve the mining industry value chain in the next 10 years, it can significantly benefit from copper, iron ore, and cement industries.”

The potential though is greater than what the numbers show. Yeganeh Eghbalnia, Senior Investment Analyst with Turquoise Partners, a financial services company offering investment management, brokerage and advisory services, says “With explorations ongoing, it is expected that up to 80 different types of minerals will eventually have proven reserves in Iran. Currently, only 100,000 km² have been explored for mining resources – 7% of Iran’s total landmass. It is, therefore, probable that with further exploration, current reserve estimates will be revised upwards.” Experts say that Iran can benefit more

Seeing the opportunity, the government is seeking to attract $29 billion in investments into the sector. “This is nearly equal to the $30 billion worth of investment opening up to oil post sanctions,” says Rebecca Keller, Science and Technology Analyst, Stratfor. Stratfor provides strategic intelligence on global business, economic, security and geopolitical affairs. “We have seen reports of international interest from European companies in Italy and France as well as from companies from East Asia, like China. The government has ambitious goals for expansion, both in mining and processing, like steel production, aluminum smelting etc,” says Keller adding that Iran plans to more than double steel production capacity to 55 million metric tons by 2025 and has similarly ambitious goals for copper cathode production. Says Wang Xinyu, VicePresident, China Nonferrous Metal Industry’s

The mining industry is more labour intensive than oil & gas and, hence, is likely to provide more employment Yeganeh Eghbalnia, Senior Investment Analyst with Turquoise Partners

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

Iran’s mineral resources Mineral resource

Iran reserve

Unit

% of global reserve

Iron Ore

2.7

Billion Tonnes

0.8 %

Copper

2.6

Billion Tonnes

Zinc

Million Tonnes

Gold

250

Million Tonnes

0.5 %

Barite

Million Tonnes

Phosphate

16.5

Million Tonnes

0.05%

Source: Iranian Mines & Mining Industries Development & Renovation Organization

Foreign Engineering and Construction Company (NFC), “Iran is a traditional and important market of NFC, since the early 1990s. We have done almost 10 engineering contracting projects in Iran. Currently, we have three to four ongoing projects in the country. So we are always interested in the Iran market, and after lifting of sanctions, I think that there will be many more opportunities in Iran for foreign investors.” Recently, Iran’s Deputy

Mine, Industry and Trade Minister announced that $10 billion in investment pledges had already been received. “We have also seen the restart of older projects that had been delayed due to sanctions, like the Mehdi Abad zinc project, which includes foreign backing from Omani and Australian companies,” remarks Keller. Experts say that though mining is currently facing a downturn, Iran should not miss the opportunity to develop its domes-

tic industries. “Emphasis must be laid on developing domestic industries with available raw material. In fact, the new government has a strong focus on value added products and plans to chart a strategic road map to develop downstream products; this will serve as a cushion for the country against mining slowdown,” says Mirmohammad. Keller opines that investment decisions can’t be based solely on current low prices in the sector as the

Iran’s ranking in selected mining products Product

International rank of Iran

Steel

Copper

Cement

Aluminum

Iron Ore

Source: Iranian Mines & Mining Industries Development & Renovation Organization

International Finance Magazine Apr - Jun 2016

We have seen reports of international interest from European companies in Italy and France as well as from companies from East Asia, like China Rebecca Keller, Science and Technology Analyst, Stratfor

MINING SPECIAL

According to Iranian Mines & Mining Industries Development & Renovation Organization (IMIDRO), the country has 37 billion tonnes of proven mineral reserves that is 7% of global reserves. It is ranked as the 15th most mineral-rich country in the world real potential for Iranian minerals is in the long term expansion of the industry. Though the potential in the mining industry is huge, oil will continue to play an important role in development of Iranâ&#x20AC;&#x2122;s economy for the simple reason that mining industries cannot account for more than the revenue generated from oil & gas, and petrochemicals However, there are advantages that the mining industry has over oil & gas. Eghbalnia says the mining industry is more labour

intensive than oil & gas and, hence, is likely to provide more employment. The industry has so far created around 190,000 jobs both directly and in related subsectors. â&#x20AC;&#x153;In the mining industry, there is more potential for SMEs to get involved in the supply chain, such as in the tile and sanitary segments, the chemical industry and steel manufacturing. Also, when compared to oil & gas, the mining sector can generate more variety of final products. Hence, we

think the mining sector has greater potential to foster a value-add industry in the long term,â&#x20AC;? says Eghbalnia. IFM editor@ifinancemag.com

The new government has a strong focus on value added products and plans to chart a strategic road map to develop downstream products Ali Mirmohammad, Senior Consultant and Business Development Manager, Frost & Sullivan

Apr - Jun 2016 International Finance Magazine

Pressure

on coal

he success of the COP21 climate change conference in Paris raises many questions about the future of the global coal industry, which is already undergoing a lengthy period of decline in key markets. Although the Paris agreement is non-legally binding, it does provide a framework for global cooperation towards ever more ambitious decarbonisation targets. It will be incumbent on national governments to regulate against carbon heavy forms of power generation and coal remains the easiest target. Coal remains a vital source of energy for the global economy. It is cheap, easy to extract and transfer, as well as to burn and produce energy. Global reserves can last at least another century and they mostly lie in politically stable areas.

“However, there is a significant problem. All stages of the utilisation of carbon in producing energy are ‘dirty’. Especially, the last stage. Burning results in high levels of CO2 emission because coal is rich in carbon. To put this into perspective, coal accounts for around 45% of global CO2 emissions,” says Iordanis Kalaitzoglou, Audencia Business School, France. These factors are causing the decline of coal its two largest markets, China and the US. Air pollution has become a major issue in China and the government in Beijing is looking to improve local air quality and demonstrate its concerns over global climate change by becoming a major market for and producer of renewable energy technologies. It is a similar story in the US where environmental lobbying, regulation and

International Finance Magazine Apr - Jun 2016

Nuisance value outweighs benefits of cheap energy Tim Evershed

the availability of a ready, cheap, lower carbon alternative to coal in the form of shale gas has proved debilitating to coal. Phil Foster, MD of Love Energy Savings, said, “COP21 raised a lot of questions in the industry about what the future will hold for our traditional power sources. The latest statistics from the International Energy Agency (IEA) showed a sharp reduction in their five-year forecasts, primarily due to China’s reduced consumption. “This decline in demand is a huge hit for the industry with China representing roughly half of global coal consumption. Prices will therefore remain low, as oversupply and COP21 targets keep up the pressure. In December 2015, prices for coal in Europe hit their lowest level in a decade and with China moving ever

In all honesty, we highly doubt that coal will ever be considered a ‘clean fuel’ but for the foreseeable future, it will remain a necessity for those economies that want to grow but cannot afford the ‘green tech’ available to wealthier nations. Phil Foster, MD of Love Energy Savings

MINING SPECIAL

forward towards a tertiary economy, it will be the developing economies that remain the industry’s only real lifeline.” Although Russia and India have plans for a huge increase in coal usage, as it still has cost advantages over other forms of energy (see chart), they are unlikely to replace the demand China once created. So the broad perception is becoming entrenched

that coal has had its day. This perception is reinforced by the failure of clean coal technologies. Carbon Capture and Sequestration projects are too few in number and struggling to produce the economies of scale that could make it a viable proposition on a large-scale. Foster said, “In all honesty, we highly doubt that coal will ever be considered a ‘clean fuel’ but for

the foreseeable future, it will remain a necessity for those economies that want to grow but cannot afford the ‘green tech’ available to wealthier nations.” IFM editor@ifinancemag.com

Levelised Energy Cost – Global Averages Coal

$85/MWh

Gas

$105/MWh

Onshore Wind

$80/MWh

Offshore Wind

$200/MWh

Solar

$100/MWh

All stages of the utilisation of carbon in producing energy are ‘dirty’. Especially, the last stage. Burning results in high levels of CO2 emission because coal is rich in carbon. To put this into perspective, coal accounts for around 45% of global CO2 emissions Iordanis Kalaitzoglou, Audencia Business School, France

Apr - Jun 2016 International Finance Magazine

â&#x20AC;&#x2DC;Marginal operations will be closedâ&#x20AC;&#x2122;

There is now a strong and broad focus on cost savings and productivity Peter Taberner

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

he iron ore industry has suffered in recent years, and it has become a market that is as bearish as any in the current commodities market. From July to December last year, iron ore prices measured in dry metric tonnes fell by just over 23%, according to Index Mundi. A single dry metric tonne ended the year at $39.6, compared to $56.4 in September. In response to the new challenges that the industry faces, there is now a strong and broad focus on cost savings and productivity. Also, iron ore companies are reviewing mining methods, the use of contractors and how they engage them, rosters, and employee conditions. And a new development is using data analytics, utilising data from systems to understand issues better, to create different ways of increasing productivity. “At this point in time, there hasn’t been a significant impact on iron ore production volumes,” Paul Mitchell, Ernst and Young’s global mining & metals advisory leader, explained. “However while no one seems to be cutting back on production from existing operations, they are curtailing capital programs, so future production will

be impacted. With lower prices persisting, what we are likely to see this year is some marginal operations begin to be closed.” Although new initiatives, such as Fortescue’s wet ore processing machine, and Rio Tinto’s usage data analytics to extend maintenance cycles, are now starting to make an impression, he added. Rio Tinto, one the largest producer of iron ore in the world, has released figures that illustrate how they are progressing in a precipitating market. In their latest set of figures for the final quarter of last year, the pretax cash cost improvements in the iron ore group were $428 million in 2015. And have now delivered $1,138 million of cumulative savings compared to 2012. The company has also said that automation is having an influential impact on costs and productivity, and autonomous drills are 10% more available than manned drills, leading to an operational saving of 8%. Their predictive analytics and enhanced maintenance planning systems are expected to reduce maintenance costs by $200 million a year. Caroline Bain, senior commodities economist, for Capital Economics, said, “There are parallels with the

oil market, as the iron ore market is dominated by major produces such as BHP Billiton and Rio Tinto, and Vale in Brazil. They have ramped up production while prices fell, and cutting production costs, designed to diminish the competition in China, which produces high cost but low quality iron ore. There has been a big drop in Chinese iron ore production last year. Regional governments will try to keep mines open for employment reasons, but they can’t really compete. Due to the economies of scale achieved from the larger producers, smaller companies are more likely to go out of business, especially in west Africa. High cost operations in Iran have also suffered. The other problem for the iron ore industry is that the demand for steel is falling, especially in China.” For this year Bain continued, unless the price falls significantly, the big four will produce more, resulting in further increases in output falls in China, which will leave the market flat in production terms. There is little evidence to suggest that iron ore prices will hike this year, she added. IFM

“

However while no one seems to be cutting back on production from existing operations, they are curtailing capital programs, so future production will be impacted. With lower prices persisting, what we are likely to see this year is some marginal operations begin to be closed Paul Mitchell, Ernst and Young’s global mining & metals advisory leader

editor@ifinancemag.com

From July to December last year, iron ore prices measured in dry metric tonnes fell by just over 23%, according to Index Mundi. A single dry metric tonne ended the year at $39.6, compared to $56.4 in September

Apr - Jun 2016 International Finance Magazine

Governments are clueless Mining companies complain that they have got little or no support from the political leadership Peter Taberner

International Finance Magazine Apr - Jun 2016

MINING SPECIAL

lobally, mining is amidst a bleak period, leaving governments across the world a conundrum of how to help the industry. The gains administrations receive from tax receipts via employees and businesses are falling, and declines in investment are leaving supply chains operating under capacity. According to the United States Bureau of Labor Statistics, the job losses incurred by the mining industry have reached 146,000 since reaching a peak in September 2014. The United States’ National Mining Association (NMA) has not been impressed with the response to this from the Obama regime. Luke Popovich, vice-

president, NMA, opined, “This administration has done nothing to help the mining industry or its workers in this down market. On the contrary, the Obama administration has used the executive authority it claims to have in order to circumvent Congress, and impose costly regulations on mining coal. Regulations that force coal power plants to shut down, mining operations to close, and raise the costs of mining in every region of the country.” Although some state governments, like in West Virginia, have been told to suspend collecting taxes from mining production, until the market recovers. China has intervened in the mining market more decisively. BMI research said that the government has announced both tax cuts

and the indirect electricity subsidy of RMB15/Mwh for domestic iron ore miners in 2015. Both measures are only expected to provide limited relief for smaller players in the market. From May 1, the taxable resource base for iron ore will be reduced from 80% to 40%, and is expected to cut costs by $2.6 per 62% Fe equivalent tonne of iron ore. Bearish conditions for mining have led to social unrest. Mitchell Hugers, commodities analyst for BMI, explained: “Worker protests and demonstrations doubled in 2015 to 2,774, with December’s total of more than 400 such incidents setting a monthly record, according to the Hong Kong-based China Labour Bulletin. Much of the purge has come in mining and construction where excess capacity and the economic slowdown in China have led to closures and layoffs. Since 2013, China’s coal industry has shed 890,000 jobs, equal to all the new jobs in the coal industry created in the stimulus-driven boom from 2007.” In Africa, the strategy has differed, Hugers continued, as opposed to tax breaks, many countries have pursued a strategy of resource nationalism and ramping up mining royalties. In South Africa, miners haven’t and won’t feel much encouragement from the government in the current bearish market. For instance, on the domestic front, much of the industry’s problems revolve around under-funded public utility ESKOM.

“During 2014 and 2015, load shedding was a major issue for miners across sectors. The result was production disruptions, and BMI have downgraded their production forecasts, on the assumption that EKSOM has failed to implement structural reforms.” Hugers added. South Africa’s Chamber of Mines, an employers’ organisation, believes that low prices are not the only issue that the mining industry faces. They highlight unsustainable cost increases, infrastructure challenges, including electricity supply disruptions, and increasing expectations from stakeholders. Charmane Russell, spokesperson for the Chamber, outlined the issues that the group is discussing with the government. “Finalisation of the Mineral and Petroleum Resources Development Bill Amendments. Amendments were agreed and the bill was due to be enacted, but was sent back to Parliament by President Zuma. The urgent finalisation of the Bill is needed. And, review of the Mining Charter, which will need to take account of both the need to advance transformation, and the current economic environment.” If the bearish conditions continue, political leaders worldwide will have to think again, on how to tackle the mining problem. IFM editor@ifinancemag.com

Apr - Jun 2016 International Finance Magazine

Why some people

are looking up International Finance Magazine Apr - Jun 2016

They are into space mining Suparna Goswami Bhattacharya

MINING SPECIAL

ost of us know asteroids as astronomical objects that orbit the sun. There are thousands of asteroids near the Earth. What most of us don’t know is some could be worth $95 billion or even $100 trillion — thanks to their composition — they are made up of tonnes of minerals. They are no less than treasures. Little wonder that companies are looking to go beyond mining the earth to mining in space. To begin with, the primary interest is to provide supplies during space exploration or journeys. “We will be providing minerals mined in space to users in space, not bring them down to terrestrial markets,” says David Gump, Vice-Chairman, Deep Space Industries, an asteroid mining company. For instance, water is present in some asteroids. It is useful for supporting life in space. Secondly, the two elements of water — oxygen and hydrogen — are used in rocket fuel.

Chris Lewicki, president and CEO, Planetary Resources, an asteroid mining company, says, “Oxygen and hydrogen are found in abundance in space and are very valuable resources that are used in rockets. So, we thought, why not mine them right there in space rather than carry it from here to space.” Near Earth asteroids (NEAs) also have abundant iron, nickel, cobalt, manganese, etc. which can be used to build structures such as space stations, more powerful solar energy arrays to feed communications satellites and space stations, and much larger antennas for communications satellites. Depending on how far out from Earth the orbital destination is, the cost to deliver water or steel ranges from $5 million to $30 million (or more) per tonne. NEAs can provide water, propellant and metals for far less than that, adds Gump. Naveen Jain, founder and executive chairman, Moon Express, believes that

with the advancement of exponential technologies, “we should be able to mine for Helium-3 and other precious resources at a favourable cost. In the long term, we want to be able to use the space resources in situ to create a fuel depot and create a biosphere for hosting humans as we explore Mars and deeper into space.” To be able to get hold of the best NEAs is a top priority for most space mining companies. “See, NEAs are like low-hanging fruits of the solar system. They are much closer energetically to Earth than the Moon. However, to choose the right asteroid is an art,” says Lewicki. Jean Paul Carnicer is the founder and CEO of Telecan Space, a consulting firm which provides a range of services like training and engineering to the space mining sector. He says the main drivers of cost-benefit analysis are demand of element and cost of prospecting. “We need to look at various factors. For instance, under cost of mining, we need to assess

We need to look at various factors. For instance, under cost of mining, we need to assess how far the asteroid is, cost of equipment, etc. Likewise, we need to take into account the cost of transportation Jean Paul Carnicer, founder and CEO, Telecan Space

Apr - Jun 2016 International Finance Magazine

MINING SPECIAL INTERVIEW

how far the asteroid is, cost of equipment, etc. Likewise, we need to take into account the cost of transportation,” he says. When traditional mining companies evaluate a potential mining target, they account for the following points: 1. Is it technically feasible? 2. How much will it cost? 3. How much risk is involved; and 4. Will it yield a profitable return? So, while choosing an asteroid for mining in space, the goals are the same, but the variables can be different. The basic aim of all mining is to find ore, which is any material that can be recovered from a site and sold for a profit. On Earth, most ores tend to be a form of metal, but in space, water can also be considered an ore because it can be recovered from an asteroid and sold for a profit. Planetary Resources has already launched a spacecraft in orbit and plans to launch two more this year.

“The imaging technology gives us an idea of the temperature of asteroids. They send us pictures which help us target the asteroids which have high water content. It is a very useful technology which can be replicated in other industries as well,” says Lewicki. Recently, the Luxembourg and the US governments passed laws recognising asteroid resource property rights. These encourage the commercial exploration and utilisation of these resources. Though as of now most companies aim to use mined resources for space only, they are not ruling out the possibility of bringing some of it back to Earth. “Everything we fight for on Earth because of their scarcity is available in practically infinite quantities in space. The Moon can be considered our eight continent of wealth right next door, with valuable energy and minerals without any biosphere,” says Jain. “With technology advancements, anything is

International Finance Magazine Apr - Jun 2016

possible. It is natural to have your doubts when there is no existing methodology to do a particular thing. However, there was a time when visiting the Moon was unthinkable. But we managed to do it. Hence, eventually we might be able to bring some of these rare metals to Earth,” remarks Lewicki. IFM editor@ifinancemag.com

Everything we fight for on Earth because of their scarcity is available in practically infinite quantities in space. The Moon can be considered our eight continent of wealth right next door, with valuable energy and minerals without any biosphere Naveen Jain, founder and executive chairman, Moon Express

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ECONOMY

The US versus Europe

The US had 18 months of recession from December 2007 to June 2009. Europe had the same length and then went into two more years Tom Groenfeldt

International Finance Magazine Apr - Jun 2016

“T

he US has an unemployment rate of 4.9 percent, about half of Europe’s, and the reason is pretty simple,” said Mark Weisbrot, co-director of the somewhat leftist (by American standards) Center for Economic and Policy Research in Washington, D.C. “The first reason is that they (Europe) went in the wrong director with their fiscal policy. While their economies were in recession, they tightened their budgets and cut spending. They had austerity policies, and Greece spent more than six years in recession. The IMF even has a nice graph with direct correlation between budgeting tightening and reduced GDP.” The US had 18 months of recession from December 2007 to June 2009, he added. Europe had the same length and then went into two more years. “Part of that was austerity, but it also had repeated financial crises where the existence of the euro was in question. We didn’t do nearly as well as we should have. Only in comparison

ECONOMY

to Europe do we look good. [Ben] Bernanke [chairman of the Federal Reserve] did very well after the bubble burst. We didn’t have austerity, we had a small stimulus. We did need much more.” Although America’s headline unemployment rate is 4.9 percent, the country has 3 million fewer jobs than it did before the great recession, hidden unemployment of people who have dropped out of the job market. “You can see from the employment rate for prime age workers 25-54 that there are a few million jobs missing. The recovery was weak.” Wage growth has also been weak at 2-2.5 percent, he added. The difference in experiences between the United States and Europe, especially the economically weaker southern tier countries and Ireland — the PIIGS — shows how important it is to have national sovereignty over national economic policies, Weisbrot said. Eurozone countries were hurt because they don’t have their own central bank, their own exchange rate policy, and they lost control of their fiscal policies as well. “The most important policy decisions were made by unelected officials,” a Quartet rather than the more common Troika, because he includes the IMF. “US officer holders would never have done what the Europeans did because they have to get elected. If Mitt Romney had won, he would never have done what Europeans have.” China’s slowdown will have minimal effect on

the US economy and then mostly on manufacturing. “The main trouble is that the dollar is way overvalued, which is part of a deliberate policy. It’s is partly why we have lost millions of manufacturing jobs in the last decade — the overvalued dollar makes our exports artificially expensive and our imports artificially cheap.” An overvalued dollar suits Wall Street — and finance now makes up 18 percent of the US economy. “They want a high dollar because it makes everything they buy overseas cheaper, including labour, and it keeps inflation lower, which they also care deeply about. Because when inflation goes up, the value of financials fall. They don’t particularly care about economic growth or employment — when unemployment goes up, the bond market rallies.” The Fed is stacked with financial interests — four

of the 12 Federal Reserve regional bank governors this year are going to be from Goldman Sachs, he said. Growth in the US has been hurt because the Fed raised the interest rate for no good reason, slowed the economy and made the dollar even more overvalued. But the Fed is moving cautiously, he added, “because it is so scared of falling back into the Great Recession.” IFM

editor@ifinancemag.com

The US has an unemployment rate of 4.9 percent, about half of Europe’s, and the reason is pretty simple Mark Weisbrot, co-director, Center for Economic and Policy Research, Washington DC

Apr - Jun 2016 International Finance Magazine

OPINION

Christoph Tutsch

Are we running out

of cash?

Societies turn to electronic payments

ecently, there has been a lot of talk about cash being phased out in favour of electronic payments. John Cryan, CEO of Deutsche Bank, has predicted that cash will disappear within a decade. Yet, when looking at the spending habits of Germany, Europe’s largest economy, this doesn’t appear to be the case. Germans conduct 80% of their financial transactions using cash and only 33% own a credit card.1 Germany’s reluctance to let go of cash could be attributed to their unique values and customs, though. The nation prides itself on 1

International Finance Magazine Apr - Jun 2016

frugality, paying its bills on time and avoiding debt, which explains why the German word for debt, Schuld, also means guilt. In addition, they are cautious of technology, protect their privacy with some of the most stringent privacy laws in the world, and quite often doubt the ability of public and private organisations to handle electronic financial records. In contrast to Germany, other major European countries have embraced electronic payments and are moving away from cash. Many of them are even capping cash transactions. Italy and Portugal have already imposed a limit of

http://qz.com/262595/why-germans-pay-cash-for-almost-everything/

OPINION

€1,000, in Spain it is €2,500 and in France €3,0002. Meanwhile, Germany is considering introducing a €5,000 limit3. It is estimated that non-cash transactions will continue to grow in the European market and that by 2020, the number of cashless payments will increase to 177 billion.4 In particular in the UK, electronic payments are flourishing, in part due to innovations such as contactless payments and frictionless payment processes. Commuters in London have been swiping their Oyster cards for many years. When contactless payment cards were introduced to pay for their travel, it was a smooth transition. Nearly a million Londoners choose to do this every day5, as it saves them money and the need

hit a 30-year low.11 However, whilst armed robberies will be more difficult in cashless societies, there is an increasing risk of online fraud, which has more than doubled in the last decade.12 Continuous innovation efforts in payments security are countering those attacks and ensure that the industry is now better equipped to deal with and, potentially, eliminate online fraud. Tokenisation eliminates the need to enter personal card details repeatedly and allows for safe ‘one-click’ ordering. Societies’ payment habits will continue to evolve at different rates due to their own values and customs. The shift towards a cashless economy could occur, which is why tech companies will have to provide a range of solutions for this transition. IFM editor@ifinancemag.com

Christoph Tutsch is the founder and CEO of ONPEX

http://www.cnbc.com/2016/02/03/the-associated-press-germany-considers-5450-limit-on-cash-transactions.html

http://www.statista.com/statistics/441782/cash-free-money-transactions-europe/

https://tfl.gov.uk/info-for/media/press-releases/2015/march/tfl-named-fastest-growing-contactless-merchant-in-europe

6 8

will it bring? Cash costs money to process, to provide security for and to be replaced as notes get worn out. Prior to accepting contactless payments, London’s public transport provider spent over £30m a year processing cash.10 In addition, if many people hoard small amounts of cash, it results in large sums being removed from circulation. This reduces the control that governments and central banks have over monetary policy, depriving them of the ability to influence the wider economy in a positive way. A move away from cash towards electronic payments will also benefit the global marketplace by making cross-border transactions easier, faster and cheaper. The shift towards cashless societies has been boosted by governments seeking to crack down on criminal activities, such as drug trafficking and tax evasion. Five years ago, Sweden’s banks were suffering a spate of bank robberies and therefore decided to move away from cash. After this, not only did Sweden’s financial sector become more efficient, but armed robberies

http://www.europe-consommateurs.eu/en/consumer-topics/buying-of-goods-and-services/cash-payment-limitations/

to purchase tickets daily. It won’t come as a surprise that contactless transactions in the UK have increased by 250% year on year.6 Sweden, Finland and Denmark are also on their way to becoming cashless societies. The Danish government is already allowing shops to not accept cash.7 In 1657, Sweden was the first country in Europe to introduce bank notes8 and may well be the first to phase them out. Currently, there are just around 80 billion Swedish crowns (about €8bn) in circulation with only half of that in regular circulation.9 Swedish consumers have a tradition of welcoming electronic payment systems. Among other factors, Sweden’s move towards a cashless society has been spurred on by the prevalent use of Swish, a direct payment app that can be used for transactions between individuals in real-time. But why are we seeing this push towards a cashless society and what benefits

http://www.mobiletransaction.org/contactless-payments-uk/ http://www.indiatimes.com/news/world/denmark-is-soon-about-to-completely-end-cash-payments-yes-thats-right-no-cash-period-234557.html

9 10 11 12

http://www.historytoday.com/richard-cavendish/europe%E2%80%99s-first-banknotes-issued-sweden http://www.techradar.com/news/world-of-tech/sweden-is-becoming-the-world-s-first-cashless-society-1306733 http://www.businesszone.co.uk/do/people/will-britain-ever-become-a-cashless-society http://www.theguardian.com/world/2014/nov/11/welcome-sweden-electronic-money-not-so-funny http://www.theguardian.com/world/2014/nov/11/welcome-sweden-electronic-money-not-so-funny

Apr - Jun 2016 International Finance Magazine

Turning a problem into an opportunity Egypt’s health sector is growing, but requires private investment Alessandra Bajec

ith a burgeoning, young population and subsequent strain on the healthcare system, where a huge gap between quality of service provision and the needs of the market does not go unnoticed, Egypt sees significant opportunities to invest in and develop the health sector. The Egyptian healthcare system faces multiple challenges in ensuring

International Finance Magazine Apr - Jun 2016

and improving the health of Egyptians, combating illnesses associated with poverty and lack of education as well as responding to the increasing number of patients. Challenges that the public sector alone cannot meet. Population growth and increased health awareness contribute to driving Egypt’s healthcare to expand its scope and channel more efforts into innovative solutions.

A broad challenge is providing quality health service nation-wide in a more distributed manner as many rural and remote areas remain underserved or cut off amid poor distribution of medical facilities and equipment, number of beds, doctors available per population size. “You hear many stories of people traveling miles from their homes, spending a lot of money to get services in Cairo then falling sick along the way,” said Karim Hussein, CEO of DKimia Diagnostic Solutions, a biotech startup that develops diagnostic solutions using nano-technology to identify the nucleic acid signature of a disease. Hussein suggested technology tools like remote diagnostic centres, new ways of drawing blood samples then directed to a central laboratory, or telehealthcare could reach a broader range of people enabling Egyptians based outside major cities (i.e. Cairo and Alexandria) to access decent healthcare. In addition, he mentioned homecare solutions for patients, whether affected by chronic diseases or recovering from surgery, to monitor them and deliver nursing or medical aid when needed. Wearables have a great potential to transform the healthcare space and extend services outside the hospital

HEALTHCARE

with devices like portable ultrasound connecting to a smartphone, wellness tools for basic diagnosis attached to a phone allowing to interact with a doctor, or insulin implants that control blood glucose level in diabetes patients without injection. Hospitals are crowded One key problem faced by Egyptian healthcare is overcrowdedness of state hospitals. In 2013, Egypt had an average of 14.88 beds for 10,000 people. Cairo, which accommodates the highest number of beds, recorded less than 34 beds for every 10,000 Egyptians, according to the Egyptian Center for Economic and Social Rights (ECESR). The Ministry of Health and Population (MoHP) operates 60% of hospital beds while universities, the army, and the private sector constitute the remaining 40%. The Egyptian Ministry of Health’s statistics show that the number of public hospitals in 2011 was 643 serving a total population of around 80 million. The patient load is huge compared to the available facilities. Lines are always endless, patients wait long hours for consultation, facilities need renovation and expansion

due to the overload, and much of the equipment needs frequent replacement. By 2014, based on data from the Health Ministry, about 40% of government hospitals were unable to provide decent medical services due to ill-maintained equipment and facilities. Technologies in operation management could be developed, for example in creating electronic medical records, scheduling incubators, organising time slots of consultation for patients, keeping operating rooms properly equipped, ensuring periodic maintenance of diagnostic machinery. “I’ve visited several hospitals in cities where large money is being spent on big facilities, but the hospitals are not running,” the DKimia CEO noted, “You’ll find a lot of resources wasted in Egypt. Healthcare is all about resource management.” Egypt’s healthcare service also lacks well-trained doctors and nursing staff. Hussein, who’s also an investor in various startups in the healthcare field, believes there is great room for innovation in terms of quality management to support the physician on the job. He gave some

A panel discussing healthcare at the Riseup Summit in December 2015 in Cairo, Egypt

examples like finding ways to normalise quality of care through processes, management systems that enforce standard protocols in hospitals and clinics, Netscapes providing latest clinical information on drugs with dosing and incompatibility with multiple drugs, ways to ensure patients get the right medication dosage through bar coding or tagging on medicines and patients’ bracelets, proper sterilisation facilities and devices like retractable single-use needles, apps giving reminders or alerts in pre-natal phase through 5 years after child birth. He also highlighted the shortfall in primary care physicians as another area of improvement, explaining that Egyptians don’t have a family doctor who has their medical history, knows about their health state, or can advise specialist through referral where appropriate. He picked the ‘doc-in-a-box’ model, found in the US to some degree, as a breakthrough whereby patients walk into pharmacies and interact with physicians who can help at a diagnostic level, give prescriptions or refer them to the next level of care. The deteriorating public health service thus does not adequately respond to the demands of the majority of citizens, meaning the Egyptian people heavily rely upon private doctors and clinics to fulfil primary healthcare needs. Although the amount spent on healthcare has increased in monetary terms over the past decade, the share of healthcare spend-

ing by the government as a percentage of GDP has been decreasing over time. Based on World Bank figures, government expenditure on health is extremely low, making up just 1.5% of GDP, which is well below the 3% minimum spending stipulated by Egypt’s 2014 Constitution. While state expenditure is steadily decreasing, the percentage of out-of-pocket spending for healthcare in Egypt is very high. The World Bank reports that contribution of out-of-pocket expenditure to the total healthcare costs amounts to 72%. Most Egyptian families are burdened by these costs, especially purchasing medication. With minimal health insurance presence in the country, measured around 0.7% of GDP, and private health coverage forming a tiny part of it, newly established AXA Egypt found a fresh market to break in and grow though offering products adapted to the income and needs of Egyptians. “As soon as we entered the Egyptian market, we saw the need for huge development in the healthcare delivery, and made it our key priority, we acquired Commercial International Life Insurance Company (CIL),” said Hassan El Shabrawishi, CEO of AXA Egypt, “Today, we’ve become one of the largest investors in Egypt since 2011.” In his view, the real challenge in breaking through the healthcare market is how a business delivery model can better serve Egyptians at a lower cost by targeting all the society, not

Apr - Jun 2016 International Finance Magazine

HEALTHCARE

just its top segment. “When you have a problem and a market need, you have an opportunity,” El Shabrawishi said. “If you do business in a way that does not provide solutions for the society, you fail’’. The Egyptian government has some plans to finalise a national universal health law with the view to grant equitable access to healthcare services that will provide adequate coverage for the average citizen. For the CEO of AXA Egypt, working towards large scale in the geographic

distribution is key to reaching the masses and create meaningful impact in the lives of Egyptians. “Through an efficient and cost-effective delivery model, you will treat more people at an affordable price or provide coverage, be it social security or private health insurance, to receive medical treatment,” he argued, “Healthcare is very sensitive, it’s a right for citizens.” Besides government pledges to improve health service, Egypt requires private investments.

According to El Shabrawishi, the government will partner more with the private sector in the coming future as Egyptians will increasingly need to be covered by health protection, whether by private or public insurance, pushing the health insurance market to develop. In critical need for investment in the healthcare industry, Egypt opens up vast opportunities for entrepreneurs. “We can look at opportunities from an entrepreneurial perspective

on how we can transform the process of healthcare from prevention (nutrition, lifestyle) to assessment like tele-medicine, and the relationships between providers and insurance companies,” stated Walid Bakr, managing director of the Abraaj Group, a private equity investing firm, at the RiseUp summit. Abraaj is aggressively investing in the Egyptian market by acquiring government-owned hospitals and other healthcare facilities. IFM editor@ifinancemag.com

TOP 5 HEALTH PROBLEMS

Poor sanitation

Inadequate health care

Unhealthy lifestyle

Poor nutrition

in 0-5 years o f childhood

Hepatitis C

(Egypt has the world’s highest rate)

Size Size of healthcare healthcare sector: sector:

$14 $14bn bn International Finance Magazine Apr - Jun 2016

malnutrition among children

Average family spend on healthcare: 9.2% of annual income or 2,416

EGP

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OPINION

Nick Nesbitt

For a better

planning

cycle

Create a winning enterprise budgeting and planning process

International Finance Magazine Apr - Jun 2016

OPINION

ccording to Forrester Research, 74% of businesses require a few months to a year - and sometimes longer - to respond to changing market conditions. The annual budgeting process can either speed up or weigh down business responsiveness, and if your

competitors have more dynamic systems in place and the processes to quickly model scenarios and reallocate resources, they are sitting in the driverâ&#x20AC;&#x2122;s seat. Their next sale may be your loss. So how can businesses be more responsive?

1 Be inclusive, not exclusive Finance must be the champion of a cross-functional planning process that spans the different lines of business, divisions, shared services, sales and operations. This establishes an alignment across functions that makes planning transparent, eliminates debates and finger pointing, minimises risk and gives a complete picture of spend, cash, production, investment and profitability.

If your staff is sceptical of corporate mandated planning tools, you can facilitate adoption and increase usability by providing interfaces that are accessible via mobile devices and the cloud and that they are familiar with, like for instance Excel, Word, web forms and more.

2 Be communicative There is more to planning than numbers. Communication of what is behind the numbers is required as part of a successful planning process. Yet, most organisations still rely on unstructured communications such as email or messaging systems, which can result in misleading or lost data. According to Manchester Companies, miscommunications can actually cost companies from 25% to 40% of their annual budget. From the beginning of the planning cycle, how accurately and efficiently you collect the data behind a number will either improve or drag down the planning process. Having a system that can collect this data at the cell, line item, or report level and make it available throughout the process, is essential. Obviously, it is just as essential to maintain audit and trail. Spreadsheet-based planning systems and many legacy systems lack the ability to audit data if it has undergone some kind of format change during its lifecycle.

Having a full audit trail of all changes â&#x20AC;&#x201C; including metadata â&#x20AC;&#x201C; provides confidence that, if your analysis uncovers an unexpected outcome, you have visibility of every change and data from the start of the planning process to the end. This is particularly relevant to banking where planning is part of the compliance process. Bear in mind that, with the proper security measures, this information must be accessible and available to everyone, not just finance or executive management. When it comes to presenting the plan to other key stakeholders, including regulators, presentations are often made using Word documents or PowerPoint decks, which are prepared manually and under tight timeframes. Luckily, some planning solutions now automate the collaborative development and distribution of these outputs with workflow and direct links to the data so you know the presentation is never outdated.

Apr - Jun 2016 International Finance Magazine

OPINION

3 Make your data actionable Information is not insight unless it can be acted upon. However, actionable information doesn’t come in a onesize-fits-all package. Managing business performance means actively monitoring business metrics and adjusting as necessary. This means that information has to be accessed cross-functionally. But how can you make it happen? • Communicate the business value of a great plan

•

and the importance of each division’s contribution to it Define meaningful KPIs at each level or division and communicate them early in the process, making it clear that everybody is working towards corporate KPIs, i.e. a common goal Create reports so that they are consumable in a format your user is more comfortable with

4 Rationalise and modernise Some research companies, including Forrester, recommend rationalising, modernising and standardising budgeting and planning applications. The reasons are simple: rationalising reduces licensing and ongoing IT

support costs; modernising makes applications easier to use and adds new functionalities and technologies, like for instance cloud and mobile; standardising eliminates the risk of inconsistency, inaccuracy and redundancy.

5 Be agile - automate Many companies are investing heavily in BI assets to deliver better insights, but much of the data remains siloed in business domains and requires significant hands-on support from skilled technology professionals. Your planning should be based on comparing actual performance and financial outcomes to modelling trends and business drivers and adjusting forecasts accordingly. This requires performance results to be constantly updated. What you need is a flexible, dynamic planning approach that incorporates business modelling and delivers realtime access to the right information and to the right people at the right time. Key to this approach is divisional autonomy, singlesource data and speed. To be agile, each of your lines of business needs to plan in a way that makes sense for its specific needs while adhering to global standards and calculations. However, being autonomous does not mean using separate planning systems. To eliminate risk and cost, a single application should be employed by all divisions. Separate spread sheets or applications make workflow, accuracy,

consistency and auditability more difficult and time consuming. A single source ensures consistent definitions and calculations and also warrants that forecasts are based on the latest actuals guaranteeing reliable and accurate information, all the time. Additionally, an effective agile planning process has to be fast. Planners don’t have time to wait for new data to be loaded and for new accounts and projects to be added. They need to analyse and react quickly and, therefore, need the reassurance and confidence that any data that may impact their planning is automatically and promptly reflected and documented. If you are using Excel as your default system, it is time to move to one that provides the flexibility of Excel but with added control, workflow, capability and security. If you are using a legacy system, or a new system you have already and quickly outgrown, you shouldn’t simply replace it. Prepare carefully for the future considering today’s pressing needs and changing markets. Automate and turn tips into reality and into a winning planning process for your company.

Nick Nesbitt is Consulting Services Director at Tagetik UK

International Finance Magazine Apr - Jun 2016

OPINION

38 BILLION

........ OF INVESTMENT DECISIONS ARE BASED ON SPREADSHEETS

MAJOR BUSINESS DECISIONS ARE MADE USING SPREADSHEETS

72%

78%

OF BUSINESS USE SPREADSHEETS FOR PLANNING AND FORECASTING

92%

75%

OF TAX CALCULATION SPREADSHEETS HAVE SIGNIFICANT ERRORS

OF SPREADSHEETS HAVE ACCOUNTING ERRORS

59%

51%

OF SPREADSHEETS ARE POORLY DESIGNED

OF SPREADSHEETS HAVE NO CONTROLS OR GOVERNANCE

OF FINANCIAL DECISIONS ARE SUPPORTED BY SPREADSHEETS

2 MOST SPREADSHEETS CONTAIN ERRORS

ONE MISALIGNED ROW COST A POWER GENERATION COMPANY

10%

OF ITS TOTAL PROFIT

A SINGLE SPREADSHEET ERROR CAN COST MILLIONS

A SINGLE CALCULATION RESULTED IN

$100M

PENALTY FOR A GLOBAL SOFTWARE COMPANY

A COPY & PASTE ERROR COST A FINANCIAL SERVICES COMPANY

$250M

MANUAL ERROR CHECKING FAILS UPTO

50% OF THE TIME

UP TO

33%

HOW MUCH RISK IS HIDING IN YOUR SPREADSHEETS?

63%

OF LARGE BUSINESSES REPORT POOR DECISION MAKING AS A RESULT OF SPREADSHEETS PROBLEMS

OF SPREADSHEETS REQUIRE MANUAL UPDATES

! TYPES OF ERRORS

WE MAKE IN MANAGING SPREADSHEETS

CALCULATION ERRORS

OVERWRITTEN FORMULA

MISMATCHED CURRENCIES

EXTRA NUMBERS

0,00 WRONG DECIMAL PLACE

NOT TRACING CHANGES

INCORRECT SOURCE DATA

FORMULA ERRORS

TAX OR INTEREST RATE ERRORS

Apr - Jun 2016 International Finance Magazine

THE OF CITY THE

FUTURE 80

International Finance Magazine Apr - Jun 2016

Infrastructure

Masdar City is poised to become one of the most sustainable carbon-neutral cities in the world Miriam Mannak

t has been a decade since Mubadala – an Emirati state-owned enterprise mandated with the diversification of the local economy – launched Masdar in an attempt to develop and expand the UAE’s renewable electricity sector. “The region’s alternative power industry was non-existent back then,” says company spokesperson Michelle Sabti. A lot has happened since then, including the roll-out of a dozen renewable projects across the UAE. One of Masdar’s flagship initiatives

is Shams One. Situated 120km southwest of Abu Dhabi, the 100MW-project with a $600 million price tag is one of the world’s largest concentrated solar power (CSP) plants. Other Masdar projects include an off-grid photovoltaic solar farm in the desert, a roof-top photovoltaic (PV) initiative in Abu Dhabi, and a solar-powered desalination pilot plant in Ghantoot. All in all, the firm has committed more than $1.7 billion to renewable energy initiatives in the UAE and beyond.

Solar powered city The above-mentioned figure excludes Masdar City, a $16-$18 billion urban development that is currently under construction near Abu Dhabi’s international airport. Spanning 600 hectares, the project is poised to become one of the most sustainable carbon-neutral cities in the world. The urban development’s main feature in that regard is a 10MW solar photovoltaic (PV) plant. As one of the largest of its kind in the Middle East, the facility was launched in 2009 and has been producing energy ever since. In addition, all existing and future buildings in Masdar City – from homes, townhouses, and apartment blocks to offices and retail spaces – will be fitted with ultra-efficient rooftop solar systems to further drive down usage of grid power. Sabti adds that sensors inside homes and offices will replace light switches and taps, to regulate and minimise electricity and water consumption. Water recycling systems too, are on the agenda. “Because of all of this, power and water usage in Masdar City is expected to be 40% to 50% lower than elsewhere in Abu Dhabi,” she says.

Apr - Jun 2016 International Finance Magazine

Infrastructure

Wind towers and narrow streets

Sabti notes that sustainability at Masdar City goes beyond minimising energy and water consumption. “All structures will be made of 90% recycled aluminium and low-carbon cement,” she explains, as we walk through Masdar City’s first phase, which is home to the Masdar Institute for Science and technology (MIST) and a number of private businesses. What is noticeable is the pleasant ambient temperature. This is the desert after all. Sabti explains that this is a result of the city’s lay-out, which is dominated by narrow and relatively short streets. “The city was built like old cities in the Arab world, in a way that minimises sun gains and maximises shade and wind flows,” she says as we pass a 45-metre tall, 2-metre wide vertical cylinder that is housed in a metal construction with adjustable louvres at the top.

“This is our wind tower,” Sabti says, explaining how the tower – developed by MIST – works. The top catches wind and convection currents, which naturally rise up due to the region’s hot climate. “These are then funnelled down the cylinder to the bottom, which creates a breeze at ground level. This lowers the perceived ambient temperature around the tower by 3 to 5 degree Celsius,” she says. “This might not seem much, but in this part of the world it is significant. On very hot days, energy efficient mist generators are activated to increase the tunnel’s cooling capabilities.”

Magnetic solar power cars

Transport and mobility wise, Masdar City will be ruled by non-motorised and electric modes of transport, as well as walking and cycling. One of the initiatives that have been implemented in Phase 1 is a bicycle-sharing system. “This will be rolled out across the city,” says Sabti. “Some parts of the city will be no-go zones for motorised vehicles.” Other transport options include an electric car ride-share scheme, a fleet of low carbon and possibly electric buses, metro connections, and magnetic, point-to-point, solar powered vehicles. The latter run on an electric magnetic monorail, and are as a result classified as some of the most energy-efficient urban transit solutions in the world. “These cars are driverless, go up to 40 km/hr, and are technically solar powered because Masdar City’s electricity is generated from the Sun,” Sabti says as our car arrives. The doors slide open, after which we are prompted to take a seat in what looks like a futuristic cocoon. Inside there is space for four people, with windows all around. After the door slides shut, our car silently cruises off. “They are reliable, efficient, and safe as they are equipped with sensors,” Sabti says. “So far, we have not had one single accident.” As our pod stops at our destination, we can’t help but to agree: these are indeed the cars of the future, like Masdar City is the city of the future.

International Finance Magazine Apr - Jun 2016

Infrastructure

Masdar City: Fast Facts •

Broke ground in 2008 and will be completed around 2025

•

When completed, it will accommodate 40,000 residents

•

Another 50,000 people are expected to commute to Masdar City daily

•

Expected population density: 130 to 160 people per hectare

Zoning plan • • • • • • •

Residences: 62% Community facilities: 12% Offices: 10% Research and Development: 7% Light industrial: 4% Hotels and serviced apartments: 3% Retail: 2%

Who has moved in • • • •

International Renewable Energy Agency (IRENA) Siemens General Electric Mitsubishi Heavy Industries

The driving force The United Arab Emirates (UAE) is increasingly looking beyond fossil fuels in an attempt to diversify the region’s oil-dominated energy landscape. The driving force is Masdar. Established in 2006, this particular venture is tasked with exploring the potential of renewable energy and sustainable technology. In the meantime, it is leading the construction of what is poised to become one of the most sustainable cities in the world.

Apr - Jun 2016 International Finance Magazine

OPINION

Nigel Purse

Don’t just

email, talk

Why we need more conversation and less technology to improve our workforce

hroughout human history, our greatest accomplishments have come from collaboration; we’ve worked together to create, learn and share effort. When Tim Berners Lee implemented the first successful communication between client and server in the late 80s, he was working with a team of computer scientists at CERN, connecting ideas which had already been developed… his creation was an object of collaboration for millions before it reached the level at which it

International Finance Magazine Apr - Jun 2016

utterly and permanently transformed the world. But in a way, Tim’s creation is a world; the Internet has evolved into a space where a massive proportion of the world’s population both work and play. It would be hard to argue that the Internet hasn’t had a positive impact across the globe, but one of its main drawbacks has been its impact on the way we communicate and collaborate. By engaging in conversation, so to do we engage those around us. The right conversations with employees

can motivate them and inspire them to excel in their work, bringing all of their commitment and talent to their role. Throughout history, we see examples of leaders varying in their readiness and competency in engaging others through conversation. Some leaders have used the strength of their personality to build productive bonds while others have relied instead on force or positional power. Until today’s era of global connectivity, in which information can travel from London to Sydney in milliseconds, leaders had no

OPINION

choice but to talk to those on whom they relied for their own successes. The explosion of digital communications of the past 30 years or so has equipped leaders with a means to escape real, face-to-face interactions. Telephones at least allowed for the transmission of voice, allowing us to detect emphasis and tone and therefore affording us some kind of genuine interaction, richer than the mere arrangement of words. Now email, instant messaging and social media allow leaders who choose that path to manage teams without the need to build personal relationships. Technology allows for efficiency; sending an email informing a team of an action or decision could take five minutes to get the required information to everyone, whereas sitting down individually with team members can take hours. Not only does this prac-

tice save a leader time, it prevents them from having to deal directly with people’s concerns, which could be uncomfortable for them and would certainly prove time consuming. An entire afternoon’s discussion is therefore swept away by a single email. There is a real danger here, as effective leadership relies on effective relationships, which in turn relies on genuine, two-way human conversations. We’re all familiar with experiencing one-way communication, and we’re well aware that we can feel disempowered and disengaged, reducing our desire to engage. To effectively match up with the challenges of a rapidly changing world, leaders must make an effort to build face to face conversation back into their work lives, resisting the temptation to use efficient but totally impersonal means of communication. Genuine human

conversation doesn’t just increase a leader’s effectiveness; it affords a deep sense of fulfilment and enhances our quality of life. Whether you are a sales executive or an accountant, a technical expert or a generalist, an introvert or an extrovert, you can become a more effective leader by consciously building proper conversation back into your professional relationships. Technology affords comfort, leisure, entertainment, travel and a hundred other things to those of us lucky enough to live in the developed world and have fulfilling, well-paid jobs. What technology cannot do is to assist us in building deeper, more meaningful personal relationships. These relationships rely on physical presence, on our well-evolved ability to sense another’s feelings and perspectives. Technology may appeal to the rational part of the brain, but recent developments in neuroscience suggest that logic comes after the fact; that much of human behaviour is motivated by the emotions, and subsequently rationalised. This is something we tend to forget or ignore; we send emails which present a rational argument for an action or decision, but forget that the recipient cannot help but react with their emotions, which are

far more powerful drivers of action than logic, as well as their reason. In many business contexts, we believe that technology has replaced the art of conversation. Leaders who value the efficiency of digital communication over the power of genuine interaction are missing a profound truth of human interaction: we build our relationships through open, trusting conversations within the context of physical proximity. The next time you find yourself sitting at your laptop, composing an email for your team, ask yourself whether you might actually gain more in terms of your team’s ongoing engagement and commitment by simply taking the time to schedule one-to-one meetings. Sometimes face-to-face conversations are impractical, but picking up the phone instead of sending an email can still have a huge impact on the outcomes you can attain. The power of conversation has determined the success of humans throughout history, and you may be pleasantly surprised by the results you can get by building conversation back into your work life, and beyond. IFM editor@ifinancemag.com

About the author Nigel Purse is the co-author of 5 Conversations. He graduated from Oxford University with a degree in Modern History. He founded The Oxford Group in 1986. He has managed to grow The Oxford Group from a one-man business based in a shed at the bottom of his garden to a global L&D firm working for many of the world’s most respected organisations, with over 200 consultants based worldwide. The Oxford Group is now part of The City & Guilds Group, a global leader in skills development, which enables people and organisations develop their skills for personal and economic growth.

Apr - Jun 2016 International Finance Magazine

Thriving on alternatives

Amoxers Wachira

International Finance Magazine Apr - Jun 2016

BANKING

Community currencies are ushering prosperity in Kenyan villages

new kind of freshly minted currency is giving poor residents of a Kenyan urban slum a much-needed financial lifeline. On a hot Saturday afternoon, a market centre in Kibera, which is Kenya and Africa’s largest informal settlement, is bustling with activity. Roadside traders throng both sides of the railway line that snakes through the vast slum, displaying all manner of merchandise to customers. It is their way of eking a living. Business is booming on this particular day. Riwel Biko, a fruit vendor has just cleared his stock. For him, and other traders belonging to a local business network, the boom comes from a different source altogether: Lindi-Pesa. Lindi-pesa (pesa means money in Kiswahili) is a community currency that most traders here use to transact business, alongside the Kenya shilling. Also referred to as ‘Sarafu-Credit’, it is in a form of currency

voucher with denominations of 5, 10, 20, 50 and 100, which are equal in value to the corresponding Kenya shilling note. Unlike national currency, which is issued and backed by the Central Bank, community currencies are backed by the goods and services of the issuing business network, making them decentralised and interest free. Biko belongs to Lindi Business Network, an organisation made up of local residents who own small and micro enterprises in the area. Members of this network can trade off their excess goods or services using the community currency, also known as credits, in a form of organised barter trade. According to Charles Chacha, the secretary of Lindi Business Association, the currency is meant to uplift local business owners. Each member is encouraged to support and barter with other members in a bid to drive up the local economy. “If we cannot afford a commod-

BitPesa marketing manager Martin Likoko

ity due to scarce national currency, we use community currency to top up the difference,” says Chacha, an electrician whose business accepts Lindi-Pesa. He explains how the voucher works, “If a member is selling a litre of milk at Ksh50, a registered buyer can get the milk by offering a voucher of 20 Lindi-Pesa and Ksh30. This, therefore, means that the buyer would have saved Ksh20 that can in turn be used normally.” Lindi-pesa is one of the five community currencies in use in different informal settlements in Kenya, all having been engineered by Grassroots Economics, a not-for-profit organisation that seeks to build prosperity in local communities. Here is how community currencies work. Not-forprofit organisations, like Grassroots Economics, encourage small and micro entrepreneurs to form a business network of 100 to 200 people. Each member is audited and endorsed by other businesses. A new member is issued a few notes amounting to Kshs400, which can be used in exchange of various goods and services at any business in the network. Community currency serves as a voucher or promissory note for members’ goods or services and can be used to account for barter among network members. A portion of the credits is collected as a tax by the currency-issuing business network. This is used to

What some Kenyans perhaps don’t understand is that any group in Kenya can create a mutual-credit exchange to assist in trade, savings and loans Will Ruddick, founder and director, Grassroots Economics

Apr - Jun 2016 International Finance Magazine

BANKING

Grassroots Economics programs director Ruth Mwangi using community currency for transactions

fund public service projects in the community, like road maintenance or trash collection. Since the currency is akin to a loan without monetary collateral, it is important that not too much is issued, (but rather that it circulates rapidly), says Grassroots Economics founder and director Will Ruddick. Ruddick realised that most people in low-income communities often have goods and services to trade, but lack money to purchase wares from each other. The currencies allow people in these villages to exchange goods and services without relying on scarce traditional money. “Community currencies do not, however, replace the national currency, but supplements it,” he adds. Community currencies enable the community to fully utilise its existing productive resources, especially unemployed labour, which has a catalytic effect on the rest of the local economy.

This translates to more purchasing power as members can weather harsh economic times when national currency is scarce. A development specialist, Ruddick is not new to printing of complementary currencies in Kenya. In his bid to bring prosperity to poverty stricken communities, he started piloting community currencies five years ago in Mombasa and Nairobi. This culminated in the launch of the first complementary currency, Bangla-Pesa in Mombasa in 2013. Printed on specialty paper that includes serial numbers and ultra violet ink that make it hard to counterfeit, Bangla-Pesa was issued in a ratio of 1:1 with the Kenya shilling. Each of the 200 businesses registered were given 400 in credit vouchers, of which half was put into a community fund and the remaining used to purchase goods and services. Bangla-Pesa’s success was instant.

International Finance Magazine Apr - Jun 2016

Ruddick says that there was 22 per cent increase in trade within the community a month later, citing a report he co authored, namely, a study by the International Journal of Community Currency Research. This success prompted Grassroots Economics to introduce four similar currencies namely Ng’ombeniPesa in Kwa Ng’ombe( Mombasa), Gatina-Pesa in Kawangware, Lindi-Pesa in Kibera and Kangemi-Pesa in Kangemi, Nairobi. So far, Grassroots Economics has issued roughly 40,000 Kenyan Shillings worth of community currency in each community, totaling approximately Kshs200,000 in circulation in Kenya. With increased trade within communities, dreams of prosperity are quickly turning into reality. Take Biko, for instance. He says he has continuously registered increased business since he started accepting community currencies last year. In Kibera, some

“

Cases of school-going children dropping out and joining crime are many, but the numbers have dropped since the onset of Lindi-Pesa Ann Wambui, a resident and headmaster of a local school which accepts Lindi-Pesa

BANKING

Community currencies

schools allow parents to pay part of the fees in community currency, keeping more students in schools. “Cases of school-going children dropping out and joining crime are many, but the numbers have dropped since the onset of LindiPesa,” says Ann Wambui, a resident and headmaster of a local school which accepts Lindi-Pesa. Other than this, communities using complementary currencies report ‘a greater sense of pride, economic

security and community cohesion’, according to Ruth Mwangi, program director at Grassroots Economics. Despite the apparent gains, community currencies have faced their fair share of challenges in Kenya. As with most disruptive technologies, there is a lot of confusion about community currencies. At one point after launching the first community currency, Ruddick and his team were arrested over allegations that the currency was fund-

ing a secessionist group in Mombasa, followed by claims by the Central Bank of Kenya of forgery. But on August 23, 2013, Director of Public Prosecutions deemed the programs legal and compliant with all laws, including CBK Act. “The reason is, we are not trying to create a separate currency, but rather give people access to credit in the form of rotating vouchers,” says Ruddick. But experts warn that these currencies also limit economic activities. Dr. Radha Upadhyaya, a lecturer at the Institute for Development Studies, University of Nairobi says that use of community currencies prevent participants from getting goods and services from outside the local economy, translating to small exchange networks. But according to Ruddick, the networks boost trade by creating a local credit reserve where at least 10

per cent of local consumption is locally produced and trade facilitated by community currency. “The use of community currency actually improves the local economies, even in Kenyan Shilling sales.” The currencies have continued to create an impact in communities in Kenya and beyond. Through a partnership with Cape University, Ruddick and his team have introduced two community currencies in South Africa. Plans are underway to roll out the currencies in more villages across east Africa, including in Rwanda, Uganda and Tanzania. “What some Kenyans perhaps don’t understand is that any group in Kenya can create a mutual-credit exchange to assist in trade, savings and loans,” says Ruddick. IFM editor@ifinancemag.com

Bitcoins too faced headwind This form of currency is not the only one to run into trouble with the regulator. In December last year, Bitcoin, a decentralised virtual currency, ran into headwind in Kenya. CBK, through a statement warned Kenyans against buying or selling the virtual currency claiming that ‘bitcoin transactions are largely untraceable and anonymous making them susceptible to abuse’. According to Elizabeth Rossiello, the managing director of BitPesa, a local start-up that trades bitcoins in Kenya, virtual currencies are not illegal in Kenya. However, she says, the market is still emerging, although with myriad challenges. These include ignorance amongst Kenyans, failure by the government to accept such currencies and lack of financial partnerships with major monetary players like banks. “But, this is a technology whose

time has come and is unstoppable.” BitPesa marketing manager Martin Likoko says that Bitcoin is a new technology whose adoption might take time, but is poised to disrupt the financial sector in the coming years. These alternative currencies are growing in popularity and are used in a variety of local communities around the world, including Europe, Africa and the US. Ruddick says that alternative currencies threaten to bring into light what has long been swept under the rug in terms of why monetary policies have increased inequality. “I see this potential awakening as a very good thing for the health of society and more stable economies,” he says.

Apr - Jun 2016 International Finance Magazine

CALENDAR INTERVIEW

01-03 July 2016 Tuning Expo (Automotive Industry)

MARK YOUR

Calendar

Saarbrucken, Germany

13 June-01 July 2016 International Festival for Business (Business Services) Liverpool, UK

Techindia (Industrial Products industry) New Delhi, India

06-07 July 2016

23 August 2016

The Global Mobile App Summit & Awards Business Aviation in Latin America(Mobile App Development, App A Vision for the Future Monetization, App Analytics, App Security (Air, Aviation & Airports industry) Sao Paulo, Brazil and App Marketing) Bangalore, India

12-14 July 2016 Magnesium China (Minerals, Metals & Ores industry) Shanghai, China

23-25 August 2016 Intersolar South America (Power & Renewable Energy, Solar Energy industries) Sao Paulo, Brazil

20-21 July 2016 Online Retailer Conference & Ecommerce Expo (Business Services)

31 August-01 September 2016 Ecommerce Show West (Business Services industry) San Diego, USA

Sydney, Australia

22-24 July 2016 China Xinjiang International Mining Expo (Mining) Urumqi, China

23-24 July 2016 Franchising & Business Opportunities Expo (Business Services)

31 August-01 September 2016 Retail Technolgy West Shows (Business Services industry) San Diego, USA

06-09 September 2016 Engineering Metals MetalÂ (Engineering Metals Metal) Izhevsk, Russia

Brisbane, Australia

23-26 July 2016 The Queensland Mining & Engineering Exhibition (Mining and Engineering) Mackay, Australia

International Finance Magazine Apr - Jun 2016

10-12 August 2016

13-17 September 2016 AMB Stuttgart (Metals)

Stuttgart, Germany

OUT OF OFFICE

I like the shift from spacecraft to woodworking Chris Lewicki is President and CEO of Planetary Resources, which aims to expand the natural resource base by developing and deploying technologies for asteroid mining. He is a workaholic but takes time out to play his favourite Van Halen number on a guitar What do you look forward to after work? After a busy day at office, I typically look forward to having a late dinner with my wife. I work almost 12 hours a day. Hence, dinner is late. After dinner, it is usually a little more work, or a late phone call, and sometimes research on personal projects. What are your favourite leisure activities? I enjoy going from the high tech world of spacecraft to the lowtech world of woodworking. I’m currently remodeling space for a workshop at a recently-purchased house, and that takes up most of my leisure time. But fitting in a few drone flights (self-built) or playing the guitar (mostly Van Halen) helps to mix it up.

Do you travel a lot? My work typically involves a lot of travelling. I travel for work most weeks, and go all over the world to meet customers, investors and partners. I just returned from CES in Las Vegas where we announced a 3D Printed metal object made with material from an asteroid. Do you buy the latest gadgets/books? I am a dangerously-early adopter. Recent purchases include a crowd-funded air quality monitor, a hacker-grade home network router, and parts for my home data storage system. I also enjoy home automation electronics. My Kindle is full of books, which I’m working to speed-read. What is your favourite food? Well, it has to be Buffalo Chicken Wings, paired with a red IPA – an American delicacy. Which is one place you will like to explore more? The main-belt asteroid named in my honour, 13609 Lewicki, and the path through our Solar System leading to it.

As told to Suparna Goswami Bhattacharya

International Finance Magazine Apr - Jun 2016

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