International Finance Magazine Jan - Mar 2016 The Green Energy Revolution

www.internationalfinancemagazine.com

January - March 2016

Volume II Issue 2

UK £4 | Europe €5.35 | USA $6

The 2015 IFM awards pg.84

The 2° shocker pg.32

Do you have stranded assets in your portfolio?

12

Banking: About what’s next

16

China will move from goods to services

37-75

The green energy revolution

Jan - Mar 2016 International Finance Magazine

International Finance Magazine Jan - Mar 2016

Note FROM EDITOR

W

e begin the New Year on a good note but with a lot of trepidation.

Crude is at a 7-year low. The bad news is the uncertainty over China, the world’s second largest economy. Besides its size, the economy is also known to support the economies of several smaller nations. The ramification of a slowdown would be felt worldwide. Part of the anxiety is due to the fact that no one knows for sure the actual condition of the Chinese economy.

What we are certain of is that the world is firmly moving towards cleaner and eco-friendly sources of energy.

When we went searching for stories on upcoming power projects, we learnt that a lot of people and organisations are keen to invest their money in clean energy. This does not mean that coal and nuclear will disappear any time soon. It is just that such people believe there is a viable and reliable alternative to these two polluting and dangerous forms of energy. As of now, the financial viability of solar and wind is debatable. But there is a concentrated effort to reduce the costs of setting up and running these eco-friendly power plants. We have featured these developments in our special section on power.

But if everyone is indeed moving towards cleaner sources of energy, what happens to the billions and trillions

invested in oil and gas? That’s a very uncomfortable question. If no one wants to answer, the main reason is that a wrong word or indication could trigger a sell-off that will render such assets worthless. We have tried to capture the transition in our cover story: The 2° shocker.

Another sector that is seeing massive disruption due to advances in technology is banking. Most of the newcomers are not having trouble finding customers due to the anti-incumbency factor — the traditional banks have been in business for way too long and complaints have been piling up.

It is not that banks are not trying to overcome their shortcomings. The challenge is that customers have become more demanding because they have seen the sea change that technology has ushered in other spheres of their lives. They are increasingly asking why banks are not making use of the developments in technology to improve their services. And, some banks took this feedback seriously.

In fact, they are investing in startups that focus on financial technology in a bid to keep up with the new entrants and also score new customers. As the old saying goes — if you can’t beat them, join them.

Read about it in our story About What’s Next.

Do tell us about interesting stories that you think should be featured on IFM. We look forward to your feedback and suggestions. Best wishes for the New Year from the team at IFM!

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

Dhiraj Shetty Editor

Design & Layout Rahil Shaikh Miya

editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

INDEX January - March 2016

Volume II Issue 2

COVER STORY

The 2° shocker pg.32

08

Jens Puhle Check the insides

04

Hacker terminator

20

Kenya feels China’s pain

76

Argentina

24 28

Tony Moroney

The illusion of growth in the UK mortgage market

80

Do you suffer from financial planning paralysis?

86

Banks see the cloud advantage

epic mess SPOOKY BUSINESS

International Finance Magazine Jan - Mar 2016

SPECIAL FOCUS

The sunrise sector

P37-75

The green energy revolution

92 Impact investing: Making headwind, but slowly

96

Bridging funding gap: Everyone Counts

100

Social media in credit scoring

104

VW: Fumes spell trouble

112

Out of Office: Urs Haeusler, CEO, DealMarket pg.84

Read IFM magazine

on your

TAB

THE 2015 IFM AWARDS Jan - Mar 2016 International Finance Magazine

Hacker terminator Instead of being defensive, companies are trying to root out cyber criminals lurking on their network Tim Ring

6

International Finance Magazine Jan - Mar 2016

byte by byte

F

or an organisation trying to fight off computer hackers, there is maybe one thing worse than finding out you have been breached... and that’s not finding out.

Because the chances are that you are not actually safe and secure, it’s just that you’ve been hacked but don’t know it yet.

And if that sounds flippant, consider the fact that nearly 90% of all large organisations now suffer one or more security breaches every year – making these incidents now “a near certainty”, according to an authoritative UK government and PwC 2015 survey.

Worse still, studies by Arbor Networks and Ponemon Institute show that once cyber criminals have broken into a typical corporate network, they spend an average of 3-6 months sitting there doing what they like before

they’re spotted.

It is this ‘dwell time’ that has led to the rise of the threat hunter. It’s a name that conjures up some kind of ‘hacker terminator’, and that sums up the appeal of threat hunting: finally, instead of being purely defensive, companies are taking the fight to the enemy and actively trying to root out the cyber criminals lurking on their network.

Threat hunters are typically highly experienced security professionals who can think like an attacker.

They sift through the mass of web and other data traffic going in and out of a company’s network looking for clues, tiny ‘anomalies’ in the normal flow that may indicate a hacker is already operating secretly inside the network.

More and more security professionals are becoming fans of threat hunting

and the idea is now being actively pushed to chief information security officers (CISOs).

So how effective is threat hunting? Case studies are hard to come by, partly because the hunters are a little like intelligence agents who detect and prevent a terrorist attack: there’s nothing to tell because nothing happened, and if they did tell, they would risk revealing their methods.

Tim ‘TK’ Keanini, CTO of cyber security firm Lancope, characterises them as a secretive bunch: “There is a strong sharing community across the hunters and a lot of them hold invite-only conferences that you will never hear about. You will be hard-pressed to hear their hunting stories. You might get a story or two over a few beers, and off the record, but there is no benefit for this information to be

If you have more than 300 users on your network, chances are that one of them is compromised per week Tim Keanini, CTO, Lancope

Jan - Mar 2016 International Finance Magazine

7

byte by byte

8

shared globally.”

But Paul Fletcher, cyber security evangelist at security firm Alert Logic, tells the story of one CISO at an (unnamed) company with all the usual information security in place who authorised a hunt to check they hadn’t missed anything.

What they had missed, it turned out, was a team of foreign hackers who had infiltrated about 800 of their computers. Some 200 of these systems were actively transmitting data to Asia and Eastern Europe – at random times and in small chunks of about 1.5 megabytes or less. Around 10-20% of the compromised systems were infected with known malware and the rest with unknown malware, potentially a ‘zero day’ exploit.

Lee Lawson from Dell SecureWorks’ Counter Threat Unit, which offers threat hunting services, tells a similar tale. “Our CTU has conducted hundreds of threat-hunting engage-

ments and evicted some very advanced threat actors, including those directly tasked by a nation state, nation state-tolerated threat groups, cybercrime groups and all other types.

“Most organisations are surprised at just how much the threat actor has stolen from the network, or the levels of presence the threat actor has. In some cases, the entire company from top to bottom has been compromised.”

So, should every organisation be threat hunting? Mav Turner, product strategy director at IT management company SolarWinds, is a fan, after his firm tried out threat hunting and found its network had indeed been compromised.

Turner is now appealing to others to try it. “Threat hunting hasn’t made it into broader awareness but we’ve started talking about it because we’ve seen some great results from it,” he said. “This is a capability

International Finance Magazine Jan - Mar 2016

that we just felt that in the security industry it was important to be talking about.”

Turner points out that nearly 70% of hacked companies are actually notified by third parties rather than finding out themselves.

“That’s the problem we’re trying to solve. How can we find them, and how can we find them faster? CISOs should be asking...how do we make sure we’re not taking hundreds of days to identify when there’s been an attack? How do we know we haven’t been breached?

And, if they’re operating under the ‘assumed breach’ mentality, where have we been breached?”

Paul Fletcher makes the point that threat hunting is no ‘silver bullet’, it won’t solve an organisation’s cyber security problems on its own. “Traditional security leans on defensive strategies to be a smaller target and this defensive strategy is still VERY relevant,” he says.

Traditional security leans on defensive strategies to be a smaller target and this defensive strategy is still VERY relevant Paul Fletcher, cyber security evangelist at security firm Alert Logic

byte by byte

»

Mav Turner, product strategy director at IT management company SolarWinds

But he is clear: “Any organisation that conducts business online should proactively pursue cyber threats within their infrastructure.”

Mav Turner recommends it for every company with a cyber security team of more than five people, partly because of the extra cost and complexity involved. “This is an advanced capability,” he says, “Every company in the world can’t just add it.

It’s going to be hard to hire

because it’s a complicated skillset.”

Organisations have two options. They can recruit their own in-house threat hunter; and Fletcher says this has the advantage that “in-house security professionals operating and maintaining their infrastructure would know best if they find a threat and/or anomaly”.

Or, they can bring in an external threat hunter from a cyber security firm. Turner

sees this as a good way to test the water: “I would recommend to most people looking to start to bring it in as a contractor, temporary service. Try it out, see if it adds value to your security organisation.”

This advanced capability also comes at an often high price, and Fletcher advises: “The cost calculation should be part of the organisation’s overall risk management programme. The potential cost of a breach versus the cost of human resources to proactively pursue threats could be quantified within each organisation, based on their tolerance level for a potential breach.”

But Keanini thinks that every big company, if they are not threat hunting already, soon will be. “All larger enterprises should have a programme in place and if they don’t, they ultimately will in the next 12 to 24 months because they cannot afford to be reactive to these unbudgeted incidents.

“If you have more than 300 users on your network, chances are that one of them is compromised per week. It is a law of numbers at this point, because the threat is just so relentless.” IFM

“

Our CTU has conducted hundreds of threat-hunting engagements and evicted some very advanced threat actors, including those directly tasked by a nation state, nation state-tolerated threat groups, cybercrime groups and all other types Lee Lawson, Dell SecureWorks’ Counter Threat Unit, which offers threat hunting services

editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

9

OPINION

Jens Puhle

Check the insides

International Finance Magazine Jan - Mar 2016

OPINION

Firms clearly have good cause to be concerned about external threats to their data, but many are overlooking the threat from within

W

ith a seemingly never ending series of high profile hacks and data breaches filling the headlines over the last year, data security has never been a higher priority. A report from PwC found that 90 per cent of all large organisations have been hacked in the last 12 months, and market leaders in everything from telecom to retail have been the victims of major breaches targeting the financial data of their customers. It is financial organisations themselves that have the most to fear however, as their data represents the biggest potential payday for criminals.

Encapsulating this threat is the recent charging of three men for the biggest data theft in history from

US financial institutions.

The attack saw details of more than 83 million people stolen from 14 major financial organisations, including JPMorgan. The data was then, apparently, used by the trio to manipulate stock markets by sending false stock tips to stolen email addresses.

However, while firms clearly have good cause to be concerned about external threats to their data, many are overlooking the threat from within. 81 per cent of companies reporting a breach told PwC that their own staff were involved in causing it.

Human error Most of these incidents tend to be caused by simple human error, with the Information Commissioner’s Office (ICO) finding that

emailing the wrong recipient was one of the most common ways for staff to leak sensitive data. While accidents are always possible, organisations need to ensure they have safeguards in place to make it harder for mistakes to happen, as well as training to raise awareness of the consequences of a leak.

Accidental leaks can be effectively prevented by limited access to sensitive data in the first place. It’s very common for new staff to be given much wider access to data than they need to, and we often see firms setting up new users as administrators with full access because it’s faster and easier.

Best practice should always be for all new users to only be given as much access as required for their roles, as the fewer people

that can access sensitive data, the less likely it is to be accidentally leaked.

Because of the way the native Windows Active Directory system works, a lot of system administrators find proper due diligence in managing access management for every new starter to be too time-consuming, especially if they have large numbers of staff joining at once due to a merger or large project. Surprisingly, large companies still have little idea about what information their staff can access, and rarely rescind access once granted, even when someone has left the organisation.

Malicious threats This lack of visibility is even more dangerous when it comes to the risk of malicious leaks, which can cause significant financial and reputational damage. A strong example is the recent incident of an internal auditor for the supermarket chain Morrisons leaking the bank, salary and National Insurance data of 100,000 staff online, leading to a class action lawsuit from those affected. This was done as an act of revenge against the chain, but even more dangerous are instances of insiders purposefully stealing high value data.

A powerful example in finance came in January 2015 when an employee at Morgan Stanley stole the data of more than 730,000 customers, including

Jan - Mar 2016 International Finance Magazine

11

OPINION

12

350,000 wealth managers.

The insider, who was later fired and then arrested for the breach, copied addresses, account numbers, investment information and other data to his home computer while apparently in talks with competitors for a job. Details of 900 customers ended up being posted online, although Morgan Stanley asserts that none lost money.

Not all customers – or organisations – get off so lightly, however. Insider data theft cost Bank of America more than $10m in 2011, after an employee passed on customer records to a fraud ring. The gang used the data to commit identify theft against hundreds of people, costing one victim as much as $20,000.

Insider leaks such as these are particularly difficult to guard against because the perpetrator is usually legitimately cleared for access as part of their job role. To address this chal-

lenge, firms should ensure they have systems in place that will alert them whenever certain files or folders are accessed. In addition, more advanced access rights management systems can send real time alerts, specifically for when information is accessed outside of usual parameters, preventing data from being copied unobserved from remote locations out of office hours.

Regulatory pressure The extremely high value of customer financial data means the financial sector is particularly at risk from both external hackers and internal threats, and they cannot afford to take the threat lightly. Alongside the threat of data leaks, strong access rights management is also a vital factor in complying with the PCI Data Security Standard version 3.0/3.1 (PCI DSS).

The standard applies to all organisations processing, storing or transmitting

International Finance Magazine Jan - Mar 2016

cardholder data, and covers both external security and internal practices. Implementing a strong access rights management policy is one of the main objectives of the standard, with compliance dependent on the ability to restrict access to cardholder data on a needto-know basis and assigning a unique ID to each person with computer access.

Tracking and monitoring all access to network resources is also required, along with regular testing for security processes.

With the threat of external and internal breaches alongside increasingly strict regulation lined up against them, the pressure on financial organisations to get their access rights management right is enormous. It is down to them to ensure they have the technology and processes in place to tightly control how data is accessed to make accidental and intentional data leaks as difficult as possible. They

must both lock down who is able to access customer records and key data and gain visibility of data that is accessed at unusual times or places.

Protecting the information at the heart of the organisation is not only a safeguard against embarrassing and costly leaks – it should be seen as an essential business practice that touches on every aspect of the operation. IFM editor@ifinancemag.com

Jens Puhle is UK Managing Director of access rights management specialist 8MAN

Why IFM? Companies are always searching for new markets and ways to grow. But not only are they finding new markets, but with every new market, they are also finding out new ways of doing business based on the unique characteristics of that market. IFM keeps you up to date with emerging markets, companies, technologies and other developments that will have a direct bearing on your businesses.

Be the first to find that new market.

Be the first to advertise your products.

Be the first to take the big leap to a new world of opportunities.

Contact IFM to tell your story or showcase your products.

EDITORIAL CALENDAR To be a part of these issues, write to: editor@ifinancemag.com

Print Marketing contact: Sean Thomas Email ID: sthomas@ifinancemag.com Phone No: +44 (0) 208 123 0715 Media Contact: Karan Belani Email id: karanb@ifinancemag.com Phone no: +44 (0) 208 123 9436

January 2016 Power producers and equipment manufacturers

April 2016 Mining

July 2016 Oil & Gas

October 2016 Payment Systems

January 2017 Scan to get your digital edition

Renewable energy

April 2017 Banking software

14

About what’s next Global banks woo startups to avoid being left behind by innovation Tom Jackson

International Finance Magazine Jan - Mar 2016

“T

raditional bank-tobank competition is not the issue. This new wave of competition is coming from both nimble, innovative, cloud- and mobile-first startups, as well as the major technology players largely unencumbered by policy and regulation,” says David Lynch, managing director at Hong Kong-based DBS Bank.

Lynch is under no illusions as to the threat posed by startups to traditional banks, saying banks are just as vulnerable as incumbents in other sectors that have been washed away by technological change.

“These companies are able to arbitrage their own scale and customer reach to create new revenue streams.

For banks, quite simply, we have a choice. We can passively observe and, if so, risk seeing large parts of our business lost to these new entrants,” he said.

The other option, and the one DBS Bank has chosen to take, is actively participate in the creation of a new fintech ecosystem that can benefit both banks and startups equally. The bank has partnered local venture capital firm Nest to launch the DBS Accelerator, which supports startups while allowing DBS to look for - and partner with - startups inno-

vating in the space.

“Working with startups helps us to drive culture change within the bank.

Bankers need to learn from these startups. Banks must adapt and those that don’t will not survive,” Lynch said.

Yet, startups also need banks. Derek White, chief design and digital officer at Barclays, says it is clear the financial services industry is changing and that startups are playing a major part in driving that change.

But banks can assist such companies with mutually beneficial conclusions.

“If there’s anything that startups need, and that heritage companies can provide,

“

It’s clear that many of these new startup business models are gaining traction, such as P2P or alternative lending, P2P FX, online and mobile payments and overseas transfers David Lynch, managing director at Hong Kong-based DBS Bank

15

Jan - Mar 2016 International Finance Magazine

16

it is customers,” he said.

Barclays is, in fact, becoming the customer itself. The bank has been establishing accelerators as part of its Rise open innovation platform. The latest programme was launched in Cape Town, South Africa, following previous launches in London, Manchester and New York. Another will follow next year in Tel Aviv.

From these accelerator programmes, already almost 30 startups have signed agreements with Barclays.

The bank is utilising Austen, Texas-based firm LiveOak’s real-time communication, collaboration and e-signature tool for onboarding online customers. It has partnered cloud-based payroll solution Dopay to allow the startup to leverage its banking licence in Egypt to offer services. There are more, and there will be oth-

ers in future.

White says the primary benefit for Barclays is the ability to rollout solutions quicker and more efficiently via startups than if the bank did so itself in-house.

“What we’re finding is that it is five to 10 times more efficient for us to work with startups, and three times quicker than when we do it ourselves.”

Another bank that has come to the same viewpoint is Citi, which recently hosted the Citi Mobile Challenge in Nairobi, Kenya, in a bid to identify innovative fintech solutions. JoyceAnn Wainaina of Citi said while many banks may view new entrants in the space as competitors, it is important to view them instead as potential partners. “We believe gaining direct access to startups in Africa will help accelerate and uncover

International Finance Magazine Jan - Mar 2016

new opportunities for Citi to develop transformational approaches to banking,” she said.

Though Citi Mobile Challenge developers retain their intellectual property rights for the apps they create, Citi is partnering with these developers in order to help it leapfrog traditional infrastructure.

“The banking industry is redefining itself more quickly now than in recent memory and we believe that we have the opportunity to embrace new ideas and create strong new partnerships around the world including Africa,” Wainaina said.

“The entrepreneurs and small businesses we have encountered through the Citi Mobile Challenge have been inspiring. These innovators are helping us push the boundaries of fintech and reimagine banking.

What we’re finding is that it is five to 10 times more efficient for us to work with startups, and three times quicker than when we do it ourselves Derek White, chief design and digital officer at Barclays

»

Sanjeev Orie, chief executive officer (CEO) of Business Value Adds at FNB

They bring an energy and passion for their work that is driving progress in the industry and fueling our own excitement about what’s next.”

Some banks are taking a less direct part in supporting and partnering fintech startups, but providing financial backing nonetheless. In Cape Town, South Africa’s First National Bank (FNB) has provided financial assistance to local startup support organisation Silicon Cape.

Sanjeev Orie, chief executive officer (CEO) of Business Value Adds at FNB, said the partnership is general, but the bank, through its Vumela Enterprise Development fund, is able to take equity in businesses.

Silicon Cape’s entrepreneurs are that pipeline.

The company has partnered with startups before, for its range of FNB

Business’ Instant Solutions, which were developed in partnership with a local startup technology company. FNB then bought and internalised these systems.

“We have not partnered or acquired any fintech startups to date. However, each proposition presented to FNB is considered on its own merit, particularly with regard to the business case as well as whether the products and services being offered are deemed to meet FNB’s customer needs,” Orie said.

“The ultimate impact is the ability of small businesses to create employment opportunities. Banks, as financial service providers, perform best when the country’s economy is growing steadily, when there is consistent and strong demand for bank accounts and products. These conditions arise typically from

stable economic growth and a working population that is gainfully employed. The role of SMMEs in this context cannot be over-stated.”

Lynch, whose bank recently we kicked off a project with a US-based predictive analytics company and is working with another startup in artificial intelligence and natural language processing, said there are a multitude of areas where banks and startups could partner.

“It’s clear that many of these new startup business models are gaining traction, such as P2P or alternative lending, P2P FX, online and mobile payments and overseas transfers,” he said.

“Many of them are focusing on underserved segments of banking and, as those models are proven, they will scale, and that presents a large threat to traditional banks. We have a choice. We can watch, buy, build our own, partner or participate and learn.”

He has a strong warning to banks that do not heed this advice, saying there is a real risk that if banks lose the engagement layer with a customer, they are resigned to being just the core.

“That can still be very profitable, but it’s a far less exciting existence and it will become commoditised,” Lynch said. IFM

They bring an energy and passion for their work that is driving progress in the industry and fueling our own excitement about what’s next Joyce-Ann Wainaina, CEO for East Africa, Citi

editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

17

OPINION

OPINION

Ousmène Mandeng

18

China From goods to services In 2016, the Asian economic giant’s output is projected to soften gradually. But, the estimations rely largely on its ‘old’ industries

International Finance Magazine Jan - Mar 2016

OPINION

C

hina’s slowdown has led to a considerable recalibration of market views. It is the third biggest economy after the US and the EU and is set to overtake the EU as the second largest by 2020. Clearly, China matters for the world economy. Its slowdown, therefore, naturally raises concerns.

China has become a formidable engine of growth for the world economy. This is unlikely to change any time soon. The biggest challenge over the next few years though will likely be China’s integration into the world financial system.

China’s slowdown is relative only. It has grown on average in real terms 10 percent per year in 200010. In 2011-15, its real growth was 8 percent. It is now projected to continue to slow to possible 6-6½ percent in 2016 and 2017. A rebound to reach previous

GDP growth rates seems unlikely as China has become significantly richer reducing prospects for sustained high growth rates as key growth success factors such as productivity growth, population growth and capital investments wean off or become negative.

China has increased its share in world GDP from 4 percent in 2000 to 16 percent in 2015 (Chart 1). This illustrates its frantic pace of economic integration.

It contributed more GDP in cumulative dollar-terms since 2000 than the US or the EU. The economic weight of China has made it one of the biggest international trading partners. Its share in world merchandise imports increased from 4 percent in 2000 to 11 percent in 2014 and is now second only to the US. Its share in world imports stagnated in 2013 and 2014 indicating some

saturation and increasing changes in its composition of GDP towards domestic consumption. The country’s persistent external surpluses have meant that it has subtracted more from GDP from the rest of the world than it added.

The importance of China as a leading merchandise importer has naturally made several countries increasingly dependent on their exports to China. In 2014, more than 80 percent of exports from Mongolia and Sierra Leone went to China.

For the larger economies, exports to the country in 2014, range from 34 percent for Australia to less than 2 percent for Mexico (Chart 2). The first round effect of a slowdown in China will therefore be felt very differently between countries.

The regions most dependent on exports to China are Asia and Latin America. In 2014, total exports to the

country represent on average (weighted) 22 percent of Asia’s exports and 9 percent of Latin America’s exports.

Sub-Saharan Africa, the Middle East & Northern Africa (MENA) and Europe are exposed less with total exports averaging 6, 5 and 4 percent, respectively.

China has remained one of the largest creditor countries. The considerable accumulation of external surpluses has allowed the country to conduct large investments abroad. Anecdotal evidence suggests that China has become a major direct investor. However, data on foreign direct investment (FDI) do not seem to support that. As a share of the total stock of outward FDI in 2014, it represents only 3 percent compared with 25 percent for the US. It has invested the bulk of its external surpluses in advanced economies’ government securities, notably US treasury notes.

The increase in China’s current account surplus will likely sustain its outward investments. The country’s current account surplus is estimated to have reached 0.5 percent of world GDP, the highest level since 2008, and is projected to maintain that level in 2016 before declining gradually. The implied transfer of resources abroad will support investments in the rest of the world.

For 2016, China’s output is projected to soften gradually. The basic assumption is an orderly deceleration towards the 6-6½ percent range over the mediumterm. However, a more pronounced slowdown is

Jan - Mar 2016 International Finance Magazine

19

OPINION

Chart 1. China’s economic integration

Chart 2. Exports to China Percent of total merchandise exports to China, 2014

China’s GDP in percent of world GDP, market prices Source: IMF October 2015 WEO.

18

Source: U.N. Comtrade.

35

16 14

30

12

25

10

20

8

15

6

10

4

5

2

also possible and will largely depend on the implementation of needed reforms, including for the financial system. The adoption of a new monetary policy framework under a floating exchange rate regime would also be desirable to mark the macroeconomic policy shift towards domestic rather than external targets. The slowdown will likely expose more vulnerabilities in particular in the financial sector and needed safeguards will have to be adopted. While debt represents a challenge for the corporate sector and regional governments, China’s significant residual fiscal space should allow to adopt sufficient countercyclical measures for a measured soft landing in output.

The estimations of China’s output still rely to a large extent on its ‘old’

industries. Limited data on China’s rapidly growing services industry reduce the explanatory power of current GDP estimates. The country’s output and possibly its rate of growth may be significantly underestimated.

For China and the rest of the world, the biggest challenge for 2016 and onwards will likely be its pace of international financial integration. A first, though mostly a symbolic step, was the inclusion of the renminbi into the IMF SDR basket demonstrating that China wants to lead on international monetary issues. Pending domestic financial sector reforms, China will eventually seek integration into the international financial system.

As the country maintains the largest stock of broad money in the world at about

200 percent of China’s GDP or 30 percent of world GDP, the pace of international financial liberalisation will be critical to allow for an orderly absorption of its financial resources. China’s international financial integration will also depend on the pace of substitution of its current foreign assets and the desire to add international diversification to its domestic assets.

The emergence of China as an international economic force has no precedent.

The country’s increasing economic role will likely be replicated in other areas, notably in the financial sector. The absorption of China’s merchandise goods will eventually be followed, though not necessarily in a similar scale, by the absorption of its services and financial products.

In the short term, the

editor@ifinancemag.com

Ousmène Mandeng is Head of Research and Development at New Sparta Asset Management

Mexico

France

likelihood of a hard landing for China remains low.

Even at about 6 percent GDP growth on average, it will contribute more than double the GDP it contributed during 2000-10 when its growth rate was 10 percent.

Other countries may simply need to recalibrate their expectations that output may no longer grow exponentially but merely linearly. IFM

In 2014, more than 80 percent of exports from Mongolia and Sierra Leone went to China. For the larger economies, exports to the country in 2014, range from 34 percent for Australia to less than 2 percent for Mexico

International Finance Magazine Jan - Mar 2016

India

U.K.

Germany

Russia

U.S.

Brazil

Japan

Korea

Australia

2020

2016

2012

2008

2004

2000

1996

1992

1988

1984

0

1980

0

20

40

Kenya feels 22

China’s Pain

Aftereffects of drop-off in commodity demand Amoxers Wachira

International Finance Magazine Jan - Mar 2016

S

lip-over effects of the slump in China’s stock market have hit hard the Nairobi Securities Exchange, the leading securities exchange in East Africa, analysts say. They warn that this turn of events could add pressure to investors who will have to contend with unfavourable market conditions throughout the year.

Independent analyst Aly Khan Saatchu says the Chinese slowdown has pummeled Sub Saharan Africa (SSA) into submission. The drop-off in Chinese commodity demand will continue to pressure SSA and particularly the commodity producers.

“There is no ‘Hail Mary’ Pass coming and because of the political architecture in most of the commodity producers, we will find many of those countries will continue to leverage the balance sheet praying for a recovery, further compounding the problem,” says Saatchu, who is the CEO of Rich management, a leading Nairobi Stocks Exchange authorised data vendor offering definitive investment advisory services in Kenya.

Shares in the Shanghai Stock Exchange have

fallen amid fears that they had been overvalued and signs of sluggish growth in the world’s second largest economy.

China devalued its currency and further cut the key lending rate to commercial banks in efforts to calm the market.

Chinese markets were the best performing emerging market in the world last year. The country’s main index Shanghai Composite more than doubled and was up over 40%. Since then, stocks have plunged 30%.

In an unprecedented move, around 1,300 companies — half of China’s listed companies — suspended their trades in the stock market to insulate themselves from the massive declines in the equity market.

This was the onset of an unabating market slump, which has spilled over to emerging markets and its shockwaves are being felt across the globe.

Financial analyst Rufus Mwanyasi confirms that African economies are feeling the heat since most of them are commodity driven.

A slowdown in China’s economy means diminished demand for commodities.

“Though Kenya does not

have a major direct economic relationship with China, its relationship with China’s direct trading partners, such as EU and the US, will transfer its weakness.”

“We have been facing turmoil in our equities market but the losses we are having now is a spillover from Chinese market. This is the worst year for the index because its current level was last seen in 2007,” says Genghis Capital equities analyst Mercyline Gatebi.

The NSE trading data show the Nairobi all-share index registered a free fall for the better half of 2015.

The trend signifies the impact of the deterioration in Chinese stocks, which could translate into the worst year for local investors in the wake of increasing factors affecting the local stock market negatively.

The stock market has suffered in the previous months amid uncertainty over implementation of the capital gains tax and a weak shilling, which sparked a wave of sell-offs by foreign investors.

Saatchu says that the current bear run is part of a Sub Saharan Africa sell-off.

“Weaker currencies and higher interest rates have fed the Bear.”

As a result, the Kenyan shilling has fared badly against major currencies, trading at over Kshs100 to the dollar, catalysing the spike of inflation.

“First, current depreciation is being driven by external factors — anticipation of a rate hike in the US and a flight to safe haven currencies due to gloomy global economic outlook. For this

Though Kenya does not have a major direct economic relationship with China, its relationship with China’s direct trading partners, such as EU and the US, will transfer its weakness Rufus Mwanyasi, Financial analyst

Jan - Mar 2016 International Finance Magazine

23

24

reason, any Central Bank of Kenya (CBK) intervention will be futile. In the shortterm, CBK needs to wait it out until calm returns to the world markets. At that point, either natural correction will firm up the local currency below 100 units or another rate rise will be necessary. In the long term, narrowing the trade deficit will help shore up the local unit,” offers Mwanyasi.

Saatchu has a different opinion. He opines that the Kenyan shilling has in fact outperformed most of its SSA peers. The weak shilling narrative tends to obscure that fact.

“On a trade-weighted basis, the Kenya shilling is close though unchanged for the year. The Tanzania and Uganda shillings, for example, have in fact fallen

much further.”

Considering that China has financed most of Kenya’s key infrastructure projects, including the multibillion shilling Standard Gauge Railway, there is uncertainty as to whether its woes will indeed affect such projects.

“Not really. First, China is still awash with cash despite its dwindling economy. Anyway, the question on whether the projects will continue or not will be a political one as opposed to an economic one,” says Mwanyasi.

Saatchu says that Kenya is less dependent on China than other African Countries like Zambia and Angola. This means that the slowdown in China is going to mean a double-whammy for those countries as China also reins in credit to them.

As a result, the Kenyan economy is set to remain at standstill by Q4 and well into 2016, a direct implication of the slump.

So, what needs to be done to cushion consumers from the high cost of imports?

“Deflationary forces are roiling the world. I think price-gouging by importers will ebb and import prices will be capped,” offers Saatchu. IFM editor@ifinancemag.com

Deflationary forces are roiling the world. I think price-gouging by importers will ebb and import prices will be capped Aly Khan Saatchu, Independent analyst

The outlook China is the biggest manufacturer and consumer of commodities. If its economy has a problem, that means problems for everyone. According to Saatchu, if the trend continues, Kenya should expect a slump in overall international trade both in the supply and demand sides.

However, resurgence of commodity prices could turn the tide for Africa, making recovery faster than expected. With a majority of African countries relying on mining and agri-based commodities for foreign exchange earnings, competitive prices in the global trade arena stand to benefit fragile economies facing a decline in export receipts.

According to Tony De Castro, the chief executive of investment banking group African Alliance, a recovery of commodity prices is in the offing and augurs well for Africa’s economies. “Commodity prices have started to rise again and will continue doing so. Maybe not the record highs witnessed last year, but the levels will be good,” he said.

In the last one year, prices for most commodities have fallen 40-50 per cent from their midyear peaks back in 2008.

The global economic slump has cast a pall on most markets and while net cash income is projected at high levels relative to historical averages, economists say there remains much uncertainty. But this is gradually changing.

Coffee, for instance, which is a key export earner for Kenya, is enjoying attractive prices in the global markets.

But even as commodity prices rise, African economies are still expected to feel the heat of the global economic downturn in the long term. Economists say Africa’s growth is expected to slow down.

International Finance Magazine Jan - Mar 2016

Oman | Tanzania | UAE

IFM

ST

BE

R

IDE

OV

R EP VIC N R E A IT S OM

A

S RD A W 5 201

Macro Software Systems LLC a leading Omani IT Organisation gets International recognition for it’s outstanding contribution to Oman’s IT Sector Since 1998

Our Services: - ERP

- Business Intelligence

- IT Outsourcing

- Document Management

- IT Service Management (ITSM)

- Bespoke Development

- Database Management

- Network & IT Security

- Cloud Services

- Mobile Applications

OMAN (Head Office): 201, Hatat House ‘A’, P.O. 921, P.C. 133, Al Khuwair, Sultanate of Oman.

Tel: +968 24565626, 24560113, Fax: +968 24565627

TANZANIA : MZ 02, Elia Complex, Bibi Titi Road P.O. 76821, Dar es Salaam, Tanzania.

Tel: +255 22 2126170, Fax: +255 22 2126185

www.macro-soft.com Email: info@macro-soft.com

UAE : Supreme Software Systems LLC Al Batin Business Centre, C6 Tower, 1st Floor, Bainuna St-34, P.O. 113100, Abu Dhabi, UAE Tel: +971 24069788, 561640258, Fax: +971 24069810

Epic

mess 26

International Finance Magazine Jan - Mar 2016

New Argentine government promises to end decade of Pinocchio economics Ana Mano

S

ipping a cold drink at a typical Buenos Aires coffee house, a middle-aged Argentine businessman pondered about his country’s economic future without much enthusiasm. Suddenly, his tone became defiant as it occurred to him that he might have to repatriate undeclared assets overseas. “Not before 10 years of legal security,” he said without being asked.

Hours before, Mauricio Macri’s centre-right coalition had driven the Peronists away from power, ending 12 years of Kirchner family rule in the presidency. The new government’s biggest challenge is to dispel a deeply rooted mistrust in Argentina’s institutions, a Herculean task given the misgivings of certain sections of the population.

One of the men chosen for the job is Alfonso de Prat-Gay, the newly appointed Economy Minister, a former Central Bank president and Congressman who worked at JP Morgan in London, New York and Buenos Aires.

Right off the bat, he inherited four years of no growth, a soaring fiscal deficit and rampant inflation, which is keeping one-third of the population below the poverty line. He also received no reserves to defend the ailing peso.

With unfaltering faith in himself, Prat-Gay put on his first act by saying, “We will tell the

truth.” That is how he opened the first press conference of his first Monday in office. The number one goal is to restore the credibility of the Indec, the national bureau of statistics.

Former Trade Secretary Guillermo Moreno intervened upon the Indec in 2007 and since then, nobody believes in the government’s statistics. As it were, Moreno replaced key Indec staff with political appointees. After the infamous intervention, any independent consultant daring to release private economic data that differed from the government’s was fined and prosecuted in Argentina. In time, Indec stopped releasing poverty figures too.

“A country without credible statistics is not credible. For us, it is urgent to have a statistics platform that tells us what is going on and not want we

27

Jan - Mar 2016 International Finance Magazine

»

The newly appointed Economy Minister, Alfonso de Prat-Gay, opened the first press conference of his first Monday in office saying, “We will tell the truth.”

28

want to hear,” Prat-Gay said in the press conference after reinstating the directors who had been fired by the previous administration, including Jorge Todesca and Graciela Bevacqua.

Not surprisingly, Todesca said he encountered ‘devastated land’ upon his return as chief of the Indec.

He spoke of incomplete and inarticulate technical and human resources. To avoid disseminating any more bad statistics, the Indec postponed the release of November inflation figures, labour and household income data indefinitely. Trade figures, which rely on customs authority information, are the easiest to reorganise and should be the first ones to come out.

After shenanigans and censorship Indec’s lack of credibility won Argentina a ‘motion of censore’ from the Interna-

International Finance Magazine Jan - Mar 2016

tional Monetary Fund (IMF) in 2013, when the entity publicly reprimanded the country for releasing flawed economic statistics after many warnings and exhortations. For IMF critics, the lender of last resort was slow to respond to a situation that had been ongoing for more than six years.

Indeed, the legacy of an incredible Indec was pervasive. After 2007, some economists in Argentina claimed that the fishy inflation figures led to billions in losses for holders of local inflation-linked bonds issued by the government.

After reassuming his post, Todesca conceded the Indec was “plagued with false and biased information”, a situation that will take months to rectify.

A no-brainer for many, Prat-Gay predicted that investors would only return to Argentina after it ended a decade of economic policy ‘shenanigans’, and finally delivered on its promises.

One of his commitments is to negotiate with the holdout creditors from the default, but first the government intends to revise the terms of the New York court ruling in favour of the bondholders involved in its $100bn debt restructuring of 2001. Argentina will refuse to pay the more than 60% of punitive interests as defined in Thomas Griesa’s decision.

Prat-Gay agrees New York court was the venue chosen

by Argentina to discuss the matter with its creditors, but he is against paying predatory interest and will negotiate accordingly.

The cepo spares no one On top of the credibility issues, Argentina ended 2015 facing a serious liquidity crunch stemming from four years of capital controls. To attract hard currency at once, the government removed a levy on certain agricultural commodities’ exports, the first

»

Detractors claim that President Cristina Fernández de Kirchner used to rein in prices and keep high popularity ratings though subsidies on energy consumption and transportation

concrete measure to raise reserves and end the cepo – the word in Castellano for currency restriction.

The new government also began talks with Wall Street banks to secure short-term credit lines that would shore up Central Bank reserves, a vital step if Argentina was to lift those controls without causing a massive devaluation of the peso.

The cepo produced many distortions and did not stop capital flight after enforcement in late 2011. Last December, state-run energy concern YPF became the latest victim as it failed to close the acquisition of two petrochemical companies because the Central Bank did not authorise it to exchange dollars. YPF said in a regulatory filing the buys fell through for reasons

beyond the parties’ control.

The restrictions fueled a parallel market fury that boosted the value of the unofficial dollar to 16 pesos in August, an all-time low.

Another side battle is to ‘unify’ the dollar market by reducing the types forex contracts used in different transactions, a unique feature of Argentina’s currency trading. In the third quarter, the gap between the official and unofficial dollar rate soared to more than 70%, an aberration compared to its largest trade partner Brazil or any other country with a relatively stable economy.

Analysts expected that once the measures were in place, the real forex rate would be closer to the current unofficial market quote.

Companies in general feared the impact of the

devaluation on their budget estimates and financial results. Banks, on the other hand, seemed to be more prepared. Despite the risk of the new measures and the likely increase of inflation due to the weaker peso, Prat-Gay said Argentina needed to return to normality. The only other country in the world with similar currency controls is Venezuela, an undesirable model, he said.

On the fiscal front, the problem is that the government runs a deficit of around 7% of GDP. The gap is almost entirely owed to subsidies on energy consumption and transportation, an artifice that former President Cristina Fernández de Kirchner used to rein in prices and keep high popularity ratings,

according to her detractors. Because her government had been financing the growing deficit through monetary expansion, annual inflation rose to 30% (by private estimates) and the peso devalued as savers sought refuge in a scarce local supply of greenbacks.

Mauricio Macri’s government has yet to detail how it will tackle the fiscal conundrum, but Prat-Gay is adamant about changing the subsidies policy. He claims there are studies showing that half of what the government spends on them ends up in the pockets of the 30% richest Argentines. He denounced that as anything but progressive.

With regards to inflation, the minister has no option other than reducing it gradually. In an interview in October, Prat-Gay said the government could aim at lowering inflation to 5% by the last year in office of President Macri, though at that point he had not been elected. Prat-Gay also is in favour of sacking Central Bank directors who fail to meet inflation targets, but that would require reforms in the institution’s bylaws. IFM editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

29

Spooky business Argentina’s intelligence agency reinforces state control of the economy, dictatorial practices 30

Ana Mano

International Finance Magazine Jan - Mar 2016

I

n a room packed with journalism students at the University of Palermo in Buenos Aires, a 41-year-old La Nación reporter discussed the perils of investigating authorities and rich companies in Argentina. As the country was five days away from the most contested presidential election since re-democratisation, the stakes were high.

Displaying two cellphones and confessing to not knowing the numbers of either because of constantly changing the numbers, the reporter – who focuses on corruption investigations in the corporate and government sectors – said his emails too had to be encrypted for privacy.

On that same day, Hugo Alconada Mon’s name had appeared on a list of 200 people allegedly spied on by the government’s domestic intelligence services. The list included judges, opposition politicians running for office, businessmen and even ex-spies, according to a criminal complaint filed

by Congresswomen Patricia Bullrich and Laura Alonso.

The episode of the list marks just another chapter of Argentina’s multiple intelligence intrigues, which gained momentum in 2015 after the mysterious death of prosecutor Alberto Nisman and the sacking of Antonio Stiuso, the legendary chief of the Secretaría de Inteligencia del Estado (SIDE).

2015 also saw a controversial reform of the country’s intelligence laws that had an effect on the business community.

The reform drew particular attention from the corporate sector as it closed the SIDE, replaced it with the Federal Intelligence Agency (AFI) and gave the government new powers to investigate all economic groups suspect of acting “to attack democratic life and consti-

Jan - Mar 2016 International Finance Magazine

31

32

»

Oscar Parrilli, head of the AFI when the agency was created, making a statement regarding the whereabouts of Antonio Stiuso, who fled Argentina in the wake of the death of prosecutor Alberto Nisman

tutional order” by means of “runs on banks, the forex market and supply shortages.”

Published in the form of decree in July, Argentina’s new intelligence doctrine set up a specific structure within the AFI tasked with preventing “market coups” and other acts of “economic and financial delinquency perpetrated by national or foreign groups.”

In an economy with tight forex and price controls, the business community frowned, though few dared to speak in public about their concerns.

“The new investigating

agency makes sense in an economy subject to a lot of state control,” said a Buenos Aires economist on condition his name was not revealed. “There is a constant monitoring of the activities of the companies.

It is an economic policy enforced through price administration mechanisms and repression,” he said.

Omnipresent state According to a book by Claudio Savoia launched after the creation of the AFI, the government has a system in place that “spies” on all Argentines and the companies doing business

International Finance Magazine Jan - Mar 2016

here. His book describes in detail a nationwide database network used to perform illegal intelligence activity that has allegedly affected some 800 people and 1,000 companies.

The government applies “the same method on the people and the companies,” the author told Infobae in an August interview.

He said data on the companies is legally collected through the Inspección General de Justicia, under the Justice and Human Rights Ministry. However, the IGJ then shares the confidential data with other government agencies. The

“

The work of Savoia has been crucial to demonstrate the amount and reach of the information that national, provincial and municipal governments have amassed on the Argentines Eduardo Estévez, an independent intelligence consultant who worked in several government offices as an internal security expert

Argentina’s government has been increasing the budget for intelligence services over the years. According to official budget data, intelligence spending rose 150% in the 2010-2015 year period, to ARS 2.410 billion list of companies that had their data handled in this way included Renault, Telefónica, Nidera, Swiss Medical Group and Mastellone Los Hermanos among many others, Savoia alleged.

The IGC declined comment for this report.

“The work of Savoia has been crucial to demonstrate the amount and reach of the information that national, provincial and municipal governments have amassed on the Argentines,” says Eduardo Estévez, an independent intelligence consultant who worked in several government offices as an internal security expert.

In matters of intelligence, “the point is to understand how much of the legacy of authoritarian rule is still in place in times of democracy,” he said in an exclusive interview in Buenos Aires.

“The reform of Argentina’s intelligence laws is overdue considering the country got rid of its dictatorship in 1984,” he argues.

On the other hand, the country made institutional advancements in March 2015 when a federal court handed a prison sentence to two high-ranking Marine officers for illegally spying on politicians, journalists, government employees and

social movements.

The investigation of the Marine officers started in 2006 under the late President Néstor Kirchner, and marked a decisive shift in the control of the Argentine intelligence apparatus, which has since been returned to the hands of civilians. “This is a milestone in the history of Argentine intelligence because it was judicially recognised by the courts that illegal intelligence activity took place under democracy,” says Estévez.

But just like the military continued to act autonomously after re-democra-

tisation, for years the now extinct SIDE too was out control, behaving according to its own agenda and promoting spying activities that harmed the image of the government, said Estévez.

The personification of this disarray was Antonio Stiuso, who was director of operations at the agency until he was fired in December 2014.

He has since fled Argentina.

Stiuso is considered a key witness in the proceedings related to the terrorist attack at the Asociación Mutual Israelita Argentina (AMIA) in 1994, and the Interpol issued a “blue notice” for his whereabouts on behalf of the Argentine government. The bombing was also being investigated

by Alberto Nisman, who died in January after accusing the administration of Cristina Fernandez de Kirchner of protecting the individuals and the country (Iran) implicated in his investigation. IFM editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

33

COVER STORY

COVER STORY

34

The 2째 shocker

International Finance Magazine Jan - Mar 2016

COVER STORY

Fossil fuel divestment movement has increased the risk of existing assets being stranded Suparna Goswami Bhattacharya

A

part from technology if there is any topic that has gathered momentum over the years, it is climate change. Carbon Asset Risk (CAR) has gone from a fringe topic discussed primarily by NGOs to a serious matter for some of the largest companies in the world.

The fossil fuel divestment movement, as it is popularly called, was launched in the fall of 2012. It followed the release of a study by the Carbon Tracker Initiative, a team of financial, energy and legal experts, which showed that the vast majority of fossil fuel reserves are unburnable if global temperature rise is to be limited to 2°C. In the early days, the

movement was restricted to university campuses in the US. Since then, it has grown significantly with the inclusion of faith institutions, local councils and pension funds across the globe.

The campaign basically asks investors to ban investments in the top 200 public companies that own the biggest coal, oil and gas reserves. Till date, it has seen over 436 institutions and 2,040 individuals across 43 countries representing $2.6 trillion in assets divest from fossil fuel companies.

“The fossil fuel divestment movement has been a huge success to say the least. Though it started at university campuses in the US, it soon spread its wings as other organisations and nations joined with

great vigour,” says Brett Fleishman, senior analyst, 350.org, an international environmental organisation headquartered in California.

For instance, the Norwegian parliament decided that the country’s Sovereign Wealth Fund, one of the biggest in the world at $900 billion and one of the top 10 investors in the global coal industry, will sell off over $8 billion in coal investments.

Similarly, the Rockefeller Brothers Fund, run by heirs to the Rockefeller oil fortune, decided to join the divestment movement by pledging to sell assets tied to fossil fuel companies from their portfolios and invest in cleaner alternatives.

In May 2015, Saudi petroleum minister Sheikh Ali Al-Naimi stated: “In

Saudi Arabia, we recognise that eventually, one of these days, we are not going to need fossil fuels. I don’t know when, in 2040, 2050, or thereafter… Saudi Arabia plans to become a global power in solar and wind energy.” This statement was made in the backdrop of weakening oil prices and increased supply.

Andrea Marandino, sustainable finance and corporate risk specialist, WWF UK, says, “As far as the factors behind this move are concerned, reports by various organisations and banks conclude that there is quantifiable risk to portfolios exposed to fossil fuel assets in a carbon constrained world.

Climate risk in portfolios is also exacerbated by increasing volatility in the oil, coal

WHO IS DIVESTING? Faith-based Groups

29%

Foundations

25%

Pension Funds

13%

Governmental Organisations

12%

Colleges, Universities and Schools

10%

NGOs

7%

For-Profit Corporations

2%

Health

1%

Source: gofossilfree.org

Jan - Mar 2016 International Finance Magazine

35

COVER STORY

36

and gas markets.”

Global oil prices are down roughly by half since June 2014 and the coal industry has suffered four consecutive quarters of price declines. According to Citigroup analysts, stranded assets in the fossil fuel industry could be worth $100 trillion.

Similarly, in an HSBC report titled ‘Stranded assets: what next?’, analysts note that “the risk of fossil fuel asset stranding could come from energy efficiency and advancements in renewables, battery storage and enhanced oil recovery,” and though “the timing of such structural events is difficult to predict”, investors must now determine what is the best strategy for dealing with possible stranded assets “that captures both climate commitment and fiduciary duty”.

The International Energy Agency (IEA) has concluded that no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal.

Thus, most of the fossil

fuels already on companies’ balance sheets may become stranded assets in a carbon constrained world. “Increasingly, financial analyses are including this risk when considering fossil fuel valuation and risk to portfolios.

Such warnings are influencing decisions to divest,” says Marandino.

Renewable energy sources have, meanwhile, been getting cheaper and more readily available. The switch away from coal has been enabled by a combination of gas, renewables and efficiency. These forces represent clear examples of an energy transition from a longer term perspective that has been driven primarily by market forces.

All the above factors have, in fact, led to the fall in share prices of oil and gas companies. “This is what makes this divestment movement historically unique — these stocks are saturated in investment risk. The energy sector (coal, oil and gas) has been the worst performing sector over the last five years. To make matters worse, the

International Finance Magazine Jan - Mar 2016

dramatic drop in oil prices has been a major downward force on portfolios holding fossil fuels,” says Fleishman.

For example, California’s pension system lost $5 billion on their fossil fuel holdings over the last fiscal year.

The S&P 500 without fossil fuels has outperformed the S&P 500 by 2 per cent over the last year. “Investors who consider carbon risk and integrate climate conscious investment strategies are well ahead of their peers when looking at long-term performance,” says Fleishman.

However, it is not easy for fossil fuel companies to burn their reserves and get into ‘greener’ pastures overnight. “If the top oil and gas companies carry out their business plans and burn their reserves, they will drive humanity into climate chaos, regardless of laudable projects they may be doing next to it,” says Fleishman. IFM editor@ifinancemag.com

The fossil fuel divestment movement has been a huge success to say the least. Though it started at university campuses in the US, it soon spread its wings as other organisations and nations joined with great vigour Brett Fleishman, senior analyst, 350.org, an international environmental organisation

COVER STORY

AnalySing the Growth of the Movement

As of September 2015, 436 institutions and 2,040 individuals from 43 countries representing $2.6 trillion in assets have committed to divest from fossil fuels* *

Three hundred fifty-nine of 2,040 individuals who have committed to divest did not disclose their country of residence. This graphic represents the

country of residence of 1,681 individuals, and the country of primary operations of all 436 institutions, that have committed to divest from fossil fuels.

THE COMMITMENTS

T

otal divestment commitments include full commitments, partial commitments and divestment from coal & tar sands. Here’s what the commitment translates into:

Full An institution or corporation that made a binding commitment to divest (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) from any fossil fuel company (coal, oil, natural gas) and especially, those in “The Carbon Underground: The World’s Top 200 Companies, Ranked by the Carbon Content of their Fossil Fuel Reserves.”

Partial An institution or corporation that made a binding commitment to divest (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) from some fossil fuel companies (coal, oil, natural gas) and especially, those in “The Carbon Underground: The World’s Top 200 Companies, Ranked by the Carbon Content of their Fossil Fuel Reserves”.

Coal and Tar Sands An institution or corporation that made a binding commitment to divest (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) from coal and tar sands companies.

Coal only An institution or corporation that made a binding commitment to divest (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) from coal companies.

Fossil free An institution or corporation that does not have any investment (direct ownership, shares, commingled mutual funds containing shares, corporate bonds) in fossil fuel companies (coal, oil, natural gas) and especially, those in “The Carbon Underground: The World’s Top 200 Companies, Ranked by the Carbon Content of their Fossil Fuel Reserves”.

Jan - Mar 2016 International Finance Magazine

37

The green energy

revolution

Power has been the sector to propel a nation’s growth plans. It is a sign of a nation’s prosperity. The ones that provide uninterrupted power to its citizens are some of the most developed nations. This criterion notwithstanding, the last decade has witnessed a sea change in the way power is generated. In fact, nowadays, a better way to put this would be — in the way energy is tapped.

Coal dominates the energy trade, but is facing a strong challenge from the sun and wind.

It is not likely to be displaced as the primary source of electricity in the near future, but what we learnt while preparing this issue is that investors are now willing to make the shift to cleaner sources of energy.

At the same time, some devel-

oping nations are straightaway investing in solar or wind power plants. This is in contrast to the developed nations who tapped water, coal and nuclear energy before turning to solar and wind. And, it is just a matter of time before engineers find a way to store energy efficiently, which will clear the path for the use of solar and wind as the primary source of reliable and uninterrupted power.

As for the cost, the extent of adoption of solar and wind energy is a good indicator of affordability. Initially, the primary driver of this adoption was the movement for cleaner energy. But now, at least in some countries, the cost is becoming a factor — it is either lower or equal to coal or hydro power.

Catch up with the important developments in our special section on the power sector.

Jan - Mar 2016 International Finance Magazine

39

Growing without

subsidy 40

This is the most important characteristic of the renewable energy sector in Latin America Kamilia Lahrichi

International Finance Magazine Jan - Mar 2016

POWER

A

s 195 countries reached a landmark agreement to reduce greenhouse gas emissions at the COP21 summit in Paris in December 2015, Latin American countries are taking part in efforts to reduce global warming by investing more in renewables.

With soaring temperatures due to El Niño – the band of warm ocean water in the Pacific Ocean – to increased rainfall and melting glaciers, the region would benefit highly from developing greener sources of energy.

“Solar is going to be key to addressing climate change,” said Andrew de Pass, CEO of Conergy in Miami, US, during the Earth to Paris conference on December 7 in Paris.

In fact, Latin America is home to a fast-growing solar 1 2 3

energy industry. GreentechSolar1 found that the region is the fastest growing market for solar energy with the fastest growth in the history of the industry.

For instance, Mexico, which has some of the best solar resources in the world, is currently building a 30 MW solar photovoltaic power plant. It is set to become the region’s largest and provide electricity to power about 160,000 households.

Resisting fossil fuels The issue is that Latin American governments focus more on fossil fuels because of plummeting crude oil prices. Internationally low prices obstruct the development of renewable energy and a green economy.

For example, oil-producer Venezuela, which has some of the largest gas reserves

on the planet, has focused on boosting natural gas production to meet its energy demand.

Argentina too is dependent on natural gas, with its huge shale gas formation in the southern Patagonia region. Exploiting it would enable the South American nation to be energy selfsufficient.

In addition, South America cannot take advantage of its largest renewable source – hydropower because of vulnerability to droughts, according to a report2 by the in Abu Dhabi-based International Renewable Energy Agency (IRENA) titled “Renewable power generation costs in 2014”.

Yet, Latin American governments are keen to boosting renewables’ use.

Climatescope3, a resource database providing countryby-country assessment on

“

Solar and wind have already reached grid parity with natural gas and coal-fired generation in some markets in Latin America Lisa Viscidi, Director of Energy, Climate Change and Extractive Industries at the Inter-American Dialogue, a centre for policy analysis in Washington D.C.

http://www.greentechmedia.com/articles/read/energia-solar http://www.irena.org/DocumentDownloads/Publications/IRENA_RE_Power_Costs_Summary.pdf http://global-climatescope.org/en/region/lac/

Jan - Mar 2016 International Finance Magazine

41

42

climate-related investment, found that Latin America and the Caribbean boast the highest clean energy penetration than any other region in the world.

As of year-end 2014, 11% of the 352GW installed in the region was represented by biomass, wind, small hydro, solar and geothermal power-generating projects.

Grid parity The main challenge lies in ensuring that the cost of solar and wind equals that of hydropower and coal.

A 2014 Citibank report4 titled “The rise of renewables in Latin America” explains that “the most important characteristic of renewable energy in Latin America is that it is competitive with conventional sources of power without subsidy. This is because

4 5 6

other sources of power generation in Latin America are relatively expensive – often two to three times more than in the United States or Europe.”

This hence encourages the development of renewables.

“Solar and wind have already reached grid parity with natural gas and coalfired generation in some markets in Latin America,” says Lisa Viscidi, Director of Energy, Climate Change and Extractive Industries at the Inter-American Dialogue, a centre for policy analysis in Washington D.C. In particular, Brazil and Chile have become regional leaders in renewables development with more accessible prices. Developers have offered prices below those of natural gas in some of Brazil’s wind auctions.

Also, Brazil’s Senate

approved in July 2015 tax break for solar power equipment after the large country faced the biggest drought in eight decades, which curbed the country’s hydroelectric generation capacity.

“Costs for both technologies globally have dropped significantly in recent years and further technological breakthroughs could make them even more competitive with fossil fuel sources across more markets in the near future,” explains Ms. Viscidi.

A November 2015 Deutsche Bank report5 found that solar energy was the cheapest source of electric power in Chile, which has a very high solar irradiance in the Atacama desert.

The country, the the world’s largest copper exporter, will install Latin America’s first solar energy plant in its

https://www.citibank.com/tts/trade_finance/financing/docs/rise_renewables_latam.pdf http://www.pv-tech.org/news/42361 http://www.wwindea.org/new-record-in-worldwide-wind-installations/

International Finance Magazine Jan - Mar 2016

Atacama desert in 2017.

In addition, the cost of solar power capacity has significantly dropped with inexpensive panels from China that dominate the market.

The World Wind Energy Association6 found in February 2015 that wind power is a cheap and reliable power source in Latin America.

In Brazil, renewables represent 15% of the total installed capacity of 126 GW, according to the Climatescope 2014’s report “Mapping the global frontiers for clean energy investment”.

Between 2006 and 2013, the country overcame economic troubles and attracted $96.3 billion worth investment for renewable energy development.

“In Brazil, the wind projects have already reached grid parity with conventional fuels,” says Tabaré Currás, Global Advisor on Energy Economics at WWF International Global Climate and Energy Initiative in Mexico.

The South American nation is doing good in the wind business with wind auctions amounting to $60/ MW. Besides, it added least 2.9 GW of installed wind capacity to its network in 2014.

Making the shift Jonas Rama, an Emerging Markets consultant on Latin America, explains that countries rich in fossil fuels,

POWER

In Brazil, renewables represent 15% of the total installed capacity of 126 GW, according to the Climatescope 2014’s report “Mapping the global frontiers for clean energy investment” namely Argentina, Ecuador, Mexico and Venezuela, might be keen to shift to renewables but do not have the means to do so.

Unlike the United States and Europe – which have feed-in tariffs that guarantee developers a set price – renewable energy in Latin America is not subsidised to encourage production.

However, “Latin American countries do offer some important incentives such as wind and solar auctions, regulations allowing self generators (such as through solar panels on rooftops) to sell excess capacity back to the grid, and carbon credits for renewable energy,” says Ms. Viscidi.

For instance, Mexico and

Chile implemented carbon credit schemes, which require polluters to buy permits to release carbon dioxide.

Accelerate the transition Although investment in renewables in Latin America went from $15.4 billion in 2013 to $23 billion a year later, according to Climatescope, governments need to do more to accelerate the transition to renewables.

Infrastructure is still weak and countries need to invest more in renewable energy.

Among other measures, governments need to include renewable energy generation in long-term strategies. They should also

make sure that there is a regulatory framework to introduce renewables at a competitive price.

Overall, it is about “sending clear signals to investors with investment-friendly policies, having a long-term vision based on ambitious goals and investing in human capital to create a labour force that could boost the energy transformation,” says Mr. Currás. IFM editor@ifinancemag.com

“

Countries rich in fossil fuels, namely Argentina, Ecuador, Mexico and Venezuela, might be keen to shift to renewables but do not have the means to do so Jonas Rama, an Emerging Markets consultant on Latin America

43

Jan - Mar 2016 International Finance Magazine

44

The sunrise sector The solar industry accounted for nearly 2% of all new jobs created in the US in 2014-15 Suparna Goswami Bhattacharya

International Finance Magazine Jan - Mar 2016

POWER

T

hough the technology sector remains the most attractive for jobseekers, there is a new industry — solar — which is fast gaining popularity, especially among youngsters in the US. A few years ago, nobody would have given the solar sector a second thought, especially against the Goliath technology sector which has names like Google, Apple, Microsoft among others.

However, with the recent cultural push toward clean energy and a reduced carbon footprint, solar energy is seeing a lot of interest.

More people are looking to solar systems as a sustainable solution to their energy needs. Also, with the ‘go green’ movement gaining

greater acceptance with every passing year, the solar sector is the industry to be in.

Rhone Resch, President and CEO, Solar Energy Industries Association (SEIA), says the solar industry is for everyone. “Solar is a cutting-edge technology, changing our environment and economy for the better and I believe young people want to be part of that movement. We are hiring big time,” says Resch.

Another reason, says David Levine, CEO, Geostellar, is that the industry is much more diverse than the technology sector. “Wherever you have solar installations, you need employees installing panels and electronics, and integrating the system into the home. People can

use Twitter, Facebook, Google and Apple products without ever meeting an employee or even communicating with one,” says Levine.

Add to this, the solar sector is equally attractive to software developers who are interested in applying their talent to something more meaningful than just work on new ways to generate advertising revenue and clicks. “When it comes to logic application, both fields offer equal challenges. Additionally, working for the solar sector comes with a ‘doing-something-good-forthe environment’ tag,” says Levine.

Today, solar is the fastestgrowing source of renewable energy in America with more than 20 gigawatts

45

Wherever you have solar installations, you need employees installing panels and electronics, and integrating the system into the home.

People can use Twitter, Facebook, Google and Apple products without ever meeting an employee or even communicating with one David Levine, CEO, Geostellar

Jan - Mar 2016 International Finance Magazine

Deiry, who runs an independent recruitment consultancy.

In 2014, the solar industry pumped nearly $18 billion into the US economy, and nearly $70 billion has been invested since the solar Investment Tax Credit (ITC) was passed in 2006. Thanks to this policy, more companies are making long-term investments in solar that allow them to lower their costs to consumers – spurring the nation’s economy even more.

Even outside the US, the solar industry is known as a job creator. “The primary difference between the tech industry and the solar industry is that solar creates jobs and technology replaces jobs. Solar creates many more jobs per MWh than any other form of energy. As the solar industry and market expands, many new jobs are created in installation, financing, manufacturing, engineering and design,” says Levine. IFM

46

of installed capacity nationwide – enough to power more than 4 million homes – and these numbers are projected to double by the end of 2016, states a research paper by SEIA. Even on the salary front, the solar sector is not far behind.

Though there is no proper data showing salary growth in the sector, information collected by The Solar Foundation and market research firm BW Research Partnership shows that the industry accounted for nearly 2% of all new jobs created in the US in 2014-15.

“The sector is employing in massive numbers. One key reason for people joining the sector is its attractive pay package. Also, one gets to do quality work in this space.

So the sector is attractive in both departments,” says Matt

Role of Engineers •

•

•

•

Mechanical Engineer: Works to create the equipment required for the production of solar panels. They are also responsible for designing and creating the machines that assemble solar panels Industrial Engineer: When a solar energy system is implemented, industrial engineers are responsible for coordinating and managing the project. They determine what is needed to complete the installation Materials Engineer: They help develop the material used in the solar industry. They work with semiconductors, metals, glass, silicon and other composites used in the development of new solar technology Electrical Engineer: They focus on the electrical components that make solar systems work.

They design, create and test the equipment

International Finance Magazine Jan - Mar 2016

editor@ifinancemag.com

•

The solar Investment Tax Credit (ITC) is one of the most important federal policy mechanisms to support the deployment of solar energy in the United States. It gives solar companies a 30% tax credit

•

Since 2006, the industry has grown at an average annual rate of 68 per cent — that equates to there being 26 times more solar installed today than there was in 2006

Cities in the USA with maximum concentration of solar companies New York

700

Los Angeles

700

Philadelphia

350

Washington DC

300

Boston

300

Phoenix

250

San Diego

250

Denver

200

Chicago

150

48

Yieldcos in choppy waters

Increasing popularity of renewable energy has resulted in higher prices for investors and a reduction in returns Peter Taberner

International Finance Magazine Jan - Mar 2016

POWER

I

n a climate of low interest rates, increased demand, falling oil and gas prices, the environment for yieldcos’ investments potentially faces choppy waters and a period of uncertainty.

The current market trends represent a turnaround in fortunes from the way in which yieldcos burst onto the investment scene in recent years.

Yieldcos have commonly been used for investing in renewable energy projects, but they are not exclusive to one sector. Typically, the structure of a yieldco involves a parent or sponsor company, who contribute

cash generating assets into a limited liability company.

The subsidiary company then raises capital, through an Initial Public Offering (IPO) of its stock. The sponsor company is allowed to control the investment through majority voting interests, allowing them to oversee the yieldco and its operations.

Investor confidence in yieldcos arrives from the regularity of a return on the investment and prospective long-term growth, in contrast to publicly traded stocks.

According to Ernst and Young, there is a ‘tax shield’ on any investor, as the

investor receives returns on capital that are taxable only to the extent the corporation has current or accumulated earnings and profits.

The yields have so far been healthy, auditors say, with growth targets of 8% to 15% anticipated in the long term.

Although, due to the popularity of investment in renewable energy, many industry commentators believe that yieldcos have left the market overheated, resulting in higher prices for investors and a reduction in returns.

Lucas Porter, a managing consultant in Navigant’s Energy Practice, a research

“

Yieldcos have not raised the cost to develop projects, and have probably contributed to declining costs of renewables. The yieldco market may be saturated for the time being, and much depends on the future interest rate environment Lucas Porter, consultant in Navigant’s Energy Practice, a research company providing analysis of the clean technology markets

Jan - Mar 2016 International Finance Magazine

49

company providing analysis of the clean technology markets, explained, “In recent months, investors have come to better understand the yieldco growth story.

The same happened with master limited partnerships (MLPs). Initially, both investment vehicles were seen as growth companies, and as such were valued as growth stocks. The principle means by which yieldcos and MLPs grow their dividends is through acquisitions. In order to make acquisitions, the investment vehicle needs to raise new capital through share issuance, which dilutes existing shareholders. The renew-

able energy projects held in the yieldco portfolio may be highly profitable from a developer’s point of view, but the return to investors depends on how much the assets are acquired for by the yieldco.”

Porter opined that low traditional fuel prices may limit the number of renewable energy projects that are profitable to develop, and thus may limit the potential pool of acquirable assets.

“Yieldcos have not raised the cost to develop projects, and have probably contributed to declining costs of renewables. The yieldco market may be saturated for the time being, and much

50

depends on the future interest rate environment,” he explained.

The third quarter results for yieldcos have shown some mixed figures.

Brookfield Renewable Energy Partners, who are renowned as one of the largest yieldcos, posted a quarter-on-quarter increase of 207 GWh generated and a year-on-year decrease of 365 GWh. Revenues were down $5 million year on year for the third quarter to $337 million. And proceeds were also down from $1,296 billion to $1,236 billion, when comparing the first nine months of 2014 and 2015.

“

Yieldcos are a new vehicle, and the sponsor of the yieldco is very important. Interest in these stocks will come from investors seeing a good business plan, with healthy cash flow, so they can raise the dividend for any stocks Dave King, portfolio manager of Columbia Flexible Capital Income Fund, the asset management group of Ameriprise Financial

International Finance Magazine Jan - Mar 2016

POWER

Revenues were down $5 million year on year for the third quarter to $337 million. And proceeds were also down from $1,296 billion to $1,236 billion, when comparing the first nine months of 2014 and 2015.

In contrast, Pattern Energy reported an increase of 77% of GWh distributed with a total of 1,256 GWh bought on the electricity markets. The total of MW capacity also increased due to the acquisition of the remaining interests of the 283 MW Gulf Wind project, which is located on the Gulf Coast in Texas.

The quarter-on-quarter financial results were also positive for the company, which owns and operates 16 wind power facilities in the United States, Canada, and Chile, as revenues were hiked up 25% with revenues climbing to $89.7 million.

Stock market figures though reveal the loss of faith in the yieldco model, as both companies suffered share price losses in 2015.

On the New York Stock Exchange, Brookfield Renewable Energy Partners peaked in late April with a $33.63 share price, which is now $25.55.

Pattern Energy also reached an apex earlier in the year, with a stock price of $32, which has now plummeted to just over $20.

Dave King, portfolio manager of Columbia Flexible Capital Income Fund, the asset management group of Ameriprise Financial,

said, “There are several opportunities in the renewable sector in stock markets, as there are things that have converged. The low conventional energy prices have started a downward slope on renewable energy prices, and now we have the increasing use of yieldcos.

If we were to invest in a yieldco, we would be looking for a diverse portfolio.

One such yieldco that we like is NYLD, which focuses on solar and wind energy, but also has an interest in traditional gas plants. Let’s not forget there have been other investment portfolios, such as Real Estate Investment Trusts, that had an uncertain beginning.”

He highlights that the unforeseen oil price fall has been the major issue for yieldcos, and renewable energy companies to attract financing.

Additionally, the economic uncertainty in the global markets, due to the situation in China and in Greece, has also taken their toll.

He explained, “Yieldcos are

a new vehicle, and the sponsor of the yieldco is very important. Interest in these stocks will come from investors seeing a good business plan, with healthy cash flow, so they can raise the dividend for any stocks.”

Volatility in yieldcos and renewable energy company share prices has been exacerbated by investors who are looking only in the short term, King believes. That short sightedness needs to be replaced by investors that have an eye on the longer horizon.

Despite the current conditions, King is optimistic about the future for renewable energy investments, although that optimism may diminish if a Republican president is elected in 2016.

King added, “I don’t think it will be an entirely smooth path, but I am positive for renewable energy stocks in the short and medium term future. There is a thirst

for renewable investments and exploring alternative energy, as there are some nuclear facilities that are being mothballed. And there have been bankruptcies in the coal plant industry, and coal still produces half of the United States’ electricity.”

Only time will tell whether investors will see yieldcos and renewable energy as the future. IFM editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

51

52

Route to a International Finance Magazine Jan - Mar 2016

POWER

53

green baseload Jan - Mar 2016 International Finance Magazine

Grid-scale storage could obviate the need for back-up fossil fuel power plants and effectively make wind and solar power baseload generation

O

wind and solar power baseload generation.

Grid-scale storage sites are national infrastructure facilities that can absorb the output of wind or solar farms, and then sustain level output for hours before requir-ing recharging.

“We’re moving away from a world where there are big, powerful, centralised power stations that provide a strong backbone and supply power all round. That has worked very well, but it is untenable. It is untenable because it relies on fuels that will eventually run out, have volatile prices and are

PHES site at Glyn Rhonwy, North Wales

»

54

ne of the major drawbacks of some forms of clean energy generation is the intermittency of source. Solar energy can only be produced during daylight hours and is more reliable in the summer months of temperate countries. Wind cannot be relied upon to blow at times of high demand. In fact, wind power is often most plentiful during night hours when demand is low.

However, grid-scale storage could obviate the need for back-up fossil fuel power plants and effectively make

Tim Evershed

International Finance Magazine Jan - Mar 2016

polluting our world,” says Dave Holmes, Managing Director, Quarry Battery Company.

He continues: “The way we’re solving that is through renewable power. The problem with renewable power is that it is intermittent and unpredictable. It is not difficult to generate the power.

Wind works. Solar works. It is not that we’re not making enough energy; it is that we don’t make it exactly when we want it.

“In the old world, we moved power through space using heavy infrastructure and wires. What we need to do with renewables is move the energy through time rather than space. We can’t have a low-carbon world without storage.

“We need storage so we can use the renewable generators we’ve already built more efficiently. You can keep on building renewables but there comes a point where you build a new wind far but you have to curtail it so much that it is not worth it. You need a battery to make it more effective.”

This is where grid-scale storage has a role to play.

It performs the role of an enormous battery that can store the energy and then release it as required.

Globally, the majority of grid-scale storage facilities utilise pumped hydro technology and a large

We need storage so we can use the renewable generators we’ve already built more efficiently.

You can keep on building renewables but there comes a point where you build a new wind far but you have to curtail it so much that it is not worth it. You need a battery to make it more effective Dave Holmes, Managing Director, Quarry Battery Company

POWER

number of Pumped Heat Electrical Storage (PHES) schemes are under planning and construction at present. PHES is dominant not only because is it capable of providing extremely high capacities of storage, but also because it is relatively low cost. In addition, PHES facilities typically have operational lives in excess of 125 years, requiring only simple and environmentally benign maintenance for continued operation.

Some PHES sites are repurposed brownfield land, including quarries, while others would use coastal features and seawater. Others still would harness existing fresh water reservoirs.

Governments around the world have generally been slow to realise the benefits of grid-scale storage although there are some notable exceptions. As might be expected from a country that has invested heavily in green energy, Germany has an impressive number of

PHES sites.

California has a very aggressive low-carbon strategy being supported by immense storage capacity.

Builders of new generation capacity in the US state are required by law to demonstrate that it will be connected to storage capacity.

In Portugal, where the government has promoted offshore wind capacity, it has legislated the requirement to linking generation capacity to storage capacity at a ratio of three-and-a-half to one.

However, Holmes says the UK is one country that is lagging behind. “Other countries have started to team renewables with gridscale storage so that surplus output is captured for use later when the sun fails to shine or the wind fails to blow. However, the UK has so far stuck to paying renewable generators to reduce output when there is surplus power, and using fossil fuel generation to fill

in the gaps when weather conditions result in little or no renewable generation.”

According to models produced by Professor Phil Taylor of Newcastle University, were the UK’s fossil fuelled back-up replaced by 10GW/50GWh of PHES storage, it would enable a 31GW wind fleet to deliver the same amount of useful electricity as a 40GW wind fleet.

Some benefits that the model predicts: • Saving £3.6 billion a year in decarbonisation costs • Mitigating the volatility of renewables • Enabling 10GW of thermal back-up to be stood down • Reducing carbon emissions by 5 million tonnes a year • Increasing grid resilience Professor Taylor says, “A smart grid that responds to customer demand and

reduces power cuts or other events on the network gives Britain the opportunity to create one of the most secure power grids in the world. It merely needs to exploit the industrial and academic expertise and array of energy storage options at its disposal.

“Having more energy flows that move in both directions on the grid will push ageing grid infrastructure to its limits and will not be able to support a green baseload.

“However, the hardware and software in a smart grid provides greater control and automation over the way the grid is managed. It not only helps regulate and balance the grid, but also reduces energy consumption. We cannot replace the grid, but we can make it more intelligent, matching supply to demand in real time and within network constraints.”

The principles of storing green energy for use at more convenient times can work at different levels and earlier this year Tesla unveiled a revolutionary new battery for domestic use.

Professor Taylor predicts that in future we will see a smarter, more flexible power grid that will exploit other storage technologies at district, local and household levels, each of them deployed to extract the maximum benefit from their distinct abilities. However, it is at the grid-scale level where the largest benefits can be achieved. IFM editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

55

Water’s not hot T

56

o the ordinary eye, the Changoi tea factory in the green plantations of Kericho, 200 miles west of the capital Nairobi, looks like any other tea factory. But amidst the lush green fields is Kenya’s biggest photovoltaic (PV) solar project.

Launched in 2014 by Solar Century, a leading solar farm developer and UK’s most experienced contractor of ground mounted solar installations, the Changoi solar farm is a first of its kind in Kenya. It produces 1 Megawatt peak (MWp) of electricity to run the energy-intensive tea factory.

The clean energy project could generate 1,600,000 kWh of power annually with an estimated carbon emission savings of 1,200 tonnes per year. It is one of only six systems in the world using a hybrid technology which integrates solar power with the grid and a standby generator.

A similar project is coming up in Nairobi where the country’s largest shopping mall, the newly constructed

International Finance Magazine Jan - Mar 2016

Kenya is keen to reduce dependence on hydro power, which has been heavily affected by erratic weather patterns

Garden City Mall, recently became the largest solar carport project in Africa, producing enough electricity to power 550 urban homes every year.

This solar car park, another innovative approach to clean energy access, generates electricity that is being used by retail tenants to power facilities such as the lights and escalators in the mall.

The two projects, together with other solar, biogas, wind, geothermal and hydroelectric power projects are Kenya’s answer to climate change and costly fossil fuel imports.

Kenya has some of the world’s most abundant and least exploited renewable energy sources. According to a report by Scaling up Renewable Energy in low income countries Program (SREP), Kenya’s geothermal potential is nearly 7,000 MW, enough to meet around three times the country’s annual energy use. Yet, only over 347 megawatts of this is exploited.

Interestingly, conservative estimates show that solar energy, though widely

Amoxers Wachira

popular, is the least exploited, partly due to expensive cost of equipment.

The need for electricity is undeniable. Only 23 per cent of Kenyans are connected to the grid, World Bank figures show. This translates to a majority of the 43 million population grappling in darkness.

Take the case of Nelly Kinyanjui.

She has lived in darkness all her life.

In the mountainous village in central Kenya where she hails from, she and her peasant neighbours have used firewood to cook and kerosene to light up their homes. But there is hope. A new wind power plant, estimated to cost the government millions of dollars, is coming up, not far away from their village.

The Kenyan government, keen on bridging the gap, has embarked on exploiting renewable energy sources other than hydro power, which has

POWER

been heavily affected by erratic weather patterns. These include solar and wind energy.

To start with, it launched an ambitious plan to light up all primary schools in the country. So far, the progress can be felt far and wide as more than 5,000 schools, as of last year, had been electrified through the national grid and an additional 2,460 schools through solar at a cost of Kshs11 billion and Kshs4 billion, respectively.

Enthusiastic entrepreneurs have taken the cue from the government.

They are currently lighting up large swathes of the country through lowcost solar micro grids. One of these is M-Kopa Solar, which provides “pay-as-you-go” renewable energy for off-grid households in Kenya, Uganda and Tanzania.

M-Kopa Solar provides power to more than 140,000 households in East Africa for $0.45 per day, and is adding more than 4,000 homes each week. The company’s customers make an initial deposit, roughly $30, toward a solar panel, a few ceiling lights, and charging outlets for cell phones — a system that would cost about $200. Then they pay the balance in installments through a widely used mobile banking service. The solar units are cheaper and cleaner than kerosene, the typical lighting source.

“Solar is a massive opportunity for entrepreneurs and investors alike,” Jesse

Jan - Mar 2016 International Finance Magazine

57

58

Moore, managing director at M-Kopa Solar, says.

Another company has imported more than 40 battery powered motorbikes for hire in rural areas. Charles Ogingo’s Pfoofy Power project is based on recharging the batteries at any electricity point, but reducing costs of the same through solar–powered charging stations. Creative, bottomup solutions like these are emerging across Kenya.

Perhaps, it’s these simple but efficient interventions that have made the Kenyan government, through its sole power provider, Kenya Power to consider adding more alternative power to the grid to supplement hydropower, which has been heavily affected by erratic rain patterns.

Kenya Power Chief Executive Ben Chumo says use of renewable sources will reduce the cost of electric-

ity to customers. A good example is The Lake Turkana Wind Power project (LTWP), which is poised to provide 300 MW of clean power to the grid by taking advantage of a unique wind resource near Lake Turkana in northwest Kenya.

Using the latest wind turbine technology, LTWP will upon commissioning in mid-2016 provide reliable and continuous clean power to satisfy up to 17% of Kenya’s total need. Additionally, Kenya plans to set up its a first nuclear power plant with a capacity of 1,000 MW by 2025, according to the Kenya Nuclear Electricity Board (KNEB), with ambitions to boost that to 4,000 MW by 2033, and to make nuclear electricity “a key component of the country’s energy” production.

With a record $10 billion in investment in 2012 and 2013, South Africa is the

region’s clear leader for clean energy development.

Nigeria is second only to South Africa in terms of installed power systems at 10.2 gigawatts. Kenya is raring to fight with the giants in this space. Kenya Power is doing this through Public Private Partnerships.

Recently, the government started buying clean energy from various institutions to supplement its generating capacity. One of these is Strathmore University, which signed a deal that would see it sell 0.25 MW of solar power to the grid, in a one-of-a-kind partnership. So far, the government is buying more alternative energy from three more suppliers, further boosting electricity access. IFM editor@ifinancemag.com

Kenya plans to set up its a first nuclear power plant with a capacity of 1,000 MW by 2025, according to the Kenya Nuclear Electricity Board (KNEB), with ambitions to boost that to 4,000 MW by 2033, and to make nuclear electricity “a key component of the country’s energy” production Ben Chumo, Kenya Power Chief Executive

The Climatoscope New Energy Finance report indicates that Kenya is set to install 1.4 gigawatts of power over the next two years

International Finance Magazine Jan - Mar 2016

POWER

59

Jan - Mar 2016 International Finance Magazine

INTERVIEW INTERVIEW

60

‘We found a double opportunity in renewables’ Miriam Mannak

IFM speaks to Diego Biasi, CEO of Quercus Assets Selection

International Finance Magazine Jan - Mar 2016

POWER

Diego Biasi, CEO, Quercus Assets Selection Jan - Mar 2016 International Finance Magazine

INTERVIEW INTERVIEW

W

hilst investing in European renewable energy projects is his core business, Italian businessman Diego Biasi is eying the African market. This continent, he says, is alive with possibilities, particularly from an energy point of view. Excerpts from an interview:

62

Could you tell us a little bit about you and your company?

I have been in investment banking for many years.

I set up Quercus Assets Selection with my late business partner Simone Borla.

After the financial crisis, we wanted to do something different, and so we started to look into renewable energy.

The sector was booming in Europe at that time. We are talking about 2008 and 2009. We found a double opportunity in renewables: the opportunity to make a

profit and the opportunity to do something good for the environment. We also wanted to go after something that allowed us to utilise our past experience in investment banking as well as our network of investors and other connections.

So we set up an investment fund geared towards green energy, in which we treat renewables as a new asset class. The fund was authorised in 2010. Simone passed away last year, so at the moment I am the sole owner of the business.

What are the objectives of your renewable energy funds?

Its mission is to invest in specifically and solely in solar, wind and biomass.

Between the authorisation of the fund five years ago and now, we have managed to raise enough capital to become the world’s fifth largest, non-listed invest-

International Finance Magazine Jan - Mar 2016

ment fund that specialises in renewable energy. We are mainly focusing on Europe at the moment in terms of operations. We started in Italy. Our first fund there was geared towards solar projects. We launched a second fund, a European multitechnology fund, followed by other funds. Whilst focusing on Europe, we are looking at opportunities elsewhere too, particularly in Africa and Middle East.

What African and Middle Eastern regions are you investigating?

We are looking at Morocco and Egypt, and South Africa. In the Middle East, we are investigating Iran.

In Morocco, we will be focusing on solar and wind, and in South Africa, Iran and Egypt only on solar.

We want to set up separate renewable energy funds for each country. We are convinced that Africa will

“

We have managed to raise enough capital to become the world’s fifth largest, non-listed investment fund that specialises in renewable energy Diego Biasi, CEO of Quercus Assets Selection

INTERVIEW POWER

be our next big step after Europe. In some of these opportunities, we play more of an advisory role, and in others, we will take the investment approach.

A number of projects could take place in the short and medium term, over the next two to three years. Some, however, could go live in a few months.

What makes Africa interesting from a renewable energy point of view?

The African market has a huge potential. Firstly, there is a large demand for and a massive shortage of energy across the continent.

Secondly, the raw material – wind and sunshine

– is largely available, much more so than in many parts of Europe. You might not expect it, but the United Kingdom is Europe’s most wanted and most active solar market. In Africa, the solar conditions are much better.

Thirdly, renewable energy infrastructure, such as turbines and panels, is becoming cheaper and better due to research development.

This makes Africa a great opportunity for the development of and investment in renewable energy.

What are the main challenges of developing and investing in renewable energy in Africa?

The main risk and thus

main challenge in Africa is the certainty of the regulations and the rules of the game. It is not so important whether the rules will change or not in future, but how authorities decide to change them.

The renewable energy sector in Africa, like anywhere else, is mainly supported by incentives. These are predominantly controlled by governments – who are in charge of the regulations.

The thing is that investing in renewable energy, like in any other field, requires planning. It can take two to three years between pitching a proposal to your investors and deploying the money you have raised.

The regulatory conditions

you have described in your proposal are based on what you know at that time. That is why these should ideally remain the same for at least three years.

Other risks and challenges in Africa include variables like the stability of the local currency, interest rates, counterparty risks and whether the government is likely to adopt retractive measures that will change the sector’s regulations. Despite that, we believe Africa has huge potential. IFM editor@ifinancemag.com

Investment in renewable energy in Africa •

The 2015 Global Trends in Renewable Energy report by the United Nations’ Environmental Programme (UNEP) suggests that Kenya leads the African pack in terms of securing energy investments in 2014, with $1.3 billion. That is more than the combined total of the preceding three years.

•

In September 2015, the Nairobi-based African Renewable Energy Fund (AREF) hit its $200 million fundraising target. The capital will be invested in grid-tied renewables in sub-Saharan Africa (excluding South Africa). The African Development Bank (AfDB) is the largest investor. The bank has put $55 million towards the fund.

•

Deloitte, in its 2014 African Construction Trends Report, says that energy and power projects constituted 46% of new large construction developments in Sub-Saharan Africa last year. The bulk of these projects revolved around solar, wind, hydro and other renewable energy sources.

•

Investment in renewables in Africa is growing. It is, however, not a recent trend: between 2011 and 2012, the value of green energy investment in Africa jumped by 228%, says the United Nations.

•

A new report by the Frankfurt School for Climate and Sustainable Energy Finance says that South Africa was one of the biggest investors in renewable energy. Last year, the country invested $5.5 billion in the sector.

Jan - Mar 2016 International Finance Magazine

63

Ian Thomas, Managing Director, Turquoise International Limited International Finance Magazine Jan - Mar 2016

INTERVIEW POWER

‘The voluntarY side will help drive things’ But Ian Thomas, Managing Director at Turquoise International Limited, a merchant bank specialising in energy and environment, believes government policy will continue to propel the renewable energy sector in the near future.

Excerpts from an interview: Tim Evershed What will drive demand for renewable energy over the next five to 10 years?

In many places, policy is going to remain a significant driver, especially in places where renewables can’t compete on pure cost of production basis. Although we will continue to see the cost of that energy fall, it is still going to be driven by government policy.

However, we will find increasing use of renewables, particularly solar but also wind, in places where government policy might be favourable but doesn’t necessarily give financial support. That is because on a competitive cost basis they will compete, in the case of solar, where there is plenty of solar radiation and where the grid coverage is not fantastic. Places like islands and undeveloped countries where grid coverage is poor to non-existent and all generation is localised.

We are also seeing large corporations sourcing all their energy supply from

renewable sources. We expect to see more companies making those commitments and carrying through on them. That might not add up to the same as a big country de-carbonising, but the voluntary side will help drive things.

Would better storage options drive industrial and domestic use?

If you had storage options for all sizes from household up to grid-scale that would be a game changer. There’s a lot of work happening on this and a lot of excitement being generated, but not a lot is going to change in the short term, particularly at the domestic level. There are big gains to be made at the domestic level, but the costs need to come down significantly to make it work.

How important is ongoing government support in driving demand?

Globally, it has been the biggest driver of demand to

date. The vast majority of renewable energy capacity has been installed because of one type of government incentive or other. In many cases, the absence of government policy means the sector won’t grow. If there are green tariffs or subsidies available for these assets, then typically they are quite attractive to investors.

What are the most exciting developments in the clean energy sector?

The most important developments are often not exciting ones in terms of capturing the public’s imagination. A lot of the broader opportunities to clean energy are related to making the bottom line better. Energy efficiency, reducing the cost of doing business and, in that sense, it can just become part of what businesses do because it makes sense to rather than because it is going to change the world.

For example, LED lighting was at zero five years ago but is already account-

ing for 10-15% of the global market. It is obviously a better solution for lighting almost anywhere and in aggregate it can make a big difference to energy consumption.

What are your predictions for the next five years?

It looks like some of the significant technology – solar, wind and even the outliers like marine energy, which hasn’t had a huge impact yet – will continue to reduce in cost.

Improvements in technology and material, and better engineering allied with increased scale can be combined with holding the line of the pricing of carbon means those technologies will become competitive.

Not necessarily cheaper but competitive for power generation. IFM editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

65

Oil rules,

but it’s time to look up

66

Saudi Arabia is flourishing thanks to oil revenue, but some are advocating turning to the Sun for its energy needs Suparna Goswami Bhattacharya

International Finance Magazine Jan - Mar 2016

POWER

F

or the longest time, Saudi Arabia has been associated with oil. For more than three decades, it has managed to maintain its leadership position as an oil powerhouse. So much so that it has managed to run its entire economy just by exporting oil.

Cut to 2014, oil prices declined steeply worldwide thanks to lower demand from the US. Add to this the fossil fuel divestment movement — many countries are pledging to go green and reduce their fossil fuel consumption.

Not surprisingly, the Saudi petroleum minister recently admitted that ‘in the long run, it is more economical to go solar’. Experts say the country is left with no choice.

One could argue that investing in solar during high oil prices is the most opportune time. Since the price of oil has declined, the question is whether it makes economic sense for Saudi Arabia to make the shift to solar now.

Browning Rockwell, Executive Director, Saudi

Arabia Solar Industry Association (SASIA), says, “Saudi’s shift to solar is not solely dependent on the price of crude. Shifting to solar during low oil prices may be more costly in the short term but the oil that is being consumed domestically has a significant fixed cost in the annual budget.”

Essentially, the old oil guard may see the extraction cost of oil as near zero, but the nation has to eventually go solar to hedge against future energy cost increases.

The move to solar might seem odd to many. But the Saudis will face a problem if they do not make the shift soon. The country burns a quarter of its oil output for domestic consumption. It also burns one million barrels (15% of exports) of oil per day to generate electricity, and demand is growing.

With electricity subsidised and on offer for as less as $0.01 per kilowatt-hour, the government is concerned that increase in consumption will eat into its oil production. Electricity consumption, which is growing at 11% annually, is one of the highest in the world de-

spite the population standing at only 30 million.

The fears were backed by a report from Citigroup, which states that if domestic demand for oil continues at current pace, Saudi Arabia could be a net importer by 2030. It is tough to maintain leadership position when domestic demand is so high.

Jeremy Leggett, Founding Director of Solarcentury and Chairman of Carbon Tracker Initiative, says, “The Saudis are burning too much oil in electric power plants, threatening future oil export revenues. They need to replace that with solar as soon as possible.

The Saudi government has said as much themselves, but need to act quickly.

They have hardly any solar installed as things stand.

They announced a massive solar programme some time ago, but are yet to implement it.”

King Abdullah City for Atomic and Renewable Energy (KACARE) was launched several years ago and has failed to develop any substantial solar project other than a few pilots.

67

Saudi’s shift to solar is not solely dependent on the price of crude.

Shifting to solar during low oil prices may be more costly in the short term but the oil that is being consumed domestically has a significant fixed cost in the annual budget.

Browning Rockwell, Executive Director, Saudi Arabia Solar Industry Association (SASIA)

Jan - Mar 2016 International Finance Magazine

POWER

68

There are some challenges. “While Direct Normal Irradiance (DNI) is significant in KSA, the desert sand, and the hazy and windy conditions present unique problems. For instance, solar panels get dusty easily because of which owners of solar farms lose 0.8% efficiency per day and up to 60% after dust storms,” explained Rockwell.

“But things can be worked out. It is not rocket science,” says Leggett adding that the country has enough talent needed to venture into solar.

Additionally, the population under 30 years of age is prosolar. “They are looking for jobs outside the oil sector.

Most of them have studied abroad and know the potential of the solar sector,” says Rockwell.

To take advantage of this new opportunity, MENA governments and private sector organisations will have to work together to rationalise energy pricing, introduce appropriate

regulations to accommodate solar power in the generation mix, develop large-scale projects, and, ideally, help develop local companies of the solar value chain.

Abdulmohsin Al Shoaibi, managing partner, DarSolar LLC, says that the transition will take time. “Anything new takes time to be accepted by everybody. At present, positive measures have been advanced to lay out the proper legislation, policies and regulatory framework to make this plan a reality in the very near future,” he says.

According to Rockwell, the government needs to announce a realistic short term programme. “Government organisations need to give authority and made accountable to implement the solar programme. For instance, KACARE was never given any real authority and accountability. The private sector also needs leadership from a prominent Saudi national committed to solar

International Finance Magazine Jan - Mar 2016

energy development.”

With the rest of the world pushing for green energy, oil is looking like a depreciating asset. The late Sheikh Rashid Bin Saed Al Maktoum, long time emir of Dubai and prime minister of the United Arab Emirates, once remarked: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.” IFM editor@ifinancemag.com

The Saudis are burning too much oil in electric power plants, threatening future oil export revenues. They need to replace that with solar as soon as possible. The Saudi government has said as much themselves, but need to act quickly.

They have hardly any solar installed as things stand. They announced a massive solar programme some time ago, but are yet to implement it Jeremy Leggett, Founding Director, Solarcentury and Chairman of Carbon Tracker Initiative

70

Green

bonds in

bloom International Finance Magazine Jan - Mar 2016

The bond between investors and energy efficiency is growing Peter Taberner

POWER

G

reen bonds are now an emerging force in the financial markets, as speculation in energy projects is increasingly at pole position in the minds of investors. Dealogic figures revealed the sharp escalation that green bonds are currently achieving.

In 2012, these bonds accounted for a relatively minor $353 million of global investments but dramatically went up to $32.6 billion in 2014. In the course of that two-year period, the number of green bond deals rose from just 4 to 80. For the first half of 2015, the green bond market continued its progress, with just over $18 billion being invested through 64 transactions.

Europe has been the powerhouse of the green bond market with 54 transactions being completed in 2014.

North America is the next largest market followed by Africa, Asia and Australasia,

which are all still at the fledgling stage.

According to Dealogic, TenneT Holding BV has been the second largest issuer of green bonds in the first half of 2015. The company transmits electricity via the high-voltage grid in the Netherlands and large parts of Germany. All of its shares are owned by the Dutch finance ministry.

Jeroen Dicker, the group treasurer of TenneT, explained their interest in green bonds: “There is a clear focus from society, private individuals and corporates on social and responsible entrepreneurship. Sustainability is one of the guiding principles in our daily work at TenneT. We are in the heart of the matter in both Germany and the Netherlands, as a company whose main task is to keep society connected to a constant and reliable supply of electricity.”

He enthused: “We saw a surge in interest from

our existing institutional investors, in addition to new investors, who focused on green bonds and corporate social responsibility related financings, such as KfW. The green bond gave us a lot of comfort early on, as we had certain socially responsible investment funds signing up for large amounts. This gives you the confidence to go towards the low end of the price range.”

TenneT believe that a strong corporate social responsibility performance of a company or project will become, in the future, a conduit for investors to be allowed to invest.

If the green bond market continues to mature, there may come a day when it is more expensive not to have green credentials behind a bond, as investors will only invest in companies that support society’s sustainability goals.

Dicker opined, “Although there is still a difference in approach between investors

“

Although there is still a difference in approach between investors from different countries within Europe, I hope that Europe will become one of the front runners of future green bonds Jeroen Dicker, the group treasurer of TenneT

Jan - Mar 2016 International Finance Magazine

71

72

from different countries within Europe, I hope that Europe will become one of the front runners of future green bonds.”

Another major issuer and underwriter of green bonds, and also based in the Netherlands, is ABN AMRO bank. They have issued bonds mainly for sustainable real estate, and have also been interested in financing offshore wind projects.

Joop Hessels, who leads the company’s green bond desk, said, “Initially in 2007, the green bond market was investor driven when the development and supranational banks, like the European Investment Bank, began issuing green bonds followed by the World Bank. The market is now more mature, and we have active dialogue with issuers and investors on

the practical implementation of an energy transition strategy, like the energy efficiency improvements of existing buildings.”

ABN AMRO can now boast of a €1 billion order book, which swamps the €500 million issued from their original green bond.

There is also a lot of demand for green bonds from the secondary market.

So far, the company’s green bonds have performed better at a rate of 10 basis points, compared to other bond ventures.

Geographically, the main tranche of investment has arrived from the Benelux countries, as there is great interest in sustainable investment from the Netherlands. They account for a third of the investors, followed by German speaking countries that comprise 27% of the green bond ventures.

International Finance Magazine Jan - Mar 2016

French companies make up 26% of the investments, with 11% of capital from the UK and Ireland.

Asset managers have been the most interested, and they represent 39% of the speculation. Banks’ outlay on the green bonds totals 28%, with 13% from pension funds, plus 11% from insurance companies. And 7% of the investment has come from governmental and supranational organisations.

Hessels explained, “Most of the investors, 60% of them, have a dedicated interest in investing in green bonds due to the positive effect of them. It’s a global market I expect to grow. Besides the continued interest from Europe, 35% of issuers have come from the US this year alone. And there is increased interest in Asia, from Indian financial institutions to Japanese development banks, and China has completed its first green bond deal.”

From the speculators’ point of view, Manuel Lewin, head of responsible investing at Zurich Insurance, explained why his company has been so enthusiastic about green bonds. “This type of investment allows us to integrate environmental, social, and government risk opportunities into a securities market.

As 85% of our assets are fixed income securities, the green bond is an almost a bespoke addition to our portfolio, and enables us to play a positive part in managing climate risk.”

In 2013, Zurich Insurance announced that they would invest up $1 billion in green bonds. Their confidence in

this investment has been so unequivocal, that they increased their commitment to $2 billion in 2014.

“The increase of green bond popularity on a global scale is down to many issues. Pension funds and other insurance companies are trying to align their investments with current themes like climate change.

There is a move away from philanthropy to corporate citizenship,” Lewin continued.

The company are content with the returns which they have acquired, as the green bond they regard as a “plain vanilla” bond.

The security of the bond will depend on the issuer, with the credit rating determining the scale of the risk involved.

Lewin opined, “We are seeing many different market segments — from Chinese banks to European utilities — issuing bonds. I think that the expansion of green bonds will continue to develop on a worldwide scale after the real take off in 2014. I see a lot of potential in the municipal issuer market in the United States, and would expect more issuers from the emerging markets.”

In other words, the bond between investors and energy efficiency looks set to grow. IFM editor@ifinancemag.com

POWER

Investor Allocation by Type 12yr

6yr 5%

3%

7%

2%

4% 15% 42% 26%

61%

35%

Source : RBS

Fund Managers

Fund Managers

Insurance & Pension funds

Insurance & Pension funds

Supranationals

Supranationals

Bank

Bank

Other

Other

Investor Allocation by Geography 6yr

73

12yr 6%

10%

12%

5%

37%

33% 11%

10%

13% 13% 22%

28% Germany & Austria

Germany & Austria

France

France

Benelux

Benelux

UK & Ireland

UK & Ireland

Nordic

Switzerland

Other

Other

Jan - Mar 2016 International Finance Magazine

Stable return, low risk and long-term vision

That’s the attraction of renewable energy projects for Allianz Capital Partners Peter Taberner

74

International Finance Magazine Jan - Mar 2016

POWER

I

nvestments into renewable energy are now rising on a global scale, and Allianz Capital Partners (ACP), has been a prominent force in creating new ventures for wind and solar power across Europe.

Since 2005, ACP has amassed a renewable energy portfolio of 54 wind farms and 7 solar power parks.

These are mainly situated in Italy, Germany, France, and Sweden, on a buy-and-hold basis.

The combined accumula-

tion of energy from these outlets reaches just over 1,500 megawatts, and is now enough to generate power for 800,000 homes.

A significant €2.5 billion has now been invested by ACP in renewable sources over the course of a decade.

The origins of the company’s vast outlay on green projects stems from an investment team that was set up in 2004, to purely focus on renewable investments.

A year later, ACP’s forayed into the energy market with a wind power investment

in Italy. Once this had been achieved, the floodgates opened, with wind farms in Germany (2006) and France (2008).

The milestone of producing 1,000 megawatts was reached in 2013, as the company invested in Sweden for the first time, with a new wind farm to add to the growing collection.

This year, the company made another groundbreaking move by acquiring four wind parks to enter into the Austrian energy market. All are located

within a 70 kilometre radius of Vienna. Two of the wind parks have been completed, and are now a full part of the portfolio.

The focus of all the investments is to produce the highest quality wind and solar parks to cement a wellearned reputation, with a preferred investment size of €30 to €100 million.

ACP may have total ownership of their energy plants, but they will also consider joint ventures for bigger investments to maximise their yield from

75

Jan - Mar 2016 International Finance Magazine

Key performance risks / mitigation strategies Regulatory stability

Technical performance

Invest in countries with solid political support

Diversification of Original Equipment Manufacturers across technologies

Variety of remuneration schemes (fixed tariff / certificates / merchant power)

1

Portfolio diversification

2

Resource volatility

Long-term power prices

Diversification

4

by location by resource (wind & solar)

3

naturally, as we are a 100% owner of the solar and wind parks we invest in, and most opportunities fall within this range. Smaller investments would not justify our management and due diligence efforts. We have some assets larger than €100 million, and we would like to do more but larger opportunities are rare.”

According to ACP, yields

from new investments in wind and solar offer returns in the region of 5% to 6%, and they are stable due to the longevity of the ventures. The deal flow that the company receives is largely from the accumulation of influential contacts in the renewable energy market.

Before a project site is selected, there is a rigorous process in place to

2004

Over € 2.5bn invested

Over € 2bn invested

1st Swedish wind farm investment

1st French solar park investment

1 stsolar investment in Italy

1st French wind farm investment

1st German wind farm investment

1st wind investment in Italy

1,503 MW

Barcelona 1,217 MW

Munich

1,005 MW 716 MW

Brussels

763 MW

597 MW

Frankfurt

410 MW 293 MW 160 MW

16 MW

2005

2007

2008

2009

International Finance Magazine Jan - Mar 2016

2010

2011

2012

Consultation of leading power market experts for long term price assumptions Base case sensitivity tests / scenario analysis

Conservative production assumptions

10 years of steady growth to become a major European player

2006

Long term Operations and Maintenance (O&M) contracts with good warranties Active asset management and improvement

ACP Global Offsite 2015 – Renewable Energy – AuM and Baseline planning

Investment team set up

76

renewable energy.

The attractions for ACP to invest in renewable energy projects are simple. They provide a stable return with low risk and a long-term vision.

David Jones, head of renewable Energy at ACP, explains, “I have worked within the energy sector since the beginning of my career. It’s the challenge of commercialising sustainable energy as part of the transition to a low-carbon economy that I find particularly attractive. Furthermore, renewable energy assets have maturities of 25 to 30 years or more, which is an ideal fit for the long-term investment strategy at Allianz.

The yields from wind and solar power are attractive, much higher than many other asset classes, and they’re totally uncoupled from the ups and downs of the financial markets.

“The ticket size comes

2013

2014

July 2015

Electrical generation capacity

decipher which site would be the most beneficial to the company’s renewable portfolio. There is a review of technical performance, which looks at the original equipment manufacturers and their diversification across all technologies.

Other leading issues that are observed are long term operations and maintenance contracts, and active asset management. Consultations will then begin with power market analysts, on how the long term prices will fare, to ensure an appetising return on any investment.

To arrive at a conclusion, several sensitivity and scenario tests will be performed to ascertain the financial viability of a site that has been chosen.

Finally, the resource volatility of wind and solar power will be appraised, with predictions made on the most conservative production assumptions.

After all strategic fit and risk return profiles have been completed, due diligence will begin. All conclusions of the negotiations will then be returned to the

POWER

Portfolio structure and approach Investment Approach/ Opportunities Top quality onshore wind farms and solar parks Preferred investment size EUR 30mn - 100mn No external leverage Core markets within Europe with a strong regulatory framework for renewables Stable and predictable cash flows Low risk long-term cash yield profile 100% ownership but industrial joint ventures considered for larger or more challenging investments

77 investment committee, who will then decide on the final approval of a site.

Although the first stage is to ensure that the country that ACP invests in has regulatory stability, with solid political support for green energy investments, including such incentives as the feed-in tariff scheme.

According to United Nations’ 9th “Global Trends in Renewable Energy Investment 2015” report, in Europe, investment into renewables seems to have lost its appeal, with a rise in spending of less than 1% last year.

Regulatory regimes are thought to be a major issue why capital outlays have stalled.

In the UK, subsidies for onshore wind farms have been slashed altogether.

Germany and Italy have followed suit in reducing government support for solar energy.

On what an attractive regulatory regime should consist of, David Jones says, “Regulatory risk is the most important aspect of a renewable energy investment. It has materialised in several markets such as Spain and Italy. As regulators seek to control the rate of investment going forward, they should only amend incentives, in a way that does not negatively affect investments that have already been made.

“A reliable regulatory framework, political support and predictability are very important for our investments. Therefore, we seek to invest only in countries with unyielding political support,

and make sure that we have a variety of remuneration structures in our portfolio in order to further mitigate and diversify this risk.” IFM editor@ifinancemag.com

“

A reliable regulatory framework, political support and predictability are very important for our investments David Jones, head of renewable Energy at Allianz Capital Partners

Jan - Mar 2016 International Finance Magazine

OPINION

OPINION

Tony Moroney

78

The illusion of growth in the UK mortgage market In the myopic pursuit of new mortgage lending volumes, lenders seem to have lost sight of existing customers

International Finance Magazine Jan - Mar 2016

OPINION

T

he UK economy is in growth, with GDP reported to be up 0.7% in the second quarter of 2015.

This figure, which looks set rise to 2.6% over 2016, is causing many to predict a rise in interest rates within a short time frame. Growth and confidence have also initiated an apparent return of growth to the UK mortgage market and, of late, the remortgage segment.1 Mortgage lenders and mortgage brokers are set to further benefit from an increase in customers remortgaging and, for some time, have been aggressively competing to attract new customers. Customers are seeing exceptional value as the pricing differential with

1

existing customers continues to broaden.

While lending strategies, at face value, appear to have been successful in their immediate goal of driving new business volumes, fixed-rate products have increased to 90% in 2014, up from 50% in 2010, creating a new dynamic for ongoing reoffers to existing mortgage customers. Furthermore, our analysis of the data shows that new mortgage pricing has actually reduced profitability for most banks.

Critically, in the myopic pursuit of new mortgage lending volumes, lenders seem to have lost sight of existing customers.

While an aggressive acquisition strategy enables banks and building societ-

ies to report larger mortgage lending volumes (and perhaps market share), in the absence of effective retention strategies, it results in lenders having to lend even more just to stand still, never mind achieve net lending growth. Therein lies the paradox, as retaining an existing customer base is far more cost efficient and, with the right tools, easier to plan for than customer acquisition.

In 2007, at the mortgagelending peak, to grow total net lending by £100 required lenders to advance £350. In 2014, banks would have needed at least £850 of new lending to achieve the same net lending growth.2 Experience suggests that this is an unsustainable mis-

judgement of fundamentals of the lending market, yet it is currently underreported in the mainstream media.

The combined factors that brought about such an unbalanced approach from lenders are complex but in short include new regulation, increased competition for the most credit-worthy customers, a historically low bank base rate, and relatively low levels of new customers entering the market.

The unskewed reality is that lenders are running hard to effectively stand still. Figures show that of the £300 billion written in the 18 months to June 2015, net lending was just £35 billion (12%).3 Net lending totals have long been a problem, but

79 Office of National Statistics, Gross Domestic Product Preliminary Estimate, Quarter 2 (Apr to June) 2015.

http://www.ons.gov.uk/ons/dcp171778_412372.pdf 2 CML quarterly Gross and Net lending press releases 3 IBID.

Jan - Mar 2016 International Finance Magazine

OPINION

80

mismanagement of back books — and of existing customers in particular — is now also on the radar of the regulatory authorities, which are looking for fair pricing, open lines of communication and timely availability of relevant information. A reliance on customer apathy or information asymmetry is no longer acceptable.

Incumbent mortgage lenders must be wary of ‘unloved’ existing customers defecting to competitors,

including new entrants in the UK mortgage market.

Although the top six players continue to control over 70% of the market, we are seeing competition from brands such as Tesco Bank and Virgin Money. Apart from new banks and financial institutions attracting customers away, customers will and are turning to the

evermoretrusted alternative finance providers.

These primarily online alternatives are growing in size, availability and levels of consumer trust. The challenge is clear: ‘protect your mortgage assets or lose them’.

In reality, against a backdrop of increasing rates and intensified competition, mortgage lenders have no choice but to face the mortgage-book retention

challenge head on. To address these trends, boards will need to redefine ‘what good looks like’ for existing customers. This will require more sophisticated retention strategies, including customer segmentation, behavioural-based pricing analytics and due regard to regulatory obligations to treat customers fairly.

The first step is to better understand what is important to your customers so that appropriate offers can be made based on a real understanding of needs. Only by doing this can mortgage lenders drive retention, book size and ultimately their return on assets. Why else should lenders expect customers to stay with them?

Building customer loyalty creates an extremely valuable asset for banks which necessitates being much more scientific to preserve and cultivate. Of course, there will always be healthy competition for new customers, but investing in acquisition alone at the expense of retention is not efficient; yet neither need be at the cost of the other.

Analysing the data held within an organisation allows lenders to collate and

We advise lenders to ask themselves three key questions: • • •

Can you profitably grow your book and offset falls in net interest margin if you need to lend £850 for every £100 of net book growth?

With 90% of new customers on fixed-rate mortgages, how do you plan to retain these customers in a rising interest-rate environment, and can you handle the operational peaks?

As intermediary lending continues to grow and as the remortgaging market returns, how do you plan to deepen relationships with customer?

International Finance Magazine Jan - Mar 2016

OPINION

81 segment customers based on preferences to determine the optimum price for any given customer. This is key to building loyalty, realising planned return on assets and treating customers fairly.

Incumbent mortgage

lenders need to respond now or risk damage to existing loan books and loss of stock-market share to competitors, both from outside and within the traditional lending space. In the current climate of new mortgage opportunities,

lenders must be careful not to neglect the opportunities and advantages they already have within their existing mortgage customer base.

The views and opinions expressed in this article are those of the author and do not necessarily reflect

the opinions, position or policy of Berkeley Research Group, LLC or its other employees and affiliates. IFM

About the Author Tony Moroney is Managing Director, International Financial Services of Berkley Research Group. He has 34 years of experience in the financial services industry, of which 28 have been in mortgages. His extensive experience uniquely combines business advisory and executive management of mortgage divisions and mortgage banks

spanning origination, servicing, arrears management, balance sheet management and governance. He has been a leading advisor on mortgages in both the UK and Ireland and has undertaken significant advisory engagements, including strategy, pricing, market-entry strategies, service diagnostic and target operating models, for both mortgage lenders

and servicers. He has also spoken at industry conferences on topics ranging from ‘risks inherent in the UK buyto-let sector’ to ‘management of credit and conduct risk in the UK mortgage market’.

About Berkley Research Group Berkeley Research Group, LLC is a leading global strategic advisory and expert consulting firm that provides independent advice, data analytics, authoritative studies, expert testimony, investigations, and regulatory and dispute consulting to Fortune 500 corporations, financial institutions, government agencies, major law firms and regulatory bodies around the world.

editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

OPINION

OPINION

Jon Louvar

82

Do you suffer from financial planning paralysis?

Jon Louvar offers a modern planning solution International Finance Magazine Jan - Mar 2016

OPINION

A

s a finance professional, you know all too well that budgeting, forecasting and planning processes can drag on for months. Whether it’s multiple scenario revisions, time-consuming consolidation reporting, or some other mind-numbing spreadsheet madness, these processes leave you suffering from what we call ‘planning paralysis’.

If you do end up with some type of result (and that’s a big ‘if’), now you also have out-of-date numbers to deal with and, worse, no real actionable items to move forward on.

Thankfully, it doesn’t have to be this difficult.

Modern solutions can create one single version of the

truth and extend planning, automation and alignment consistently throughout an entire organisation. But before choosing a solution, the finance department needs a clear understanding of what tools will actually work for your organisation and what the biggest barriers for success are. What’s the use of adding a shiny new solution into your current set-up if your users just fall back into old patterns of dumping data into spreadsheet after spreadsheet? You can’t run a high-performing business on stale data and spreadsheets.

So how do you choose the right solution for your organisation?

I’ve got some ideas. Five of them, to be exact.

Integration If there is one thing guaranteed to wreak havoc on planning cycles, it is the separation of the planning process from the ERP system. ERP stands for Enterprise Resource Planning. So it should be possible to plan in it and keep budgets and actuals together. Right?

Unfortunately, it hasn’t proven to be so easy.

Most planning solutions still require you to export summary data out of the ERP and into a spreadsheet, a data warehouse, or the cloud.

Duplication breeds chaos.

The minute it occurs: • Real-time access becomes limited • Competing spreadsheets generate version-control

nightmares Multiple data environments lead to reconciliation issues So, cut out the extra steps (and headaches). Focus on finding a solution that allows you to integrate your ERP data and your planning together into one. This integration ensures your budgets and forecasts are never separated from your actuals.

•

Collaboration According to a recent survey1 of over 500 senior finance professionals, a typical budgeting process can take up to six months to complete. As we all know, even after six months, departments often haven’t established the target objectives to drive opera-

83 1

Deloitte Finance Report ‘Integrated Performance Management’, published 2014 Authors Richard Horton, Head of Finance Research; Paul Searles, Senior Manager, Planning, Budgeting & Forecasting Lead and Kimberly Stone, Manager, Finance Performance & Analytics.

Jan - Mar 2016 International Finance Magazine

OPINION

needed. Flexibility is essential: users need to be able to investigate data down to its source in order to make well-informed changes to reports and forecasts as the business moves forward.

84

tions forward. To beat this, contributors in the field must themselves feel responsible for the numbers.

That means empowering them from the very beginning. And for that to occur, collaboration is key.

Others outside the finance department need to play their part in the planning process. It may not be easy to get reliable real-time information from the furthest reaches of the company, but when people closer to suppliers and customers are able to contribute, your modeling becomes far more realistic. Corporate leaders will have more accurate, relevant, and up-to-date information to establish a competitive edge.

Collaboration can be difficult because there is often no simple way for end users to enter their data and comments into the planning system. Instead, those drivers are typically collected

and stored in spreadsheets.

To avoid this, new solutions enable centralised, but user-managed forms to keep everyone on the same page. These solutions also allow users to agree on the underlying forecast drivers and assumptions up front.

Proper automation means that workflows can be put in place that hold everyone involved accountable for their inputs.

Everyone working together around a realistic budget built from the ground up fuels the high performance needed by today’s most successful and efficient companies.

Analysis Waiting until month-end to analyse your results is a bit like waiting all month to wash your clothes!

The ability to compare performance against forecast on a daily basis, we believe, is another key

International Finance Magazine Jan - Mar 2016

factor driving high financial planning performance. Being able to make on-the-fly adjustments keeps you on track throughout the whole month. This concept, known as ‘continuous planning’, eliminates the month-end chaos that so many organisations struggle with. So why aren’t all companies doing it?

Typical non-integrated cloud or warehouse planning systems don’t have advanced reporting capabilities and features that enable users to drill down into transaction details.

Because of this, employees can’t see what’s actually driving their numbers. Once again, they’re forced to export transactional data from the ERP into spreadsheets in order to investigate the causes of variances.

A better planning solution, then, must not only plan efficiently, but also provide detailed analysis when

Automation When more people across an organisation are feeding data into a system – along with data from the growing Internet of Things (IoT) – the number of drivers that companies can leverage expands enormously.

In an ideal world, companies would combine those drivers with their ERP data and build dynamic modeling scenarios to provide immediate transparency into actual performance and forecasting.

Finance professionals hardly need to be reminded about the importance of modeling, of course, but most of the tools available are either too simple or too complex.

Some frustrated users are turning to cloud-based planning solutions to replace their complex Excel modeling environment.

These newer tools typically promise an easy-toimplement, out-of-the-box solution. Such simplicity is welcome, but sometimes it’s not enough. It breeds an inability to perform complex model calculations, and often has an inflexible interface that requires specialist support if changes are needed. This leaves cloud adopters with users who are turning back to their old spreadsheets.

At the other end of the spectrum are data warehouse solutions. These were

OPINION

developed when technology was not yet able to support or efficiently process vast amounts of transactional data. With data warehouse technology, companies can replicate summary information and generate computations over summary data, but they cannot access the underlying transactional information.

Data warehouse technologies are also, obviously, technical tools. They’re only built by trained consultants or individuals with technology backgrounds, making for a very expensive and time-consuming process.

Once again, this complexity means that individual users will likely slip back into old spreadsheet solutions to satisfy their ad-hoc requirements.

The basic problem here isn’t the spreadsheets them-

selves. Excel really is good at modeling. The real problem arises when users under pressure are making manual entries because they cannot import Excel models into their planning system and push data drivers through.

Modern tools elegantly automate these processes, allowing you to leverage Excel’s full functionality to model even the most complex scenarios. These tools can push real-time data into Excel models and send the results back to the planning environment in one sweep.

The highest performance solutions are even capable of cascading computations from any level of granularity.

When your planning solution includes this level of automation, you are on your way to achieving the power of predictive analytics for

your organisation.

Sustainability When organisations invest time, money and energy in software that is clumsy or difficult to use, the solution usually dies right on the vine. Management learns to be wary of these unsustainable solutions, and employees understandably grow reluctant to try anything new.

Usability is the most important factor for sustainable software. The more benefits a solution offers, and the more ways it can be readily used, the faster it will be adopted.

A planning system that offers easy reporting and analytics will have an even greater head start. Reporting helps people to understand the business better, and analysis helps them to

manage it. Choose a planning system designed to integrate all these functions, and you’ll have a sustainable solution. IFM editor@ifinancemag.com

Jon Louvar is Director of Planning Strategy of Hubble at Insightsoftware.com

Yes, you can transform your financial planning

More organisations are finding that it is indeed possible to extend planning, automation, and alignment throughout the whole organisation.

Doing so takes a thorough understanding of the barriers to success and a real dedication to changing the entire process. The rewards, however, are worth it: better overall performance, greater competitive advantage, and the satisfaction of everyone working harmoniously from the same set of data.

To find your organisation’s perfect solution, look for these five elements for success and be prepared to shop around. You certainly don’t want to invest in an ill-matched planning solution that drives people back to their old planning paralysis habits.

When you find that single reliable source of real-time truth, continuous planning becomes second nature. That’s the dream, right? From there, you can look forward to a day when you can kiss spreadsheet madness and planning paralysis goodbye.

Jan - Mar 2016 International Finance Magazine

85

Awards

2015

The award presentation ceremony took place in The Landmark London Hotel on November 27

T

he International Finance Magazine 2015 Awards were presented to the winners at a glittering ceremony in London on November 27. Trophies and certificates were handed over to the winners at a gala dinner hosted at The Landmark London Hotel.

Peter Meyer, CEO, the Middle East Association (MEA), was the chief guest at the awards ceremony.

The awards were presented by Peter Meyer, Dr. Cigdem Kogar, Chief Representative of Central Bank of Turkey in London; Kofi Addo, Head of Trade and Investment, Ghana High Commission; and Thomas Mbun, Head of Treasury and Finance, Ghana High Commission.

The awards recognise excellence in banking, finance, Islamic finance, insurance, brokerage, CSR and other fields. The aim is to turn the spotlight on people who are making a difference in the industry and nation, and companies that are blazing a trail, with the focus on emerging markets and opportunities.

Meyer had worked in MENA for 15 years before joining the MEA as its CEO. He is familiar with many of the companies and award winners from the region. The MEA is the UK’s leading business forum for promoting trade and investment.

Dr. Kogar, an economic counsellor at the Turkish embassy, has worked in the research department as an economist in her 25 years at the Central Bank of Turkey. At the awards ceremony, she interacted with the winners and discussed their work.

Attendees were treated to a performance by Dominic Holland, one of the UK’s best and most respected stand-up comedians.

International Finance Magazine Jan - Mar 2016

AWARDS CEREMONY

•

1

2

3

4

6

5

1. The award presentation ceremony was held at The Landmark London Hotel on November 27, 2015 2. Dr. Cigdem Kogar, Chief Representative of Central Bank of Turkey in London presenting the award for Best Non-Life Insurance Company in Bangladesh to Farzana Choudhury, MD and CEO, Green Delta Insurance 3. Jeroen Meijers, Marketing Director, Ocidental Group, Portugal 4. Attendees were treated to a performance by Dominic Holland, one of the UK’s best and most respected stand-up comedians 5. Y. Bhg. Dato’ Siti Zauyah Md Desa, Board of Director, Bank Rakyat, Malaysia 6. Omar El Maghawry, Deputy CEO, FEP Capital, Egypt addresses the audience after receiving the awards for Fastest Growing Investment Bank and Best Private Equity Company in Egypt Jan - Mar 2016 International Finance Magazine

88

The cloud

advantage

Financial services firms have gone from asking if they should move to how fast and what to move first Tom Groenfeldt

International Finance Magazine Jan - Mar 2016

F

inancial firms are overcoming their skepticism about cloud, but once they start running applications in the cloud, they tend to expand their deployments quickly.

Ian Massingham, technical evangelist at Amazon Web Services (AWS), said that financial services firms have gone from asking if they should move to how fast and what to move first.

Tesco Bank in the UK moved from trying out AWS to hosting its web landing page to using it widely across the bank, including for its Tesco Drive mobile insurance app. Aviva, the UK-based insurer with more than 30 million customers worldwide, created its first web app in January 2015 and expected to have 200 web-based application by the end of the year.

“By shifting their financial reporting to AWS, Aviva are able to scale up quickly dur-

ing peak periods and back down when it’s quieter,” said Massingham. “The application, as a result, runs 20 percent quicker and 50 percent cheaper and Aviva have saved £1.5 million.”

As banks in particular face pressure on margins and capital requirements from regulators, cloud offers lower operating costs and the ability to modernise systems by moving apps to the cloud and paying for it out of operating expenses rather than costly capital projects.

Sean Foley, the chief technology officer for Microsoft’s Worldwide Financial Services Industry Group, said, “Three years ago, we heard from banks that they would never move to cloud.

Two years ago, they said they plan to move, but not now. Today, we are involved in more nuanced discussions of how to get there while meeting internal and external obligations and regulation.”

In general, financial regulators want banks to know that whether they run operations in their own data centres, outsource or use a cloud provider, they [banks] must be responsible for what happens to the data and the services. Regulators also want to be able to audit both banks and their providers.

Foley said, “Many regulators are focused on ensuring that even the smallest banks can get access to information on an automated basis.”

Mark Gunning, strategy and marketing director at banking systems vendor Temenos, is confident cloud adoption will rise in a familiar hockey stick pattern, he just isn’t sure when. “It won’t be three years, but it won’t be 10 years, and it will vary by geography.”

The key drivers are cost and agility.

Jason Timmes, assistant vice-president for software development at Nasdaq,

By shifting their financial reporting to AWS, Aviva are able to scale up quickly during peak periods and back down when it’s quieter Ian Massingham, technical evangelist at Amazon Web Services (AWS)

Jan - Mar 2016 International Finance Magazine

89

»

Jeremy Suddards, vice-president for financial services industries at HPE.

90

said that moving the company’s data warehouse to Amazon’s RedShift cut costs by 57 percent. Some of the advantages of cloud rise out of the bureaucracy of large financial firms — Timmes said it can take three to four months to implement a server at Nasdaq.

Although cloud is sometimes dismissed as an old concept — time-share or outsourcing — by people who prefer dismissing it to

learning about it, it creates a dynamic new approach with sophisticated technology.

Public cloud providers use virtualised servers which can run several different applications on a single machine. Computer power can be dynamically allocated and reallocated. So, for example, Bankinter in Spain can use a large number of AWS servers to run 5 million credit risk simulations in 20 minutes, compared to

International Finance Magazine Jan - Mar 2016

23 hours when it performed the task in-house. Bankinter pays only for the server time it uses and then the machines revert to AWS and await their next task, which could be from a completely different industry.

Aon Benfield Securities, Inc. (ABSI), a financial services provider, is using AWS to reduce simulation time by using Graphical Processing Units (GPUs).

As a result, it has been able to lower the calculation and total reporting process time from 10 days to 10 minutes, said Massingham.

Cloud provides a way to handle the spikes in computing demand, such as interest rate calculations on savings accounts, quarterly statements, risk management scenarios, or claims processing in insurance after a natural disaster. In retail, Black Friday credit card processing can crash traditional data operations, but cloud providers can see it coming and have resources ready to go into operation in seconds or minutes.

“Web traffic spikes caused by major calendar events

Moving the company’s data warehouse to Amazon’s RedShift cut costs by 57 percent. Some of the advantages of cloud rise out of the bureaucracy of large financial firms Jason Timmes, assistant vice-president for software development at Nasdaq

Misys, the global banking software company, announced in December that it would offer capital markets processing in the cloud. It is starting with post-trade processing in its FusionCapital component, and it chose Hewlett Packard Enterprise (HPE), which will host FusionCapital on a private cloud.

“Our HPE Helion cloud infrastructure offers all the benefits of the public cloud but with greater security, control and compliance.” said Jeremy Suddards, vice-president for financial services industries at HPE. Some experts in financial technology think private cloud is a temporary comfort zone for bankers who don’t trust cloud.

Or, as Misys said in response to a question: “Private cloud provides a dedicated set of storage infrastructure for each company to provide comfort on privacy/security.”

Private cloud doesn’t offer the potential to spike up to hundreds or thousands

of servers for development and testing, or to meet peak demands, and then drop capacity when it is no longer needed. Its overhead is constant whether there is demand for the computing power or not.

Some banks are running private clouds behind their firewalls with dynamic allo-

Mark Gunning, strategy and marketing director at banking systems vendor Temenos

»

occur all year round,” noted the British consulting firm Compare The Cloud. “During the summer, calendars are filled with events, from festivals such as Glastonbury or Bestival, to popular sporting tournaments such as Wimbledon. In the run up to Christmas, Black Friday and Cyber Monday will lure vast numbers of shoppers to seek out the best bargains online.”

Insurers have huge data centres to handle peak demands, but most of the time they run at 10 to 30 percent utilisation, according to analysts at Celent, the financial services technical consulting firm.

On the other hand, major cloud providers serve thousands of different types of businesses. Peak demands will vary and they can maintain relatively high utilisation rates and thus offer costs that are sometimes a tenth of IT operations at a bank.

Definitions of cloud can vary and include hybrid cloud and private cloud.

cation of resources to meet demand. Nordea, one of the largest banks in Scandinavia, has developed an internal cloud with software from Automic, which has an OS agent that connects to specific operating systems or applications.

Jesper Christensen, the bank’s chief IT infrastructure specialist, said that with Automic, the bank’s IT department can provide servers, and services, to business units in hours rather than the weeks it used to take.

Hybrid cloud can describe a combination of in-house computing and external cloud. Cloud requires that apps be running on standard operating systems — mainframe systems can’t run in the cloud where apps have to be stateless — i.e. they can run on one standard server today and on another standard server, or servers, tomorrow. One

Jan - Mar 2016 International Finance Magazine

91

92

option in hybrid is to leave client data on the bank’s legacy mainframe and move client-facing apps like mobile payments or peer-topeer payments, to the cloud.

New core banking systems, like Temenos, can be deployed in the cloud. So another option for banks stuck with legacy systems is to move some or all of their banking functions to a modern platform like Temenos and deploy in the cloud.

One of the earliest adopters of cloud at a major bank was Michael Harte, CIO at Commonwealth Bank of Australia until he left in 2014 for Barclays in London. He was turning to cloud enthusiastically by 2012. At the bank, it took eight weeks and several thousand dollars to stand up a new server, he told Australian computer publications, while with AWS, it could be done in eight minutes for 25 cents.

“We’ve halved storage costs, we’ve halved most of

our app testing and development cost. We’ve got a wide range of technology functions as a service. We’ve got application development, testing, infrastructure, software and storage,” he says.

Only now are other banks catching up.

But Harte said customer information would remain behind the firewall.

Banks typically start their cloud implementation with systems that do not hold critical customer account information. These can range from Bankinter’s credit risk scenarios to Office 365 or customer relationship management (CRM) systems.

Although security remains a major concern at banks considering a move to cloud operations, and it is often elevated by IT to protect its fiefdom, a number of experts think that major cloud providers are safer than bank data centres.

Because they are remote from the bank, attackers would have a hard time lo-

International Finance Magazine Jan - Mar 2016

cating the bank data. Unlike bank data centres, which have secure perimeters but trust what is inside, cloud providers protect each partition and server so that information can’t leak from one company or application to another. If a single penetration did occur, it would not be able to move.

All leading cloud providers have security certifications and regular audits, although it is still up to the financial firm to perform its own due diligence including on-site inspections before signing a contract.

Also, because the data and operations are remote, the danger of insider access is significantly reduced.

“The argument could be made that the lack of physical access and relationships with people could make data in the cloud more secure,” Matt Davies, senior director of EMEA marketing at Splunk, told InformationWeek.

In addition, the major

cloud providers have large teams of security experts who are constantly proactively monitoring for threats around the world.

AWS cites a recent Gartner report, (“Clouds Are Secure: Are you Using Them Securely?”) which concludes: “CIOs and CISOs need to stop obsessing over unsubstantiated cloud security worries, and instead apply their imagination and energy to developing new approaches to cloud control, allowing them to securely, compliantly, and reliably leverage the benefits of this increasingly ubiquitous computing model.”

Vulnerabilities still exist, of course. Financial firms are responsible for controlling and monitoring all employee access to the cloud.

Data should be encrypted in transit and in storage, except for low-value information such as marketing material. The cloud provider is responsible for keeping the data secure only once it has arrived, and the cloud provider is not responsible for access control.

So protect those keys, but don’t use security as an excuse to stay away from cloud. IFM editor@ifinancemag.com

GULF BANK

WINS

Best Car Loan Best Cash Management Best Customer Service Retail

Best Retail Bank in Kuwait

Best Cash Management Bank

Elite J.P Morgan Quality Recognition

Best Customer Experience Overall Branch Kuwait

Euro Straight Through Processing “STP Award”

Excellence in Learning and Development

‘GB STP’ Award - Citibank Award

Best Retail Bank in Kuwait 2015

Best Retail Customer Service Bank in Kuwait 2015

Best Customer Service in Kuwait

Best Commercial Bank Best Innovation in Retail Banking

94

Impact investing: Making headwind,

but slowly

Though there is demand, investors are still unsure of how to approach the sector IFM Correspondent

International Finance Magazine Jan - Mar 2016

C

orporate Social Responsibility is something that most companies are familiar with. However, to see more businesses making a sustainable impact on society, there has to be something more for them than just charity. And here is where the concept of ‘Impact Investing’ is gaining popularity.

Impact Investing refers to investments made in companies, organisations and funds with the intention of generating a measurable, beneficial, social or environmental impact alongside a financial return. The words ‘impact investing’ were coined in 2007, but the concept started much earlier in the 1970s and 1980s.

Sir Ronald Cohen, chair, Primary Motivation

Social Impact Investment Taskforce, in his report titled ‘What is Social Impact Investment’, states that impact investment should not be confused with philanthropy as businesses involved do expect a financial return and focus on economic value alongside social investment.

Microfinance is a great example of impact investing wherein local entrepreneurs receive loans to grow their businesses at a reasonable cost. Microfinance saw a number of organisations coming together to create a large impact on society wherein investors face low risk with attractive returns and it has a net positive impact on society.

“Making impact investing work requires a combined

Traditional Investment

effort from a wide range of organisations. We need governments and regulators involved to create an encouraging environment for impact investing to flourish; we need social organisations to be open to new forms of funding; and we need the industry to build the supply of investible opportunities and funds,” says Greg B Davies, head of behavioural finance at Barclays.

Even venture capitalists have a crucial role to play.

“They can actually unleash the power of impact investing by funding the enterprises that will serve today’s and tomorrow’s customers,” says R Paul Herman, CEO, HIP Investor, an impact investing firm. Khosla Ventures and DBL Investors are some of the venture capital-

Social Impact Investment

“

They can actually unleash the power of impact investing by funding the enterprises that will serve today’s and tomorrow’s customers R Paul Herman, CEO, HIP Investor, an impact investing firm

Giving and philanthropy

Financial Return

Yes

Yes

No

Social Return

No

Yes

Yes

Capital to Recycle

Yes

Yes

No

Jan - Mar 2016 International Finance Magazine

95

96

ists who invest heavily in firms which are positively impacting society.

Another good example of impact investing is the Bristol Together Project wherein it was decided to train and employ ex-offenders to renovate empty properties.

Because of their criminal record, many ex-offenders find it difficult to get employed. To tackle this Paul Harrod founded Bristol Together. Investors purchased Bristol Together bond and it was decided to repay a bond yield of 3% per annum to the investors after five years. Profits were recycled to purchase more run down properties. In 2014, 17 properties were refurbished and properties worth £4 million were sold. Out of more

than 60 men employed at Bristol Together since 2011, only one has reoffended, a staggeringly low figure compared with the standard 26.1% who reoffend within one year of release.

Similarly, the Real Lettings Property Fund, the largest social impact residential property investment fund in the UK, has current investments exceeding £36 million. The fund offers investors a risk adjusted return on an ethical product that finances the purchase of accommodation for single people and families who are homeless or at risk of homelessness.

However, companies are often not interested in impact investing as many find the returns lower than

what is needed to sustain a project. “This is a major myth. Many mistakenly restrict themselves to the question, so I need to spend money? The better question is, what returns do I make on my investment in employee training, or in energy efficiency,” says Herman.

Though there is considerable untapped demand for impact investing, many investors simply don’t know how to approach this sector. “Once you start asking investors to balance their social and financial needs at once, they quite reasonably find it daunting and shy away from it. To some extent, the same is true of

many corporations: this is a new area that is developing fast, and one in which few large organisations have existing experience or expertise,” says Davies. Hence, to get in the comfort zone will take time. “Novel areas of any industry are always somewhat discomforting for both investors and companies. A core objective of our approach is to address this reticence for investors — to make it easier and more comfortable to approach this important, but daunting, area of investing,” he says. IFM editor@ifinancemag.com

Tax incentives for Impact Investing

30% income tax relief

Exemption from Capital Gains Tax (CGT)

Up to 100% inheritance tax relief after two years (on certain qualifying share investments)

What is SITR? Social Investment Tax Relief (SITR) is a government initiative to encourage investors to invest in qualifying social enterprises through newly issued shares or unsecured debt investments. Individuals can invest up to £1 million per annum in more than one social enterprise (independent of any investments under other tax reliefs) and investments must be held for a minimum of three years

International Finance Magazine Jan - Mar 2016

97

Jan - Mar 2016 International Finance Magazine

Everyone

counts

98

International Finance Magazine Jan - Mar 2016

East African tech solutions bridging funding gap for smallholder farmers Tom Jackson

P

eris Bosire knows all about the travails of smallholder farmers in Africa, having grown up in Kebuse, an impoverished village near Kisii in southwestern Kenya where most people rely on agriculture for their livelihood. It is lessons learnt back home that have inspired this social entrepreneur.

“Farmers, the most hardworking and genuine people, who feed the world, are the poorest citizens, stuck in a self-destructive vicious cycle of poverty,” Bosire said.

“They lack access to any kind of credit to help them optimise the potential of their farming activities. My mother spent a whole week tilling her small farm while a tractor could do the same task in 15 minutes for as little as $20.”

What Bosire observed in Kebuse is a problem replicated across Africa, and much of the developing world, when it comes to smallholder farmers. The Initiative for Smallholder Finance reports that the $9 billion supplied by local banks to smallholder farmers each year is less than three per cent of total demand.

In Sub-Saharan Africa, smallholders receive only one per cent of bank lending, though more than 60 per cent of the population relies on agriculture.

The majority of Kenya’s seven million farmers are financially excluded.

This funding gap has serious repercussions for farmers, as well as for food security. Opportunity International says Africa is home to a quarter of the world’s farmland, yet generates only 10 per cent of crops produced

globally. Most farmers are operating at just 40 per cent of their potential capacity.

Bosire and other local entrepreneurs are looking to address this issue by bridging the gap between rural farmers and banks and microfinance institutions. She co-founded FarmDrive, which leverages mobile technologies to come up with more effective credit assessment tools.

“Traditional credit assessment tools used by financial institutions are simply not built to work for smallholder farmers,” she says.

“Traditional finance systems require credit history, bank statements and records, all of which are out of reach for most of the rural population. Smallholder farmers are hence viewed as high risk, locking them out of formal

99

Jan - Mar 2016 International Finance Magazine

100

financial systems. Consequently, they are forced to accept higher interest rate loans from more predatory sources and, in most cases, don’t get any finance.”

FarmDrive looks to bypass the exclusionary requirements of traditional financial systems, with its record-keeping platform allowing farmers to input financial information via SMS, aggregating this information to build comprehensive credit profiles.

“Through the platform, we are able to understand each farmer’s credit ability based on their productivity, cash flows and other factors that affect their farming activities,” Bosire said.

“FarmDrive’s record keeping platform is built and designed to be used on mobile phones. This ensures that at any given time, accurate up-to-date information is available on each farmer’s activities. The digital record keeping infrastructure is accessible on feature phones via SMS and USSD to meet the needs of their endusers.”

The FarmDrive solution is currently being piloted in parts of central Kenya,

with over 6,000 farmers in the pipeline. The company has also partnered with a leading tech-driven microfinance firm to provide an affordable line of credit to qualified farmers. Bosire said technology is a major driver in enhancing financial inclusion and making farms more productive, but says mobile phones are only one part of this.

“The mobile phone is the device that is most likely to already be in the hands of many farmers but the possibilities and channels don’t start and end with mobile phones. It’s important to think of the mobile phone as just one part of a much wider agriculture value chain and see where it might fit in,” she said.

Another Kenyan tech startup, Chamasoft, comes at the problem from the other side. There are around 300,000 investment groups — or “chamas” — in the East African country, many of which would be ideal candidates for lending to smallholder farmers. But, like farmers, investment groups are struggling to keep track of their finances.

“The majority of invest-

International Finance Magazine Jan - Mar 2016

ment groups in Kenya manage their finances on spreadsheets or use paper based records,” said Edwin Njoroge, product manager at Chamasoft.

“This leads to issues such as incorrect records, loss of records, and lack of transparency, thus leading to a lack of trust within the group. This leads to the dissolution of the groups.

Chamasoft steps in to solve this problem by making the chama’s financial information available to the members on the cloud.”

Chamasoft automates the task of invoicing members and calculating figures owed to the group, presenting members with a summarised dashboard detailing exactly how the chama is doing. The software extracts financial reports such as cash flow and balance sheet, keeping members in the loop and reducing the workload on treasurers.

Aside from ensuring sources of funding remain active, Njoroge said Chamasoft can also assist farmers more directly.

“We can help them organise themselves into groups that can grow into farmers’

The majority of investment groups in Kenya manage their finances on spreadsheets or use paper based records Edwin Njoroge, product manager at Chamasoft

Access the best stories in the world of business at your convenience associations, which in the long term can champion the interest of farmers or even offer financial services to farmers within the group,” he said.

Another local company looking to address the shortage of funding is Atikus, but co-founder Kate Woska and her team take an alternative tack, using insurance as a “market lubricant”.

“Lenders sincerely desire to grow loan portfolios, but often do not have access to well-designed, affordable risk solutions. Consumerlevel efforts to improve access to credit fall short if lenders cannot grow without proportionally increasing risk,” she said.

Launched in Rwanda, Atikus aims to increase capital flows to creditworthy yet underserved MSMEs, including farmers. Its mobile loan origination and administration tool LoanSkout digitises lenders’ in-office and field-based loan activities, capturing an “immense amount” of client data that would be impossible with paper-based processes.

“LoanSkout allows lenders to fluidly collect and visualise portfolio data, enabling Atikus to apply the information towards prod-

uct development and adopt the application as a lowcost, efficient distribution channel for products like microinsurance,” Woska said.

“Providing credit protection will enable lenders to better leverage existing capital and issue more credit to MSMEs in a safe, controlled way.”

For Woska, agriculture is crucial to Atikus’ plans.

“Ag-focused tech has the highest potential for true impact on the agricultural industry on a global scale,” she said. “Whether it is through better inputs, platforms connecting farmers to inputs, data collections tools, or mobile-based financing products, there is an unprecedented rise in tech development specifically for agricultural and rural users.” IFM

Read IFM magazine

on your TAB Also available on iPhone (5 and above)

Scan to get your digital edition

editor@ifinancemag.com

Jan - Mar 2016 International Finance Magazine

OPINION

James Blake

Social media in credit scoring

International Finance Magazine Jan - Mar 2016

OPINION

Snapshots from borrower’s social media activity could reduce the number of loans rejected based on inefficient and incomplete data from traditional credit scoring methods

C

redit scoring has been around since the late fifties, originating in the Merchant Associations and small Credit Bureaus. Lenders created a score based on the borrower’s financial behavior, such as frequency and reliability of repayments, plus more surprising factors such as a ‘gut feeling’ assessment of the borrower’s personality, likes and reputation. The system eventually matured into the pragmatic and factual credit scoring system we are familiar with, but inefficiency and incomplete data still haunts the scoring process.

There are three main credit reference agencies – Experian, CallCredit and Equifax – and it’s likely that lenders will consult all three about one borrower

because while their databases overlap, they also differentiate across industries that require finance, such as automotive, mobile phones and mortgages.

While there is no universal rule for credit score calculation in the UK (and, it’s a myth that a borrower can become blacklisted), the traditional methods of calculating a credit score are employed by all three agencies. If a loan application is rejected by one bank, the same information could be used to fuel another rejection, trapping consumers in a cycle of unsuccessful and repetitive applications.

As technology advances, much data about a borrower is created and stored online, but currently it’s unmeasured by the credit reference agencies.

According to IBM, 2.5bn

gigabytes of data was generated every day in 2012 alone and 90 per cent of online data has been created in the last few years. There are calls for the industry to incorporate unmeasured Big Data into the credit score calculation. The current system — enforced by the FCA to prevent a relapse of the plummeting markets in 2007 — is increasingly frustrating for borrowers and lenders who are ring fenced by incomplete data that lacks context to correctly inform lender’s decisions.

The Mortgage Market Review (MMR) has come under particular scrutiny and criticism for this inaccuracy, citing that while the affordability criteria is rigorous the application process now takes in excess of 40 days, with brokers spending significantly more

time caught in bureaucracy when mistakes are made.

Government bodies are also struggling to contribute efficiently to a fast paced, data-centric world, where their usual transparency and openness are no longer sufficient to support their decision-making tactics.

Data analysts and decision-makers are scrambling to plug knowledge gaps, but by embracing Big Data they can revolutionise, streamline and clarify the actions of both the government and credit scoring industry. Big Data provides a much needed and innovative break from business as usual. For example, the benefits have already been realised by insurers who are minimising their risk of fraud by scoring their consumer using contextual measurements such as honesty, life events, extraversion and conscientiousness. The same holistic approach, that combines Big Data trails and the financial database insights, are a force to be reckoned with.

Troubleshooting traditional credit scores Borrowers can prepare for a credit score assessment by tidying up their accounts and demonstrating responsibility and reliability, but there are no magic formulas or quick fixes when it comes to credit scoring, and different lenders have varying thresholds.

As standard, lenders will consider postcode, salary,

Jan - Mar 2016 International Finance Magazine

103

OPINION

process wasting time and money for brokers, lenders and borrowers. If Big Data had plugged in to the credit score calculation, it would have bridged the knowledge gap between intermittent employment and the context of the irregularity, making the application successful first time.

104

family size and reasons for wanting a loan, but the credit score agencies will also supply peripheral information such as electoral roll data (residence and address details), court records to include bankruptcy and debt orders, linked data and other lenders who have searched for the borrower, and finally, account data.

The latter reveals account behaviour across all credit and store cards, loans (including payday loans), mortgages, bank accounts, energy and mobile phone contracts, but nothing about the context of the borrower’s real life situation. The closest it gets is a full data share but it simply reveals if you’re a model customer (or not) and how you repay your accounts, but it’s designed to catch out borrowers who play the system rather than support well-behaved spenders.

Credit scores usually consider long-term behavior, focusing on payment history (35%), total amount owed (30%), length of credit history (15%), new credit (10%) and type of credit in use (10%). The evaluation of these five categories allows lenders to forecast future behavior and risk of the borrower. Credit scoring is ac-

curate, but linear. It doesn’t take into consideration the context of that information.

If a borrower is not awarded credit, the lender is required to disclose why they’ve been refused. For example, it could be due to intermittent employment and in that situation it’s assumed the borrower is irresponsible. Without the data to suggest anything to the contrary, rejecting the application is the only solution.

In the real world, the borrower could have saved up enough money to leave regular employment and take up an internship, or perhaps go travelling, and still afford to pay their bills and fulfil their responsibilities. It’s likely the borrower would put that information online, in the form of a status or profile update, contributing to their trail of Big Data stored online.

The break in regular income could be enough for lenders to label the borrower as a risky option and deny a loan, but in this situation the outcome was based on incorrect information and to contend the decision, the borrower must provide proof that debunks the calculation. Simple enough, but it elongates the

International Finance Magazine Jan - Mar 2016

Calculating credit score using big data from the real-world With such a heavy focus on structured databases in the traditional method of calculating a credit score, some would view it as outdated tool in our technologically evolving world.

The emergence of social media has brought about a data revolution, and with it a trove of new information for businesses to tap into.

It’s thought that by simply overlaying social data onto traditional data, the context of these financial decisions – that on the surface appear to be risky or irresponsible – will give lenders more confidence when agreeing to offer loans to borrowers.

The technology is already in existence.

Social media data can be incorporated to enrich reliable credit scores by delivering deeper insight into each customer as an individual, instead of a number. Unlike traditional credit scoring, it reveals recorded events and phrases that businesses can analyse to discover what is going on “behind the scenes” financially. It echoes the original methods employed by the Merchant Associations and small Credit Bureaus, where a part of the credit score

looks at personality, and what’s actually going on in a borrower’s life. Social data offers that same insight, minus the one-to-one visit, and brings personalisation into the equation. Affordability assessments will become more detailed and bespoke than ever before.

For example, lenders would be able to see if a borrower had recently needed to invest in a new boiler, whether they currently shop at Lidl or Waitrose, if they have just been on holiday, got engaged, or had a new baby. Social data reveals these snapshots so businesses can draw their own, well-informed, financial conclusions.

The number of social media users is continuing to balloon. It currently stands at 1.96 billion (Statista, 2015) and is only set to increase. For lenders, there has never been a better time to join the data revolution and utilise thousands of data points, extracted from digital footprints, to supplement traditional credit scoring. IFM editor@ifinancemag.com

James Blake is the CEO of Hello Soda

Fumes spell trouble

106

International Finance Magazine Jan - Mar 2016

VW’s strife sours market sentiment towards German automakers Tim Evershed

107

Jan - Mar 2016 International Finance Magazine

T

108

he emissions cheating scandal that engulfed German carmaker Volkswagen in the US is likely to have global consequences. As well as the financial cost of recalling millions of cars, VW has incurred reputational damage and can expect to be on the receiving end of fines and lawsuits. It will also have to tighten up its corporate governance standards in the wake of CEO Martin Winterkorn’s departure.

All these factors have combined to deal Volkswagen’s creditworthiness a huge blow. Its debt is now effectively rated as junk status and it appears that it has soured market sentiment for other German automakers too.

VW’s five-year Credit Default Swaps (CDS) widened 185% in the two days following news that the car maker allegedly cheated on US emission tests and was ordered by the Environmental Protection Agency (EPA) to recall nearly half a million cars.

After pricing consistently

in line with ‘A/A-’ levels for the past year, the cost of credit protection on VW’s debt has now nosedived to below investment grade.

Meanwhile, other German carmakers, most notably BMW and Daimler, saw CDS spreads widen 94% and 77%, respectively, in the wake of the scandal.

In addition, the European Investment Bank (EIB) has threatened to call in an outstanding €1.8 billion loan. The EIB had granted loans worth around €4.6bn (£3.4bn) to Volkswagen since 1990 for the development of engines with lower emissions and manufacturing sites in South America.

The bank says it is checking to see whether VW used any of the loans to cheat on emissions tests for diesel vehicles.

Weak corporate governance Standard & Poor’s downgraded VW’s long-term debt rating by one notch to A- and said it could cut it “by up to two more notches” again in future in face of the “wide-ranging negative

credit consequences, following its admission that it installed software designed to manipulate diesel engine exhaust emissions in 11 million vehicles”.

Fitch Ratings placed VW, including its ‘A’ Long-term Issuer Default Rating (IDR), on Rating Watch Negative.

In a statement explaining the action, Fitch said this “crisis is also another illustration of our assessment of the company’s fairly weak corporate governance”.

It added: “We expect VW’s brand image and reputation with regulators and consumers worldwide to be seriously undermined… in particular, the extent of the contagion of the crisis in the US on customers in other markets is unclear and therefore it is difficult to quantify the potential loss on revenue and profitability over the next two to three years.”

Although it is unlikely that the fine by the US Environmental Protection Agency (EPA) for violation of the Clean Air Act will reach the maximum level of $18 billion, it will undoubt-

It is too early to assess the full implications for automotive manufacturers, suppliers and other industry constituents, but we expect the whole sector to be affected to various degrees. In particular, we believe regulators worldwide will reassess the timeline to reach planned more stringent emission limit targets and could even review the targets themselves Emmanuel Bulle, Corporates Analyst at Fitch Ratings

International Finance Magazine Jan - Mar 2016

End of the road for diesel?

»

Martin Winterkorn resigned as CEO in September 2015 in the wake of the scandal

edly be severe. That fine and the lawsuits that follow will almost certainly run into billions of dollars.

VW has announced that it will set aside a provision of €6.5 billion to cover the costs related to this issue, including efforts to win back the trust of its customers.

However, Saxo Bank’s Peter Garnry said, “We don’t think the current provisions are big enough. VW has set aside €6.5bn to cover the costs, but clearly, the market thinks the fine will be bigger than the $18bn the EPA has talked about.

This is a huge scandal and it looks like this was not an isolated case in the US.” Turning point However, VW travails could mark a turning point for the global auto industry, with potentially profound and lasting repercussions far beyond the group’s own credit profile. It could accelerate developments and trends across the sector and could trigger new business

decisions and political reactions globally.

Emmanuel Bulle, Corporates Analyst at Fitch Ratings, said, “It is too early to assess the full implications for automotive manufacturers, suppliers and other industry constituents, but we expect the whole sector to be affected to various degrees. In particular, we believe regulators worldwide will reassess the timeline to reach planned more stringent emission limit targets and could even review the targets themselves.”

The changes in the automotive industry could be seismic; threatening the long term the dominance of the internal combustion engine, which could come under pressure from a fundamental change in consumers and regulators’ attitude toward emissions and fuel efficiency. IFM editor@ifinancemag.com

T

he Volkswagen scandal could accelerate the underlying growth of vehicles with alternative powertrains, including fuel cells, electric and hybrid engines. The growth of alternatives should benefit manufacturers and suppliers that have positioned themselves strongly in these technologies, either through R&D or marketing, and are increasingly focused on vehicle electrification.

Bulle added, “This event could also in the shorter term lead to a shift towards petrol engines, particularly in Europe, where the proportion of diesel engines has increased substantially in the past two decades to account for more than half of sales now.”

A diesel engine emits more pollutants such as nitrogen oxide (NOx) and particulates than an equivalent petrol engine, but 15%-20% less carbon dioxide (CO2) on average. Diesel is, therefore, a critical technology for enabling carmakers to fulfil CO2 targets.

A shift away from diesel would have a bigger impact on European manufacturers, which have higher market shares in their domestic market than US and Asian manufacturers, which sell more cars outside Europe where diesel penetration is low.

Bulle said, “This could have a significant impact on manufacturers of small cars with diesel engines, including Peugeot and Renault, for which it will be difficult to pass on the cost increase to customers. German manufacturers BMW and Daimler, and Jaguar Land Rover have a material exposure to diesel and are also likely to be affected, but this should be mitigated by their greater price elasticity.”

He added, “It is also unclear whether this scandal will accelerate the mistrust among some sections of the population regarding cars and driving in general.

However, it is unclear for how long this scandal will receive public attention, and therefore to what extent it will trigger regulatory and political reactions. Several companies in the auto industry and in other sectors have rebounded after deep crises in the past.”

Jan - Mar 2016 International Finance Magazine

109

A step-by-step account of how the cheating was exposed

110

Parts supplier Bosch made the suspect software available to Volkswagen “purely for purposes of internal testing only”.

Despite warnings of illegality,VW fits the software in cars destined for sale to the public

Researchers at the University of West Virginia are commissioned by the International Council on Clean Transportation to subject VW vehicles to road tests.

The findings suggest the cars are over 40 times over nitrogen oxide limits After prompting from US authorities,VW recalls some models for software updates and claims that the issue has been resolved

California Air Resources Board runs new tests and informs the Environmental Protection Agency (EPA) of the negative results

2007

2014

May 2015

VW admits to EPA that it deliberately installed the software in its cars

PA makes public its findings and accuses VW of installing clean-air cheating software in almost half a million cars in the US

VW CEO Martin Winterkorn apologises for having “broken the trust” of the public and pledges to co-operate fully with the authorities

VW shares plummet 17% losing €15 billion in early trading

Sep 3, 2015

Sep 18, 2015

Sep 20, 2015

Sep 21, 2015

VW admits up to 11 million cars worldwide could be affected; shares lose another 20% of value

VW CEO Martin Winterkorn resigns

EU urges member states to investigate whether vehicles comply with European pollutions rules. First private lawsuit filed in US

Matthias Mueller named VW’s new CEO. In the US, authorities ban sale of Volkswagen diesel cars until 2016 while Switzerland suspends sale of new Volkswagen models

EPA says some Porsche and Audi models are also using the suspect software

Sep22, 2015

Sep23, 2015

Sep24, 2015

Sep25, 2015

Nov 2, 2015

Models recalled in the US

JETTA (2009 – 2015)

Manufacturing year

AUDI A3 (2010 – 2015)

Manufacturing year

JETTA SPORTWAGEN (2009-2014) Manufacturing year

GOLF (2010 – 2015)

Manufacturing year

International Finance Magazine Jan - Mar 2016

BEETLE (2012 – 2015)

Manufacturing year

GOLF SPORTWAGEN (2015) Manufacturing year

BEETLE CONVERTIBLE (2012-2015) Manufacturing year

PASSAT (2012-2015)

Manufacturing year

Impact in other countries Vehicles being recalled worldwide

South Korea

all 28 EU member states

Switzerland

South Africa

Japan

Australia

New Zealand

How will this play out now?

VW recalling up to 11 million cars worldwide, hopes to resolve the issue by early 2016. Fines and lawsuits in the pipeline.

What is the damage monetary, reputation that VW is looking at?

We will know only once the lawsuits, regulatory penalties and cost of recall have been accounted for.

Jan - Mar 2016 International Finance Magazine

111

We

n o w again!

IFM BEST BUY-SIDE Y MANAGED DAT ATA SERVICES PROVIDER - USA

AWARDS 2015

RIMES ES Technologies echnolo

RIMES has been voted Best Buy-Side Managed Data Service Provider at the International Finance Magazine 2015 Industry Awards. In fact, this is our 6th industry accolade in 2015. Thank you to all our clients and partners for their support. Discover more at rimes.com

Calendar

MARK YOUR

Calendar

3-4 March 2016 Asia International Conference & Exhibition for Retail, eCommerce, Logistics and Parcel Industries (Retail, Logistics, E- Commerce) Singapore, Singapore

Melbourne, Australia

02-03 March 2016 The Technology For Marketing & Advertising (Marketing & Advertising)

Intermodal South America (Automotive, Bicycles, Rickshaw & Spares, Plant, Machinery & Equipment, Railway, Shipping & Aviation Products, Travel & Tourism industries.)

Sao Paulo, Brazil

3-5 March 2016 Oil & Gas World Expo (Oil & Gas)

16-19 April 2016 Santos Offshore Oil and Gas Expo (Oil & Gas)

Mumbai, Mumbai

Santos, Brazil

4-6 March 2016 POWER-GEN Russia (Power & Energy industry) Moscow, Russia

20-21 April 2016 E-Commerce Show Asia (E-Commerce) Singapore, Singapore

5-7 March 2016 International Luxury Property Show (Real Estate industry) Shanghai, China

27-28 April 2016 Biggest Small Business Expo (Business) Melbourne, Australia

11-13 March 2016 Offeshore, Oil Gas Technology, Equipment Exhibition (Oil & Gas) Nanjing, China

29 February 2016 -2 March 2016 Online Retail Supply Chain Summit (Business Services)

5-7 April 2016

3-5 May 2016 Mining & Engineering Western Australia (Power, Renewable Energy & Energy Conservation industry) Perth, Australia

15-16 March 2016 Scottish Renewables Annual Conference & Exhibition (Packaging Materials, Business Services, Power, Renewable Energy & Energy Conservation industries) Edinburgh, UK

11-13 May 2016 International Trade Fair and Congress for Energy-Efficient Buildings and Distributed Generation (Power & Energy industry) Stuttgart, Germany

15-17 March 2016

ST. PETERSBURG TECHNICAL FAIR (Production Chain) St. Petersburg, Russia

22 June 2016 KVK Fair (Banking, Insurance & Finance industry) Dusseldorf, Germany

London, UK

Jan - Mar 2016 International Finance Magazine

113

OUT OF OFFICE

What do you look forward to after work and on weekends?

Spending time with the family, playing with the kids and spending time with my wife. Besides that, I try to have some fun with my colleagues. I try to have a good balance of sports and spending time with true friends. In between all this, I try to give more quality time to my parents and sister.

114

On your off day, what is your schedule?

If we have no plans to meet friends or undertakings such as skiing, skating, hiking, swimming, sightseeing, I love to spend time with the family; build, tinker and invent new things in and around our house, explore nature or just relax and read.

and traveling. Besides that, I enjoy cooking a good meal. To be able to have a great conversation with my family and friends at home gives me recreation, energy and balance for my work.

What is your favorite dish and why?

Like in business, I am very entrepreneurial and experimental when it comes to food. I love to try out new cuisines and tastes. I love to try healthy and freshly prepared food. I am a big lover of Asian food (Sushi, Thai, Vietnamese) and salads, but I also keep some Swiss traditions with a great Raclette or Zurich Geschnetzeltes, especially in cold, snowy, winter evenings.

As told to Suparna Goswami Bhattacharya

Do you buy the latest books or gadgets?

I don’t feel forced to buy the newest things all the time, but I am for sure very interested in all technological development. I am very well informed and most often, an early adapter. But I would never queue up to be the first t0 buy a gadget.

Where was your last holiday?

We escaped the cold Swiss weather and enjoyed the warm and sunny October of south of Turkey to relax at the beach. Before that, I’ve had some exiting days in NYC meeting friends, business partners and shopping for my loved ones.

What are your hobbies?

I love sports, adventure

International Finance Magazine Jan - Mar 2016

I enjoy cooking a good meal

Urs Haeusler is the CEO of DealMarket, a Zurich-based online platform for fundraising and deal flow management