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Capital Finance International

Spring 2014

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Bahrain Bourse’s Fouad Rahman Rashid:



2 | Capital Finance International

Spring 2014 Issue | Capital Finance International


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B REITLING.COM | Capital Finance International

Spring 2014 Issue


CHRONOMAT 44 FLYING FISH | Capital Finance International


Editor’s Column The Wheel of History Churning Out Repetitions The degree of success attained is such that, notwithstanding its considerable size and weight, the Brazilian economy has so far failed to produce even a single brand of global renown. Argentina remains a sorry basket case stoically harking back to policies that have failed time and again, squandering an enviable development potential in the process and condemning untold millions to needless deprivations. Meanwhile, Venezuela is heading toward the abyss under the expert guidance of a madman. The nation is being torn apart by social and political turmoil as the heirs to the Bolivarian Revolution seek to impose their ill-defined and immature ideas on governance by hook and crook.

Most of the time, human history constitutes but a succession of yawn inducing repetitions. Yesterday’s news gets repackaged and is duly echoed today. Originality in thought or action is very much the exception and an oftentimes unwelcome one at that. In the Crimea, the Sudeten Crisis of 1938 is being restaged with levels of brinkmanship that rival the original performance. Should the lead actor employ his 40,000 or so troops, now amassed at the border of a prostrate nation, to gobble up some additional acreage, the script will have been played out in full. It is not just here that history repeats itself. In fact, we seem to be recreating the 1930s. The world is slowly recovering from severe financial turmoil, dancing – as it does – on the edge of a volcano. This time around there is no Glass-Steagall Act to discourage commercial banks from engaging in risky securities trading. The disassembly of Glass-Steagall – a twenty year process that started in the 1980s – was the direct cause of the 2008 crisis, an event still without a proper name.

Editor’s Column

For now, let’s just call it the Panic of 2008. Perhaps hardly original, but the word panic does cover the irrational fear that, back then, gripped the global marketplace. It wasn’t so much the Greek god Pan who instilled terror with his eerie woodland noises, but Mr Greenspan whose initially indecisive mutterings caused banks to tumble left, right and centre. Contrast this, if you will, to the intervention by Mr Draghi of the European Central Bank (ECB) who in July 2012 almost singlehandedly put a stop to the euro’s suffering by assuring that his ECB would do “whatever it takes” to preserve the currency – thus dispatching god Pan back to the woods and ending the panic.

As this current issue of aims to illustrate, good governance – a simple yet elusive concept – is the key that unlocks lasting progress. Every single time principles of good governance are flouted, things go horribly wrong. Russia and the Ukraine, now embroiled in a potentially lethal conflict, are both countries governed by cliques that shun transparency while raiding already depleted national coffers. Corruption defines much – though thankfully not all – of South America. Countries that have wholeheartedly embraced good governance, such as Uruguay and Chile, are barrelling ahead while others remain stuck in their past failings. Good governance is also gaining traction across Africa, already delivering promising results. It is this continent that now starts to shine as a beacon of hope. Home to vast populations hankering after progress, Africa has only just begun to find its groove. Developments here now move fast as much remains to be done. The BRICS are yesterday’s news. Brazil is mired in its old carefree ways; Russia is on the move but, alas, not in an economic sense; India keeps on trying to overcome its lethargy; China grows as if there is literally no tomorrow; and, South Africa shouldn’t even be considered part of this collective of aspiring quasi-superpowers. No, Africa and parts of the Middle East definitely have it: These are the places that have figured out how to apply the principles of good governance to the furthering of development goals. The countries of the Gulf Cooperation Council are moving ahead without looking back. They may not be hotbeds of creativity, but they do take and adopt the very best the world has to offer in the way of tried-and-tested governance principles. Here, both corporations and state institutions have discovered good governance to be the only way forward. Look for inspiring examples in this issue. It is from here, then, that we may expect the proverbial monkey wrench to stop the wheel of history from churning out repetitions. It’s a story worth reporting on and one perhaps even more interesting than the tiresome power politics, and the attendant antics, that keep the big guys busy.

Wim Romeijn Elsewhere in the world, the mercantilist and protectionist development models that were much in vogue in the 1930s are rearing their heads once again. Policymakers in Argentina and Brazil still cling to outdated dogmas that prescribe tariff walls as essential tools for the forging of national industry. 6

Editor | Capital Finance International

Spring 2014 Issue | Capital Finance International



Letters to the Editor

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The notion that the EU should turn inward out of concern for global warming is rather ludicrous. It may be emotionally satisfying for the EU to claim the moral high ground; it is not likely to contribute much, if anything, toward growing – or even lasting – prosperity. The global climate change scare has proven to be yet another way for big business and governments to cash in. Carbon taxes and emissions trading mechanisms move billions of euros from one account to the next without anybody getting any the wiser – least of all the climate. The EU is in the business of integrating a continent of previously warring tribes and nations. That’s quite a tall order as it stands. Instead of introducing yet more regulation, the EU should perhaps consider to allow for a reassertion of market forces and a strengthening of its anti-trust legislation. ROGER MATTHEWS Bath (UK) The European Union is doing rather poorly when it comes to marketing its ideas. Because of this, in a number of countries nationalist parties are faring increasingly well. In The Netherlands, Mr Wilders’ Freedom Party now commands an impressive lead in the opinion polls. The UK Independence Party isn’t faring too badly either. France, Italy, Austria and even placid Sweden have their own nationalist parties parroting each other’s condemnations of Brussels. The Swiss now wish to modify the treaties that shape their country’s status as an EU associate state. Switzerland is, in fact, part of the EU in all but name. They solemnly promised to abide by all of the EU’s regulations. One of those concerns the freedom of movement which the Swiss now find discomforting and want see changed. That is a no-go. The four freedoms of movement – of people, labour, goods and services – form the very foundation of the EU edifice. The Swiss are free to take it or leave it. There is to be no cherry-picking of EU regulations. Before you know it, the British and Dutch – both worryingly xenophobic as of late – will demand the same. It will be the end of the EU. That is an issue the European Federalist Party may want to consider taking aboard. GUUS WETERING Eindhoven (The Netherlands) Thank you for a more balanced approach to the late Mr Mandela’s astonishing career. Your obituary avoided the boundless adulation that followed Mr Mandela’s passing. While a great and courageous statesman, Mr Mandela remained very much human and as such prone to error. He also stunted the development of South Africa by stuffing his cabinet with a number of impressively incompetent people. While we all can benefit greatly from Mr Mandela’s lessons in humility, forgiveness and magnanimity, his legacy of cuddling up to dictators (Castro, Mugabe) and less than optimal economic management is slightly less impressive. ERIC LANE Jaipur (India) Mr Roubini’s article on the lessons of the recent financial crisis and its aftermath is both timely and important. Now that economies are on the rebound we may want to consider adjusting policies in order to avoid a repeat performance. An evaluation, however, is not in the works and it would very much seem that business-as-usual remains very much in vogue. The notion that reinvigorated central banks may impose macro-prudential regulation and supervision of the financial system is – it would seem – a case of wishful thinking. Unless the world’s major economies revert to the Glass-Steagall era of strict separation between commercial banks and securities firms, the world will shortly experience yet another financial meltdown. Just as war is too important an endeavour to be entrusted solely to generals, high finance is much too serious an affair to entrust to bankers. MARK POOLE Canberra (Australia)


Spring 2014 Issue

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It never fails to amaze me that Chile’s rather straightforward development model hasn’t found much traction elsewhere in the developing world. The country’s undeniable success in creating prosperity indeed merits close attention. Alone in Latin America, Chile has eliminated abject poverty from its society and has done so within a generation. While neighbouring Argentina hobbles from one crisis to the next, Chile quietly and efficiently moves ahead. Chile also offers living proof that a social democracy can still deliver the goods. This is something even governments in Europe might want to take note of. Their progressive dismantling of the welfare state in name of economic efficiency may lead to a few gains in the short term but will eventually disrupt societal cohesion and thereby undermine economic strength. The economy is what people collectively do to further their interests. It is most decidedly not an end in itself as some economists would have us believe. EUSEBIO FARIAS Fortaleza (Brazil) One cannot help but admire Warren Buffett and would wish more billionaires – and even some millionaires – would demand their taxes be increased. It is not just absurd but downright unjust that billionaires should be taxed at lower rates than your average working stiff. Also, other billionaires might want to emulate Mr Buffett’s modesty. He lives a most comfortable life and derives happiness not from excess but from doing right and being just. How hard can that be? And, how many billions does one need to satisfy cravings for luxury. Compare this to the former math teacher who became one of Britain’s largest landlords. Fergus Wilson owns some 1,000 flats and amassed a fortune in excess of £180m. He is now evicting all tenants who receive housing benefits – even those never late on rent payments – arguing that they pose too great a risk. Mr Wilson is the archetypical, almost Dickensian, ugly capitalist. To Mr Wilson the bottom line reigns supreme and all other considerations are unwelcome. The world stands in dire need of more Buffett and less Wilson. Let’s adjust tax law accordingly. KEES-JAN WIJNGAARD Ghent (Belgium) While the European Environment Agency undoubtedly engages in most valuable work and noble pursuits, it appears yet another example of Europe choosing lofty ideals over pragmatism. The continent faces the challenge of creating meaningful work for tens of millions of unemployed youth. These people need jobs now and building a few windmills is probably not going to cut it. Europe needs cheap, plentiful energy to fuel its slow moving economy. That may come from nuclear or some fossil or other. Once the economy is up and running and producing healthy surpluses, we may start looking into other ways of keeping that momentum going. To seek major adjustments now in the way we conduct our collective business is to hamper growth. Europe cannot afford that just yet. ADRIAN CUNNINGHAM Leeds (UK) It is most encouraging, and inspiring, to note the IMF and the World Bank actively engaging with the nascent powerhouses of Africa to foment that continent’s growth. At long last Africa’s time seems to have come. The continent is poised for rapid growth. By consistently focusing on education and good governance, the IMF, the World Bank, and even private businesses as Schlumberger may yet help unlock the vast potential of Africa. Keep up the good work! KEVIN SHAW Cape Town (South Africa)


Editor Wim Romeijn Assistant Editor Sarah Worthington Executive Editor George Kingsley Production Editor David Graham

> COVER STORIES Good Governance: Fouad Rahman Rashid (34 – 37)

Editorial William Adam David Gough-Price Diana French John Marinus Ellen Langford

Distribution Manager Len Collingwood

Subscriptions Maggie Arts

Commercial Director Jon Gerben

Publisher Mark Harrison

Chairman Tor Svensson Capital Finance International 43-45 Portman Square London W1H 6HN United Kingdom T: +44 203 137 3679 F: +44 203 137 5872 E: W:

IFC: Thoughts on Corporate Governance and Its Future (40 – 45)

MIGA: Achieving Investment-Grade Bonds with MIGA’s Credit Enhancement (62 – 64)

Grant Thornton: A Defining Period for UAE Capital Markets (124 – 126)

IMF: Danger of Emerging Markets Capital Outflow (164 – 165)

UNOPS: Infrastructure to Empower Women (168 – 171)

Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers


World Bank Group: A Promising New Resource for Development - The Potential of Sovereign Wealth Funds (172 – 173) | Capital Finance International

Spring 2014 Issue


As World Economies Converge World Bank

Nouriel Roubini

Michael Pettis


Joseph E. Stiglitz

José Antonio Ocampo

48 – 59

Financial Innovators

62 – 70



Nykredit EPC

72 – 92



Bramer Bank

African Century Leasing

Chinua Achebe

Sarit Centre


94 – 105 2014 Awards

Rewarding Global Excellence

106 – 139

Middle East



Booz & Co.

RAK Insurance

Luxury Goods Market

Sultan Group

Grant Thornton UAE

Commercial Bank of Dubai




140 – 151

Editor’s Heroes

Ten Men and Women Who are Making a Real Difference

152 – 159


Jáuregui y Del Valle

Ernst & Young

Ronan Farrow

Solar Power in Brazil

160 – 165



168 – 174

Emerging Economies Perspective

World Bank

UNOPS | Capital Finance International



Chairman’s Column Good Governance The Russian economy remains largely dependent on the export of oil and natural gas. Sure, plenty of nouveau riche Russian oligarchs travel the world flashing their opulence and newfound wealth. However, their country’s lopsided development has marginalised untold millions. The masses have seen little, if any, progress. Corruption, democratic deficiencies, shackled media and the absence of a level, and reasonably competitive, playing field have resulted in a dearth of investment. Entrepreneurship has suffered as well. The flouting of corporate, institutional and state good governance rules conspires against durable economic progress. Russia’s nationalistic rhetoric and the confrontational style of its diplomacy seek to invent foreign foes that conveniently help mask the many economic problems facing the country.

The world is indeed converging. Innovative companies from frontier markets – that are now fast becoming knowledge-based – are setting new global standards for best practice. Meanwhile, “old” companies from the developed world are actively seeking new growth markets. Global cross-border trade is up. As economies converge, a shift occurs that affects the balance of growth. Mature economies, led by the US, regain the role as the main drivers of output. Emerging markets still grow at a faster clip than the advanced economies do, but the gap is shrinking. The developing nations’ growth advantage has diminished significantly. The gap is now as small as it was in 2002.

Chairman’s Column

Mature economies, at long last emerging from recessions, are expanding at an average rate of 2.2% in 2014. Next year, their GDP is expected to grow by an average of 2.3%. For emerging markets and developing economies, these rates are 5.1% and 5.4% respectively. However, these averages hide pronounced regional and sectorial discrepancies. While China’s economy is still humming along nicely and producing growth rates exceeding 7% (somewhat decelerated but still mighty impressive), other BRIC economies seem to have run into, well, a brick wall. Brazil, Russia and India have seen their economies’ growth rates drop to about half the precrisis levels. Even before the Ukraine issue came to the fore, Russia’s growth in terms of GDP and industrial production had already come close to a full stop. Most Russian companies have reported a sharp reduction of export orders. Both the rouble and the Russian stock markets are now quite anaemic.


Brazil’s growth rate (estimated at 2.3% for 2014) is not unlike Europe’s. Winning the World Cup in football might buy the government some time and stem the population’s increasing dissatisfaction for a while, but it will not do away with social inequality. Here too corruption, a shaky political edifice, red tape running wild, and a rather bizarre tax system all scream for serious reforms and better governance. GDP growth is an important indicator. However imperfect and crude, it does constitute a measure of employment, investment, trade and profit levels. However, growth numbers generally do not take into account any social inequalities. Experience increasingly shows that excessive social distortions or imbalances dampen growth rates and hamper development. Business strategy should benefit all stakeholders and this includes the wider society in which business in conducted. Doing good makes sound business sense. Examples that affirm this simple principle may be seen in this and prior issues of our magazine. A happy staff and satisfied customers will eventually make shareholders quite cheerful as well. Take this one step further, and the entire community – and indeed the whole planet – stands to benefit if corporations put their business on a sustainable and responsible footing. Research shows that companies tend to prosper when they embrace concepts of environmental and social awareness and adopt solid corporate governance policies. These companies usually deliver superior financial performance and do well on stock markets too. Studies have documented the close relationship between good corporate governance practices and financial performance, valuation, cost of capital as well as access to external and internal financing. | Capital Finance International

Spring 2014 Issue

Sensible corporate governance policies allow companies to differentiate themselves in the marketplace. They also help them gain access to capital. On the other end of the spectrum, weak governance frameworks – such as poor disclosure and transparency policies, lack of shareholder protection, and insufficient oversight at board level – often fail to impress global investors. For example, shareholder care and protection are essential to the development of any given country’s capital markets (e.g. the flight of Russian companies to the London Stock Exchange). It hardly comes as a surprise that the good governance of pension funds contributes significantly to higher saving rates. It increases the available pool of investment capital which is exemplified by the enduring success of countries such as the Netherlands, Denmark and Chile. The operational performance of companies is usually also directly linked to governance practices – or the lack thereof – of the host country and the transparency of its institutions. On the one (poor) side of the scale are countries such as Brazil, Venezuela, and Greece while the other side is populated by the likes of the UK, Switzerland, and Norway. Better corporate governance also leads to an improved financial system which in turn underpins the expansion of the private sector as a whole through greater access to banking services and the availability of funding for job-creation at the level of small and medium enterprises. This is real trickledown economics that helps lift people out of poverty. Improvements in the quality of corporate governance further facilitate increased rates of GDP growth, productivity, and a much better ratio of investment to GDP as it occurs in, say, the US and Germany. In emerging markets, corporations are important contributors to sustainable and equitable growth which reduce poverty levels. Governance policies can be a powerful driver for progress. Conversely, they can also impede progress. Improvement in corporate governance practices is particularly critical for companies from countries that are dependent on external sources of finance to fund current account deficits, such as Argentina, Egypt, and India. Global GDP growth is set for a remarkable jump this year and next. For developing and frontier economies, such as those of the Philippines, Indonesia and Mexico, improvement in corporate governance is thus critical in order for these countries to access the capital now required to take full advantage of the opportunities that are arising as the global economy rebounds.

Chairman’s Column

Good reading!

Tor Svensson Chairman Capital Finance International



> Otaviano Canuto, World Bank Group:

Macroeconomics and Stagnation Keynesian-Schumpeterian Wars Policy makers in the advanced economies at the core of the global financial crisis can make the claim that they prevented a new Great Depression. However, recovery since the outbreak of the crisis more than five years ago has been sluggish and feeble. Since these macroeconomic outcomes have to some extent been shaped by policy mixes adopted in response to the crisis, the appropriateness of those policy choices is a question worth revisiting. This is particularly the case as one considers the hypothesis that a long-run trend toward stagnation may have already been at play during the pre-crisis period, even if temporarily countervailed by pervasive asset price booms.

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n the other hand, there is a core divergence among those Keynesian and Schumpeterian economists who have proposed such stagnation hypotheses. While both groups agree that asset bubbles momentarily offset underlying stagnation trends before the crisis and that the recovery has been subpar, they point to different underlying factors for continued anaemic levels of growth. Keynesians argue from the demand side and believe that fiscal policies have been far too restrictive, with too much emphasis on monetary policies, whereas Schumpeterians believe that the necessary force of creative destruction has not been allowed to fully take place for a long time now. ACTUAL GDP LAGGING ITS POTENTIAL Chart 1 – from Davies (2013) – depicts several key features of the ongoing recovery in advanced economies. First, the aggregate growth trend exhibited prior to the crisis is no longer there, either because it was not really sustainable in the long run and/or as a legacy of the crisis. Second, a new Great Depression has been avoided but actual GDP has remained subpar relative to the latest IMF/OECD estimates for potential output. Finally, despite the possibility of catching-up with potential GDP in two years – as outlined in the central GDP projection – such an outcome remains subject to policymakers properly calibrating their responses to a wide range of idiosyncratic challenges ahead (Canuto, 2014). As shown by Kose et al (2013), the ongoing recovery in advanced economies has been sluggish and fragile when compared to the


“While both groups agree that asset bubbles momentarily offset underlying stagnation trends before the crisis and that the recovery has been subpar, they point to different underlying factors for continued anaemic levels of growth.” three previous ones. While real GDP per capita returned to positive trajectories soon after previous temporary downturns, this time it not only started decelerating well prior to the global recession year (2009), but has not yet fully recovered its peak levels. At first glance, this is not surprising, given the nature of the factors underlying the crisis: The pervasiveness and magnitude of asset booms and busts; design flaws of the Eurozone fully revealed as the crisis unfolded; the degree of synchronization of recessions; policy uncertainty associated with a loss of confidence on the sufficiency of established policy blueprints; and so on. Moreover, any such transition from a previously booming economy to a “new normal” would necessarily entail a significant reallocation of resources, with creation/destruction of jobs and productive assets. As remarked by Rajan (2013):

“(…) the bust that follows years of a debt-fuelled boom leaves behind an economy that supplies too much of the wrong kind of goods relative to the changed demand. Unlike a normal cyclical | Capital Finance International

recession, in which demand falls across the board and recovery requires merely rehiring laidoff workers to resume their old jobs, economic recovery following a lending bust typically requires workers to move across industries and to new locations.” On the other hand, gauging by the size and persistence of the gap between actual and potential GDPs exhibited in Chart 1, one may question whether such a transition might have been made faster with appropriate macroeconomic policies. After all, while economists often assume that, no matter where potential GDP might be, actual GDP will eventually move to it, and convergence can occur in the reverse direction. Losses associated with prolonged periods of significant output gaps – e.g., labor de-skilling, foregone R&D efforts, and resource idleness – then become permanent. THE CRISIS RESPONSE HAS BEEN SINGLE-HANDEDLY BASED ON MONETARY POLICY Kose et al (2013) point out how the recovery in advanced economies may have reflected peculiarities of the policy mix adopted as responses to the recent economic downturn, as compared to previous experiences. While both fiscal and monetary policies have been implemented in a countercyclical direction in the past, this has not been the case most recently. Monetary policy has been extremely accommodative. As policy interest rates approached the bottom – the lower zero bound – central banks went so far as to expand their balance sheets, in conjunction with other

Spring 2014 Issue

into fiscal unsustainability of its crisis-ridden members. Austerity has also been favoured in the UK. Why has the fiscal and monetary policy mix been so different? On the fiscal policy side, as shown by Kose et al (2013), public debt levels in advanced economies were much higher than in the past when the macroeconomic downturn took place. Public deficit levels had soared in the run-up to the recession, given the scale of financial support measures and substantial revenue losses.

Chart 1: Aggregate G4 (US, Euro Area, Japan, UK) GDP, Potential and Trend. Note: Potential Output is Average of IMF and OECD estimates. PPP weighted average. Source: Fulcrum Asset Management.

However, one may also say that a policy option for austerity was exercised. In the cases of the US and UK, financial markets were not imposing any substantial short-term fiscal retrenchment – especially if medium-to-long-term structural adjustment plans were to be announced. In the Eurozone, the intensity of fiscal adjustment in crisis-ridden members could have conceivably been lower provided that a correspondingly higher financial support from outside had been made available. Unconventional monetary policies, in turn, came out of the urgency of halting potentially¬ catastrophic processes of debt deflation and bank-credit freezes that threatened to transform solvent-but-illiquid balance sheets into insolvent ones. In the case of the Eurozone, such risks of financial meltdown were compounded by negative feedback loops between banks’ portfolios and rising risk premiums associated with crisis-ridden national public debts.

Chart 2: [Left - Advanced Countries. Right - Emerging Market Countries. Blue line - Average of previous recessions. Red line - Recovery from Great Recession.] Short-term interest rate during global recessions and recoveries (percent). Note: Zero is the time of the global recession year. Each line shows the PPP-weighted average of the countries in the respective group. Source: Kose et al (2013)

Chart 3: [Left - Advanced Countries. Right - Emerging Markets. Blue line - Average of previous recoveries. Red line - Recovery from

Very loose monetary policies smoothed the process of private-sector balance-sheet deleveraging by keeping yields at low levels and propping up asset values. In the Eurozone, risk premiums abated after the European Central Bank pledge to do “what it takes” to keep currency convertibility. The phasing out of unconventional policies has been protracted as a reflection of the sluggishness and feebleness of the macroeconomic recovery and the absence of fiscal stimulus as an alternative. In the Eurozone, the debt overhang is still salient and balance-sheet deleveraging still has some way to go, but certainly in the case of the US, where debt deleveraging has already been substantial, fears regarding consequences of the unwinding of quantitative easing have made it a measured and paced process.

100 in the year before global recession. Zero is the time of the global recession year. Each line shows the PPP-weighted average of the countries in the respective group. Source: Kose et al (2013)

unconventional monetary policies (Canuto, 2013a). Chart 2 illustrates that by matching short-term interest rates during previous and current (the Great Recession) experiences. Conversely, while previous recovery experiences were supported by the expansion of public

spending, fiscal policy has this time moved in the opposite direction (chart 3). The fiscal stimulus implemented in the US at the outset of the downturn was reversed not long after, and followed by fiscal contraction. In the Eurozone, in turn, fiscal austerity policies were implemented as financial havoc morphed | Capital Finance International

Can one point out the single-handed reliance on monetary policy to counter downturn as a factor underlying actual GDP tracking behind potential levels? After all, most analysts attribute an asymmetric capacity to monetary policy in economic downturns: The ability to countervail risks of asset-debt deflation is not accompanied by an equivalently strong capacity to induce agents to invest in new productive assets. As the saying goes, “one can pull a string, not push it!”

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Great Recession.] Real primary expenditure (index, PPP weighted). Notes: Dashed lines denote WEO forecasts. Figures are indexed to

Furthermore, after a certain point, ultra-loose monetary policy would only lead to a repeat of the bubble-blowing process seen before the crisis.

London City

In this sense, countercyclical moves by policy makers might have reduced the length and size of the observed output gap had fiscal policy operated as a countercyclical tool complementary to monetary policy. However, as we approach in the following, this issue is far from being settled. WHAT IF A “SECULAR STAGNATION” TREND HAS BEEN AT PLAY? WHICH ONE? The role of asset bubbles pulling up the precrisis growth trajectory depicted in chart 1 is now widely acknowledged. In the case of the US:

“(…) the liquidity-generating machine inflated US asset values and fed the exuberant growth of US household spending. US consumers have accounted for more than one-third of the growth in global private consumption since 1990. Increasingly, their spending was made possible by the wealth effect generated by the rising prices of housing and household financial assets and stocks, whose values were in turn expected to more than outstrip those of household debt. It was this upswing in consumption by US households, and others as debt-based consumers-of-last-resort in the global economy that essentially made possible the extraordinary structural transformation and productivity increases experienced by some manufacturing exporters and commodity producers among developing economies.” (Canuto, 2009) Columnist

A similar bubble-led growth process could be found inside the Eurozone, starting with the downward convergence of perceived risks and interest rates throughout the zone after the introduction of the new common currency. Today’s countries under stress were able to sustain domestic absorption much above domestic production capacities for a long period, easily financing the difference because of fallenfrom-heaven domestic asset value appreciation. The underestimation of fiscal risks can also be seen as a manifestation of such euphoria. Asset-price dynamics has now been mainstreamed as an important subject to be addressed by policy makers. Macroprudential policies are now a component of the macroeconomic stabilization toolkit (Canuto, 2013b). However, enhancing the policy framework by revamping financial regulation and supervision and combining monetary and prudential policies in order to ensure both financial and macroeconomic stability may not be enough if some underlying secular trend of stagnation is at play. If the pre-crisis growth trend depicted in chart 1 was inextricably dependent on the overspending induced by the financial frenzy

16 | Capital Finance International

Spring 2014 Issue

– credit and house bubbles – then running its course, avoiding future asset price booms and busts might simply lead to stability around low growth rates. Such a view underlies the possibility of a “secular stagnation” trend as discussed by economists like Krugman (2013) and Summers (2013):

“Manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth. (…) short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.” (Summers 2013) They and other – say, Keynesian – economists have suggested an array of possible causes for the US economy and others to display a propensity of aggregate demand shortfalls, in the sense that, as a result of structural conditions, aggregate spending would be enough to ensure full employment and use of potential output capacity only in the presence of negative real interest rates. Such an “investment drought” – or, as a flipside, a “savings glut” as measured by levels of non-consumption expenditures required to sustain income at full employment – could be seen as underlying the evolution depicted in chart 4, obtained from Fatas (2013). Beyond the legacies of the crisis – higher risk aversion, increased savings by states and consumers, increased costs of financial intermediation and major debt overhangs – several long-standing factors could be pointed out as dampening investment. Among them, I would single out two as most significant: First, rising income concentration – rising shares of income accruing to capital and the very wealthy – would be leading to overall underconsumption, only occasionally countervailed with unsustainable over-indebtedness by the poor.

Summers (2014) argues that:

“(…) our economy is held back by lack of demand rather than lack of supply. Increasing capacity to produce will not translate into increased output unless there is more demand for goods and | Capital Finance International

17 Columnist

Second, features of technology evolution might also be contributing to an investment drought. Steep declines in the costs of durable goods – especially those associated with information and communication technology and/or outsourcing – would mean less spending levels associated with investment plans out of corporate savings. Furthermore, the trajectories of technological evolution currently unfolding would not carry an array of high-return investment opportunities comparable to past ones.


On the other side of the debate, there are those – say, Schumpeterian – economists who have offered supply-side based hypotheses of a long-run stagnation trend already in course for some time. Like Joseph A. Schumpeter, they lay emphasis on growth as a process of “creative destruction” in which obsolete forms of resource allocation and wealth – jobs, fixed-capital assets, technologies, and balance sheets – are replaced by higher-value ones.


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Chart 4: [Dark Blue - Private Nonresidential Investments (% of GDP). Light Blue - Real Interest Rate.] US - Private Nonresidential Investment and Real Interest Rates. Source: Fatas (2013).

services.” He strongly recommends establishing “a commitment to raising the level of demand at any given level of interest rates through policies that restore a situation where reasonable growth and reasonable interest rates can coincide.” It follows from this view that the policy mix that has prevailed since the aftermath of the crisis


has been inappropriate. Instead of relying singlehandedly on ultra-loose monetary policy, public spending – on infrastructure, energy and others – should be rescued from the retrenchment to which it has been submitted. By the same token, pro-active public policies to ignite private investment spending should also be implemented. | Capital Finance International

Although accepting an eventual role of monetary policies in avoiding systemic financial meltdowns, they tend – also like Schumpeter to be more sceptical of fiscal or other types of countercyclical stimulus if these are designed in ways that retard the process of creative destruction. As for the post-crisis policy mix, even if it is acknowledged that fiscal policy may have moved precociously to the contractionary side, ultimately public policy action to prop up aggregate demand is not considered to be a key component of the fight against stagnation: “If you are postulating a stagnation across the longer run, ultimately it will have to boil down to supply side deficiencies.” (Cowen, 2013).

Spring 2014 Issue

USA: Detroit

The evolution of declining investments in tandem with lower interest rates shown in Chart 4 would be seen as stemming from disadvantageous rates of return not related to the pace of aggregate demand expansion. Technological evolution leading to stagnation trends has been for some time now put forth as a hypothesis by Gordon (2014). Nevertheless, his arguments are about low productivity-raising features of current technological trajectories rather than on their supposedly dampening implications regarding aggregate demand.

“(…) the advanced countries’ pre-crisis GDP was unsustainable, bolstered by borrowing and unproductive make-work jobs. More borrowed growth – the Keynesian formula – may create the illusion of normalcy, and may be useful in the immediate aftermath of a deep crisis to calm a panic, but it is no solution to a fundamental growth problem. If this diagnosis is correct, advanced countries need to focus on reviving innovation and productivity growth over the medium term, and on realigning welfare promises with revenue capacity, while alleviating the pain of the truly destitute in the short run.” FOR THE SAKE OF CONCLUSION Keynesian and Schumpeterian hypotheses of stagnation trends are based on non-directly observable factors. Therefore, the struggle for hearts and minds of public opinion and policy makers will likely remain unsettled. Nevertheless, let us conclude by offering two broad takeaways: First, regardless of the size of public outlays, public action and spending should be both | Capital Finance International

designed in ways that “maximize the bang for the buck” in terms of overcoming obstacles to the process of creative destruction. Take the case of Japan: the third arrow of Abenomics – on structural reforms of the services sectors and others – will be a condition for successful results from its fiscal and monetary arrows. In the Eurozone, quicker action to restructure/ consolidate “zombie” balance sheets and companies, in line with a more pro-active stance taken by monetary and financial authorities, should also hasten the path out of the current stagnation. Second, regardless of whether advanced economies are indeed facing either demand- or supply-side stagnation trends, a major bet for the global economy to escape remains on the developing world’s economic transformation as a source of growth (Canuto, 2011). However, for that to happen, developing countries themselves will also need to pursue their own countryspecific agendas of structural reform (Canuto, 2013d). i

Please see the online version at for references.

19 Columnist

Cowen (2011) has in turn approached stagnation as an outcome of the exhaustion of a significant set of “low-hanging fruits” reaped in recent history, namely one-off supply-side opportunities associated with post-war reconstruction; trade opening; diffusion of new technologies in power, transport, and communications; educational attainments and others. Other supply-side possibilities of stagnation recently suggested are associated with features of resource allocation – e.g. over-sizing of financial activities, as discussed by Canuto (2013c).

As outlined by Rajan (2012), such line of proposition about stagnation trends suggests that:

> Nouriel Roubini:

Emerging-Market Risk and Reward


EW YORK – One definition of an emerging-market economy is that its political risks are higher, and its policy credibility lower, than in advanced economies. After the financial crisis, when emerging-market economies continued to grow robustly, that definition seemed obsolete; now, with the recent turbulence in emerging economies driven in part by weaker economic-policy credibility and growing political


uncertainty, it seems as relevant as ever. Consider the so-called Fragile Five: India, Indonesia, Turkey, Brazil, and South Africa. All have in common not only economic and policy weaknesses (twin fiscal and current-account deficits, slowing growth and rising inflation, sluggish structural reforms), but also presidential or parliamentary elections this year. Many other emerging economies – Ukraine, Argentina, | Capital Finance International

Venezuela, Russia, Hungary, Thailand, and Nigeria – also face significant political and/or social uncertainties and civil unrest. And that list does not include the perilously unstable Middle East, where the Arab Spring in Libya and Egypt has become a winter of seething discontent; civil war rages in Syria and smolders in Yemen; and Iraq, Iran, Afghanistan, and Pakistan form a contiguous arc of volatility.

Spring 2014 Issue

Nor does it include Asia’s geopolitical risks arising from the territorial disputes between China and many of its neighbors, including Japan, the Philippines, South Korea, and Vietnam. According to the positive narrative about emerging markets, industrialization, urbanization, per capita income growth, and the rise of a middle-class consumer society were supposed to boost long-term economic and sociopolitical stability. But in many countries recently wracked by political unrest – Brazil, Chile, Turkey, India, Venezuela, Argentina, Russia, Ukraine, and Thailand – it is the urban middle classes that have been manning the barricades. Likewise, urban students and the middle classes spearheaded the Arab Spring, before losing authority to Islamist forces. This is not a complete surprise: in many countries, working classes and rural farmers have benefited from per capita income increases and a broadening social safety net, while the middle classes feel the pinch from rising inflation, poor public services, corruption, and intrusive government. And now the middle classes tend to be more vocal and better politically organized than in the past, in large part because social media allow them to mobilize faster. Not all of the recent political unrest is unwelcome; a lot of it may lead to better governance and greater commitment to growth-oriented economic policies. Among the Fragile Five, a change in government is likely in India and Indonesia. But uncertainty abounds. In Indonesia, economic nationalism is on the rise, implying a risk that economic policy will follow an inward-looking course. In India, the opposition Bharatiya Janata Party’s prime ministerial candidate, Narendra Modi, if elected, may or may not be able to implement at the national level the growth-oriented policies that he successfully implemented at the state level in Gujarat. Much will depend on whether he can shed his sectarian attitudes and become a truly inclusive leader.

New York: Central Park

“Not all of the recent political unrest is unwelcome; a lot of it may lead to better governance and greater commitment to growthoriented economic policies.”

By contrast, a change in government is unlikely in South Africa, Turkey, and Brazil. But the current rulers, if reelected, may shift policies. South African President Jacob Zuma has chosen a pro-business tycoon as his vice-presidential candidate and may move toward market-oriented reforms. Turkish Prime Minister Recep Tayyip Erdoğan cannot realize his dream of a presidential republic and will have to follow his opponents – including a large protest movement – to the secular center. And Brazilian President Dilma Rousseff may embrace more stable macroeconomic policies and accelerate structural reforms, including privatization. | Capital Finance International

Even in extremely fragile and risky cases, such as Argentina, Venezuela, and Ukraine, political and economic conditions have become so bad that – short of becoming failed states – the situation can only get better. Argentine President Cristina Fernández is a lame duck; and any of her potential successors will be more moderate. In Venezuela, President Nicolás Maduro is a weak leader who may eventually be unseated by a more centrist opposition. And Ukraine, having gotten rid of a kleptocratic thug, may stabilize under a Western-led economic revival program – that is, if the country can avoid civil war. As for the Middle East, risks remain abundant, with a bumpy economic and political transition likely to take more than a decade. Even there, however, gradual stabilization will eventually lead to greater economic opportunities. So, in most cases, there is reason to hope that electoral change and political upheaval will give rise to moderate governments whose commitment to market-oriented policies will steadily move their economies in the right direction. Of course, the risks should not be discounted. Emerging economies today are more fragile and volatile than in the recent past. Structural reforms imply the need to pay shortterm costs for longer-term benefits. State capitalism of the sort exemplified by China has strong support among policymakers in Russia, Venezuela, and Argentina, and even in Brazil, India, and South Africa. Resource nationalism is on the rise, as is a backlash against free trade and inward FDI. Indeed, rising income and wealth inequality in many emerging markets may eventually lead to a social and political backlash against liberalization and globalization. That is why economic growth in emerging markets must be cohesive and reduce inequality. While market-oriented reforms are necessary, government has a key role to play in providing a social safety net for the poor; maintaining high-quality public services; investing in education, training, health care, infrastructure, and innovation; enforcing competition policies that constrain the power of economic and financial oligopolies; and ensuring genuine equality of opportunity for all. i ABOUT THE AUTHOR Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at New York University’s Stern School of Business. Copyright: Project Syndicate, 2014.


> Michael Pettis:

Global New Deal Required for Emerging Markets to Bounce Back


wo processes bear most of the blame for excess savings and weak global demand. First, because the rich consume less of their income than do the poor, rising income inequality in countries like the US – and indeed in much of the world – automatically force up savings rates. Second, policies that forced down the household income share of GDP – most noticeably in countries like China and Germany –


had the unintended consequence of also forcing down the household consumption share of GDP. This income imbalance automatically forced up savings rates in these countries to unprecedented levels. Excess savings as a troublesome issue was temporarily sidestepped by a credit-fuelled consumption binge and by a surge in non- | Capital Finance International

productive investment. Both phenomena took place around the world over the past decade or so. However, ultimately neither is sustainable. In a closed economy – and the world is a closed economy – there are only two sustainable consequences of forcing up the savings rate: There must be either a commensurate increase in productive investment, or a rise in global unemployment.

Spring 2014 Issue

These are the two paths the world faces today. As developing economies cut back on wasted investment spending, excess manufacturing capacity and weak consumption growth mean that the only way to increase productive investment is to embark on a global New Deal that addresses infrastructure shortcomings in countries such as the US and India that have neglected domestic investment. Otherwise the world has no choice but to accept high unemployment for many years to come or at least until countries like the US redistribute income downwards, and countries like China and Germany increase the household share of GDP. Neither of these options is likely to be politically feasible. But until ordinary households around the world regain their share of global GDP that they lost over the past two decades, the world will continue to face the same choices: An unsustainable increase in debt; an increase in productive investment; or higher global unemployment. HOUSEHOLDS SQUEEZED Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place. Without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty – not just in the developing world but also in peripheral Europe – and it is clear that we should expect the woes of developing countries to get worse over the next two to three years. Recent events in the Ukraine have capped several years of social unrest, revolution, and war around the world; these seem to have intensified since the beginning of the global crisis of 200708. This should not have surprised us. We should probably brace ourselves for several more years of political uncertainty. In late 2001, I published an article with Foreign Policy discussing what the world might look like following the global crisis which I, perhaps a little prematurely, was expecting imminently.

“There must be either a commensurate increase in productive investment, or a rise in global unemployment.” | Capital Finance International

In the article I pointed out that over the past two centuries we have experienced a number of globalization cycles, largely driven by deep changes in monetary conditions. These cycles followed a pattern regular enough to allow us to make some fairly confident predictions. We were, I argued, living towards the end of one such cycle, and when underlying liquidity conditions change, we are likely to see a repeat of the phenomena experienced at the end of previous cycles. Thus, I wrote:

Following most such market crashes, the public comes to see prevalent financial market practices as more sinister. Criticism of the excesses of bankers becomes a popular sport among politicians and the press in the advanced economies. Once capital stops flowing into less


developed, capital-hungry countries, the domestic consensus in favour of economic reform and international integration begins to disintegrate. When capital inflows no longer suffice to cover the short-term costs to the local elites and middle classes of increased international integration – including psychic costs such as hurt feelings of national pride – support for globalization quickly wanes. Populist movements, never completely dormant, become reinvigorated. Countries turn inward. Arguments in favour of protectionism suddenly start to sound appealing. Investment flows quickly turn into capital flight.

Ukraine: Kiev Pechersk Lavra

These predictions were rather easy to make, I argued, because they occur so regularly. One of the predictions that I should have made – but didn’t – was that after the globalization process has been reversed we are likely to see an upsurge in war, revolution, conflict and social unrest. These, after all, are the events we usually associate with the end of globalization cycles. At the time I wrote the article (published less than two weeks before the 9/11 terrorist attack), it really seemed that the world had changed in some subtle, but profound, way and that we had become too sophisticated to engage in such disruptive behaviour. I should have known better. I have spent much of the past two decades trying to show how persistently historical patterns re-emerge, and why the claim that “this time is different” is almost always wrong. Yet I believed that when it came to revolution and war perhaps this time really was a little different. International institutions were strong enough, I believed, to manage the kinds of pressures that normally emerge from a reversal of sustained globalization. This turns out, perhaps, not to be the case. Watching the news on television, especially events now unfolding in the Ukraine, leaves me with a sense that we still haven’t figured out how to manage these pressures. The recent rout suffered by emerging markets has left a lot of people very confused about the direction in which the global economy in general – and developing countries in particular -are heading. It turns out that, once again, we should not have found recent events at all surprising. They are part of the globalization cycle. THERE WAS NO “DECOUPLING” We had of course wanted to argue that this time around was indeed different. For several years we have been hearing that the global crisis of 2007-08 marked some kind of inflection point that signalled the decoupling of developing countries from the advanced countries of North America and Europe. The argument, as I understand it, is that the developed countries of Europe and North America had gotten themselves caught up in a debt-fuelled consumption boom which culminated in a crisis that heralded the start of a reversal process. The developing world had, according to this argument, managed to untie itself from the demand generated by more developed countries. Henceforth

24 | Capital Finance International

Spring 2014 Issue

its growth would be driven by domestic demand arising, at least in part, from more favourable demographics. The growing middle classes, especially those of China and India, were emerging to become a major generator of demand. Not only were other developed countries benefiting from this new source of demand, but eventually the entire world would benefit from the demand generated in the developing world. I never found this thesis very convincing. In fact, I completely rejected this “decoupling” argument. As I see it, the decade before the crisis was characterized by a series of unsustainable processes driven largely by structural changes in the global economy. These changes forced up global savings rates. In my view, the 2007-08 crisis was just the first stage of a rebalancing process, in which the overconsumption of the developed world was forced by rising debt to reverse itself. But of course this couldn’t happen without equivalent adjustments elsewhere. The crisis now affecting emerging markets is, as I see it, simply the second stage of this global rebalancing; or the third, if you think of the sub-prime crisis in the US as the first one and the euro crisis in Europe as the second one. To understand the link, we need to go back to the pre-crisis period. Ever since the 2007-08 global crisis, the world has suffered from weak global demand. Demand had been quite strong before the crisis, but this largely reflected a consumption binge fuelled by easy credit, combined with a huge amount of what proved to be wasteful real estate development. Both factors were unleashed as a consequence of soaring stock and real estate markets which in turn were the result of speculative capital pouring into countries like the United States and those of peripheral Europe. The crisis put an end to all this. After stock and real estate markets in both the United States and Europe collapsed, the great consumption and real estate boom in many parts of the world also ended. CAUSE AND EFFECT Normally slowing consumption rates should also cause a reduction in investment levels. The purpose of productive investment today, after all, is to serve tomorrow’s consumer. However, at first this didn’t happen. Instead, in 2009-10 we saw China intensify its credit-fuelled investment binge. The same happened in the developing countries that produced the hard commodities China needed. These increased investment level were supposed to offset the impact of declining consumption in the west. It certainly had that effect. The collapse of China’s current account surplus, for example, had almost no impact on domestic employment because it was promptly offset by the aforementioned surge in domestic investment. This is what set off talk of “decoupling”. As weaker consumption and real estate investment in Europe and the US forced down growth in global demand, it was counterbalanced by greater demand in the developing world – driven in large part by China. | Capital Finance International


Brazil: Rio De Janeiro

Not surprisingly, this meant that a larger share of total demand accrued to poor countries at the expense of developed countries. DECOUPLING IN THE 1970S This process was not sustainable. In China, well before the crisis, we were already experiencing the problem of excess investment in manufacturing capacity, real estate and infrastructure. In developing countries like Brazil this was matched by investment in hard-commodity production based on the unrealistic growth assumptions of China. Weaker demand in the rich countries, especially weaker consumption, should have reduced whatever the optimal amount of global investment might have been, especially as we already suffered from excess capacity. To put it schematically: 1. Before the crisis the world had already over-invested in real estate and manufacturing capacity based on unrealistic expectations of consumption growth. 2. The global crisis forced consumption growth to drop. This should have meant that if investment levels were too high before the crisis, they were even more so after. 3. Instead of cutting back on investment, however, the developing world reacted to the drop in rich-country demand by significantly increasing investment, driven at least in part by worries that the consumption adjustment in Europe and the US would cause a collapse in export growth which would in turn force unemployment up to dangerous levels. Clearly this wasn’t sustainable. Not surprisingly, soaring debt is now forcing this investment surge to end. As a result, we are now going to experience the full impact of slower consumption growth in the rich countries. But instead of this being mitigated by higher investment growth in


the developing world, it will now be reinforced by slower investment growth here. Over the next few years demand will revive only slowly in the US, and perhaps not at all in Europe. In the developing world it will weaken. We’ve seen this movie before. In the mid-1970s, the US and Europe were mired in recession as the loose monetary policy of the 1960s, soaring oil prices, and many years of US spending on both the Great Society and the Vietnam War, forced the US into an ugly adjustment. Instead of succumbing to reduced global demand, however, developing countries were flush with cheap capital driven by international banks eager to recycle burgeoning petrodollar deposits. This caused an investment binge in emerging countries most of which had already experienced a decade or so of high growth. While the West suffered, these countries continued to grow. For perhaps the first time in modern history, excited bankers and businessmen spoke ecstatically about the decoupling of the developing world from the slow-growth issues in the US and Europe. LESSONS FROM HISTORY But the end result should have been predictable. Developing-country debt levels soared throughout the late 1970s, and once the Fed – concerned with US inflation – turned off the liquidity tap, excessive debt forced much of the developing world, and all of Latin America, into a “lost decade” of low growth, high unemployment, political turmoil and financial distress. In the 1970s of course the big capital push behind the surge in investment was driven by the soaring savings being accumulated in the Middle East. Here, oil revenues rose much faster than the increase of consumption. Today, the big | Capital Finance International

capital push is driven by soaring saving rates in China, as structural constraints cause China’s production of goods and services to rise much faster than China’s ability to consume them. The result is that over the next few years global demand will be even weaker than it has been since the crisis. Consumers in North America, peripheral Europe, and the newly rich middle classes around the world are still cutting back on consumption to pay down debt. Investors in China, Latin America and Asia are finally responding to overcapacity and soaring debt by themselves, cutting back on investment. But if we all cut back our spending to service debt, paradoxically; our debt burden will only rise. The great danger is this rising debt burden will force us to cut back even more, thus making matters only worse – and, by the way, forcing at least some countries in both the developing world and in Europe, to default. Nothing fundamental has changed. Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global saving levels, or, to force down global consumption – which amounts to the same thing. Lower future consumption makes investment today less profitable. Consumption and investment, which together comprise total demand, are likely to stagnate for many years to come. SQUEEZING OUT MEDIAN HOUSEHOLDS Two processes bear most of the blame for weak demand. First, because the rich consume less of their income than do the poor, rising income inequality in countries like the US – and indeed in much of the world – automatically forces up savings rates. Second, policies that forced down the household income share of GDP – most

Spring 2014 Issue

noticeably in countries like China and Germany – had the unintended consequence of also forcing down the household consumption share of GDP. This income imbalance automatically forced up savings rates to unprecedented levels in these countries. For many years the excess savings of the rich, and of those of countries with income imbalances, funded a consumption binge among the global middle classes – especially in the US and peripheral Europe. This situation allowed us to pretend that there was no problem of excess savings. The 2007-08 crisis, however, put that fallacy to rest. It is worth remembering that a structural tendency to force up the savings rate can be temporarily sidestepped by a surge in consumption levels driven by easy and/or cheap credit, or by a surge in non-productive investment. Both happened around the world in the past decade or so, but ultimately neither one is sustainable. In a closed economy, and the world is a closed economy,

there are only two sustainable consequences of forcing up the savings rate: Either there must be a commensurate increase in productive investment, or there must be a rise in global unemployment. This is the choice the world faces today. As the developing world cuts back on wasted investment spending, excess manufacturing capacity and weak consumption growth means that the only way to increase productive investment is for countries to embark on a global New Deal. This would allow countries that are seriously underinvested in infrastructure – most obviously the US but also India and others – to address their shortcomings absorbing productive investments in the process. Lacking such a New Deal, the world has no choice but to accept high unemployment for many more years until countries such as the US start making work of redistributing income downwards and countries like China increase the household share of GDP. Neither of these

scenarios is likely to prove an easy political sell. However, until ordinary households around the world regain the share of global GDP that they lost over the past two decades, the world will continue to face the same choices: An unsustainable increase in debt levels, an increase in productive investment, or higher global unemployment. The latter choice will be distributed through trade conflict. Emerging markets may well rebound strongly in the coming months, but any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until this rebounds, the global imbalances will remain firmly in place. Without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect the woes and challenges of developing countries only to grow worse over the coming few years. i

ABOUT THE AUTHOR Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank. Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt. Pettis has been a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University. He can be contacted at | Capital Finance International


> Joseph E. Stiglitz:

Stagnation by Design


EW YORK – Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in. While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.


The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust. Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned | Capital Finance International

to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns. Policymakers’ response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. Moreover, underinvestment in both the public and private sector has created a generation of

Spring 2014 Issue

young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity. On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused. Every downturn eventually comes to an end. The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with longlasting consequences. Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory. But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.

New York: Stock Exchange

“On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013.”

Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists’ miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: unless government policies change, we are in for a long period of disappointment. Markets are not self-correcting. The | Capital Finance International

underlying fundamental problems that I outlined earlier could get worse – and many are. Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality. The trade surpluses of northern Europe have increased, even as China’s have moderated. Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression. This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. But, rather than government facilitating the transition, austerity is inhibiting it. Malaise is better than a recession, and a recession is better than a depression. But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament. Instead, our current difficulties are the result of flawed policies. There are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people. i ABOUT THE AUTHOR Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers our Future. Copyright: Project Syndicate, 2014.


> Mauldin and Tepper’s Code Red Reviewed:

Code Red or Red Herring? By Stephanie Kelton

If you aren’t already unnerved by what Bernanke & Co. have been doing for the last five years – things like quantitative easing (QE), a zero-interest policy (ZIRP) and large-scale asset purchases (LSAPs) – then reading John Mauldin and Jonathan Tepper’s latest, Code Red, may leave you seeing red. It’s a maddening tale of the harm that has already befallen savers as well as a warning about the longer-term damage that may be in store for all of us down the road.


s always, Mauldin and Tepper are fun to read. They don’t just excoriate the Fed for propping up banks with trillions of dollars created out of thin air, they deliver the message with fecal flair, using metaphors like, “free money is like a unicorn that leaves trails of tasty chocolate droppings wherever it goes.”

funds rate) would almost always sit at zero. Indeed, one might say that the natural rate of interest is zero and that whenever rates are positive, it’s because the central bank is keeping them artificially high. So it isn’t so much that the Fed’s low interest rate policy is punishing savers but that it isn’t supporting a risk-free lunch the way it used to. We may not like it, but it’s difficult to justify the outrage. After all, none of us is entitled to generous risk-free returns.

But they’re also taking on a serious (and to my mind dangerous) narrative that’s being promulgated by scores of economists, journalists and others, who are working hard to build the case that, like Colonel Jessup in A Few Good Men, Chairman Bernanke was the brave warrior we all needed, the one who’s policies (however distasteful) ultimately protected us all from greater harm. Mauldin and Tepper do an excellent job of denying this narrative by pointing out that the Fed’s “unconventional” (or Code Red) policies “worked” not by improving the economic well being of the masses but by massively enriching those at the very top. Low, and sometimes negative, real rates chased investors into riskier assets in the hope that a rising bubble would lift all boats. It didn’t. Wealthy asset holders are wealthier than before, but the gains haven’t trickled down to everyone else as Bernanke hoped. Instead, the Fed’s policies widened the already gaping divide between the very well off and everyone else. The hardest hit? Savers. “[T]hese unconventional policies are generally good for big banks, governments and borrowers, but they are very bad for savers.” The problem, the authors maintain, is that Code Red policies have taken away the free lunch, risk-free return that savers used to be able to count on when buying government bonds. This is considered an unjust form of “financial repression” that’s devastating for those who rely

The bigger problem for savers, though, is the long-run damage that Mauldin and Tepper anticipate as a result of the widespread adoption of Code Red policies. And that’s what the book is really about. How should investors prepare for a world in which currency wars, speculative bubbles, debt crises and punishing inflation become the norm?

Cover: Code Red

on interest income to build their net egg. “Try retiring at 60 at today’s interest rates,” they lament. “We live in a world where it’s no longer necessary for the market to decide short rates or long rates.” The “financial repression” argument is a popular one, but it can also be misleading. The story generally runs as follows: If it weren’t for the Fed meddling around to keep interest rates artificially low, markets would be delivering a more “normal” rate of return. The truth, which I suspect Mauldin and Tepper know, is that in the absence of Fed intervention – either paying positive rates on overnight reserve balances or draining a sufficient quantity of excess reserves by selling bonds – the market rate (i.e. federal

It’s a fascinating read with plenty of sound analysis behind it. However, it misses the mark on two important fronts. First, there’s an unwarranted obsession with the Fed’s balance sheet. Thus, while it’s true that QE flooded the banking system with excess reserves, there’s no reason for investors to anticipate higher inflation as a consequence. Here, Mauldin and Tepper fall prey to two flawed textbook theories: the deposit multiplier and the Quantity Theory of Money. For them, reserves are “potential money,” and it’s only a matter of time before banks suddenly start lending them out, causing the broad money supply to explode and inflation to take off. Anyone relying on these textbook theories to reason through the implications of QE is almost certainly going to get things wrong. Banks don’t lend reserves (except to one another in the overnight market). Having reserves doesn’t make it more likely that a bank will lend, and not having reserves doesn’t make lending less likely. Banks are capital constrained, not reserve constrained,

“It’s a fascinating read with plenty of sound analysis behind it.” 30 | Capital Finance International

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and inflation does not simply increase pari passu with increases in the monetary base. As Martin Wolf wrote in a recent Financial Times column, “Fear of hyperinflation is based on a mechanistic model of the links between central bank reserves and bank lending, which is irrelevant to contemporary banking. Banks are constrained not by reserves but by their perception of the risks and rewards of additional lending.” The other big argument that falls partially flat surrounds the issue of debt. Picking up on the theme from their prior book, Endgame, Mauldin and Tepper warn of a debt-burdened world in which the unwinding of some Code Red policies will place additional strain on government finances, increasing the potential for default. What would happen, they ask, if the central bank were to stop buying government bonds and markets refused to pick up the slack on reasonable terms? The U.S. government is likened to a household that must find a way to “live within its means,”

and Greece is held out as an example of what might eventually happen to the U.S. or Japan. And while we’ve all heard this kind of thing from politicians and media pundits, investors must be careful to distinguish shrewd rhetoric from prudent insight. Mauldin and Tepper must know that there is zero risk of a Greek-style default by the Japanese or U.S. government. To understand why, simply consider the following quote, which opens the first chapter of Code Red: “[T]he U.S. government has a technology called a printing press (or today its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes.” A household cannot do that, and neither can Greece. Actually, Greece could do it, when it still had the drachma and its own central bank, but it no longer can, and that’s the fundamental difference between the solvency risk of a currency user (like Greece) and a currency issuer (like the U.S., Japan or the U.K.). The former really can encounter payment problems, but a country like the U.S. or Japan can always pay its bills. So it’s wrong to say, “Japan will soon find | Capital Finance International

it impossible to pay back its Godzilla-sized debt or even service the interest payments on it” or to chortle, “Somewhere, Charles Ponzi is smiling.” My own view is that we aren’t going to see rising inflation because banks start lending out all those reserves, and I don’t think bond markets will go on strike, forcing rates to spike and governments like the U.S. or Japan to default on their debt. But that doesn’t mean inflation will remain low or that the Fed won’t eventually raise rates nor does it mean that the Code Red policies of the past won’t have unintended consequences that may wreak havoc in the future. Re-leveraging, speculation, bubbles, and more could, as Code Red warns, pave the way for recurring and intensifying crises. Mauldin and Tepper close out the book with sage advice for any investor who must navigate what will almost certainly be a turbulent road ahead. i ABOUT THE REVIEWER Stephanie Kelton, Ph.D. is Associate Professor and Chair of the Department of Economics at the University of Missouri-Kansas City. You can follow her blog at


> José Antonio Ocampo:

Emerging Economies on Their Own


EW YORK – There was a remarkable similarity between European Central Bank President Mario Draghi’s statement after a recent meeting of the ECB Governing Council and US Federal Reserve Chair Janet Yellen’s first testimony to Congress: both asserted that their policy decisions would take into account only domestic 32

conditions. In other words, emerging-market countries, though subject to significant spillover effects from advanced economies’ monetary policies, are on their own. This confirms what emerging-country authorities have known for a while. In 2010 – following the Fed’s announcement of a third round of | Capital Finance International

quantitative easing – Brazilian Finance Minister Guido Mantega accused advanced countries of waging a global “currency war.” After all, advanced economies’ policies were driving large and volatile capital flows into the major emerging markets, pushing up their exchange rates and damaging their export competitiveness – a phenomenon that Brazilian President Dilma

Spring 2014 Issue

Rousseff later referred to as a “capital tsunami.” Recently, the impact of the advanced economies’ withdrawal of monetary stimulus has been just as strong. Since last May, when the Fed announced its intention to begin tapering its asset purchases, capital has become less accessible and more expensive for emerging economies – a shift that has been particularly painful for countries whose large current-account deficits leave them dependent on foreign finance. In response, Raghuram Rajan, Governor of the Reserve Bank of India, has called advanced-country policies “selfish,” declaring that “international monetary cooperation has broken down.” To be sure, emerging economies have plenty of their own problems to address. But there is no denying that these countries have been victims of advanced economies’ monetary policies, which have increased capital-flow volatility over the last three decades. According to the International Monetary Fund’s April 2011 World Economic Outlook, though the volatility of capital flows has increased worldwide, it is higher in emerging market economies than in advanced economies. Boom-bust financial cycles are driven largely by shocks generated in advanced economies, but they are key determinants of emerging markets’ business cycles. Moreover, the spillover effects of advanced economies’ monetary policies extend beyond financial shocks. Emerging economies are also suffering from the effects of developed countries’ external imbalances – particularly the eurozone’s swelling current-account surplus.

Washington, DC: Federal Reserve Building

“In other words, emerging-market countries, though subject to significant spillover effects from advanced economies’ monetary policies, are on their own.”

In the last few years, the deficit economies of the eurozone’s periphery – and, more recently, Italy – have undertaken massive external adjustments, while Germany and the Netherlands have sustained their large surpluses. As a result, the burden of offsetting the eurozone’s rising surplus has fallen largely on emerging economies, contributing to their growth slowdown. Such spillover effects are precisely what international policy cooperation – such as the “mutual assessment process” that the G-20 established in | Capital Finance International

2009 – was supposed to prevent. The IMF has created an elaborate system of multilateral surveillance of major countries’ macroeconomic policies, including the “consolidated multilateral surveillance reports,” the spillover reports for the so-called “systemic five” (the US, the United Kingdom, the eurozone, Japan, and China), and the “external sector reports” assessing global imbalances. But this system has proved to be utterly ineffective in preventing spillovers – not least because the Fed and the ECB simply ignore it. Given that the US dollar and the euro are the top two international reserve currencies, spillovers should be considered the new normal. Adding insult to injury, the $1.1 trillion appropriations bill for federalgovernment operations agreed last month by the US Congress does not include any money to recapitalize the IMF, the main instrument of international monetary cooperation. That decision represents yet another setback for IMF reforms aimed at increasing the influence of emerging economies. Given the considerable benefits that stable and prosperous emerging countries bring to the world economy – exemplified by the role that they played in propping up global growth in the wake of the recent crisis – it is in everyone’s interest to change the status quo. The G-20 and the IMF’s International Monetary and Financial Committee must work to align reality with the rhetoric of macroeconomic-policy cooperation. For that, the recent statements by Draghi and Yellen should be treated as ground zero. i

ABOUT THE AUTHOR José Antonio Ocampo, a professor at Columbia University, has served as United Nations Under-Secretary-General for Economic and Social Affairs and as Minister of Finance of Colombia. He is the co-author (with Luis Bértola) of The Economic Development of Latin America since Independence. Copyright: Project Syndicate, 2014.


> Bahrain Bourse:

Cover Story

Nimble, Innovative and Ambitious – An Exciting Exchange Ready for the Future


Bahrain: Manama

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The Bahrain Bourse is fast gaining a reputation as the comeback kid of the Gulf Region. Severely hit by the global financial crisis that erupted in 2008, the exchange was experiencing a period of bloom that may well become a boom. Last year, the Bahrain All-Share Index rose 17.2%. The value of shares traded doubled while volumes shot up by almost 200%. Earlier this year, a three year high was attained, sealing the reversal of the Bourse’s fortunes.


he Bahrain Bourse (BHB), a shareholding company that replaced the Bahrain Stock Exchange in 2010, is on the small side by GCC (Gulf Cooperation Council) standards. With a market capitalisation just over $20bn, BHB accounts for barely one percent of the GCC countries’ aggregate market cap. However, its reduced size belies the dynamism that has of late marked the Bahrain Bourse as place where great things happen and do so fast. For businesses of any scope it is well neigh impossible to find a more welcoming place than Bahrain. This is not the say-so of local authorities, but the finding of the Wall Street Journal and the Heritage Foundation, a US think tank for public policy. On their annual Index of Economic Freedom, Bahrain consistently claims top honours in the MENA Region (Middle East and North Africa). The kingdom ranks a most respectable thirteenth on the global index, leaving business-friendly powerhouses such as the UK, the Netherlands and Taiwan in its wake. “We are delighted that Bahrain’s efforts to improve economic freedom and the kingdom’s strong economic fundamentals have again been recognised,” said transportation minister Kamal Ahmed. “Bahrain’s leading position and consistent high ranking over the last twenty years is a reflection of efforts to ensure we provide investors with the free and open business environment they need so we can continue to deliver sustainable growth for Bahrainis.”

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The Heritage Foundation’s report emphasised the kingdom’s open markets that have but few (low) tariff barriers, boast a favourable tax regime that exempts most business and individuals from taxation, and allows for the expedient formation of new businesses. Bahrain also enjoys an exceptional location as the premier gateway to the wider GCC region which now boasts an economy worth $1.5 trillion. Backed up by these solid fundamentals, the management of the Bahrain Bourse is set on empowering their exchange, claiming some of the limelight now being directed at the more flashy markets of the region. The timing of the Bahraini initiative is impeccable. The Middle East is well on its way to becoming the most exciting marketplace globally. It is not just Dubai and Abu Dhabi grabbing the 36

“We are proud of having attained this exceptional level of compliance and transparency.” Fouad Rashid, CEO

investors’ attention. With the Kingdom of Saudi Arabia shortly expected to opening up its vast markets to outside investors, the region is bound to attract the lion’s share of the monies sidelined since the financial crisis of 2008 and still waiting for a safe – and profitable - haven. The Bahrain Bourse is now finding ways to tap into this reservoir and, in the process, to develop new ways of gaining the investors’ attention. Corporate governance is one of those ways. Often seen as a given and at best the preserve of sticklers, in Bahrain corporate governance is now being employed as an innovative tool for fostering business growth. The management of the Bahrain Bourse sees corporate governance best practices not as a hindrance to the pursuit of profitable business, but rather as a powerful enabler of growth. BHB CEO Fouad Rashid explains that the Online Disclosure System which the bourse plans to introduce this year will allow listed companies to almost effortlessly distribute corporate information faster and wider than before, thus providing both investors and brokers with plentiful easily accessible data. “This is a big plus for all our stakeholders. It is also part of a broader sustained effort to create a thorough awareness of the importance of excellence in investor relations. The Bahrain Bourse run a comprehensive programme in partnership with JP Morgan financial services company that aims to create this awareness,” says Mr Rashid who emphasises that timely disclosures are now nearly universal with close to 100% of listed companies observing the rules. “We are proud of having attained this exceptional level of compliance and transparency.” The annual programme has been running for four years among the exchange’s listed companies and is attended by participants from Bahrain, GCC member states and other countries of the region. In addition, BHB is also working with Charted Financial Association (CFA) Bahrain in conducting courses and workshops for listed | Capital Finance International

companies, brokerage firms, investors and other related parties. On corporate governance, BHB sets an example for others to follow. It established and implemented a comprehensive policy across the entire organisation from board level to employees. The Bahrain Bourse thus promotes corporate governance among listed companies by setting an example of governance and transparency. BHB offers free-of-charge workshops and seminars to capital market participants besides a series of awareness programmes. With this array of programmes and services, BHB targets not just the big corporate players. Special attention is dedicated to smaller – often family-owned – businesses that seek room to grow. The BHB SME rulebook has been adjusted to better account for the needs of SMEs (Small and Medium Enterprises). The Bahrain Bourse has now embraced a view spanning a much longer term that aims to bring SMEs not just to the capital markets, but also shows these companies how to benefit from the corporate governance practices imposed on publically traded companies. “We actually wish to go even further and open the doors of our exchange to non-Bahraini SMEs. This can be their home market as well. We are now waiting for feedback from the regulatory authorities on our plans,” says Mr Rashid who goes on to explain that already now, policies are being into place that allow foreign brokers to trade on the Bahrain Bourse without having a physical presence in the kingdom other than a clearing agent. Shortly, any broker properly licensed in his or her home country may trade in Bahrain on the same terms as local brokers do. Organised trading in Bahraini stock commenced in 1989 and now includes financial instruments such as equities, fixed income instruments, and mutual funds. Currently, there are 47 companies listed on the exchange alongside 23 mutual funds, and nine bonds / Islamic Sukuk. The three indices tracking the market’s performance are the Bahrain All Share Index, the Esterad Index (a basket of selected local publicly-listed companies), and the Dow Jones Bahrain Index. Bahrain allows up to 100% foreign ownership in Bahraini public shareholding companies. Moreover, Bahrain does not enforce any taxes on cash dividends nor on capital gains. This

Spring 2014 Issue

is supported by the existing of five custodians operating in Bahrain Bourse including internationally known entities such as HSBC, Citi Bank and Standard Chartered Bank. Since its establishment, BHB has joined several regional and international organizations such as the World Federation of Exchanges (WFE), the Arab Federation of Exchanges, the Federation of Euro-Asian Stock Exchanges (FEAS), the Africa & Middle East Depositories Association (AMEDA), and the Association of National Numbering Agencies (ANNA). BHB is continually engaged in the improvement of its legal and technical infrastructure in order to meet the fast increasing needs and demands of issuers and investors alike. BHB adheres to international best practice which include improved online services, ease of processing and cost effectiveness of operations. The exchange recently signed an agreement with NASDAQ OMX to replace its Horizon trading platform with the state-of-the-art X-Stream system in order to remain fully upto-date with technological requirements. The upgrade will provide BHB with a high-end, multi-asset trading platform that complies with the highest international standards. The bourse’s management believes that having this sophisticated system in place will allow for the introduction of a new range of products and services. The new system is expected to be in place by the second half of 2014 and represents yet another step to BHB’s stated goal of becoming a trading hub for the Gulf Region. The Bahrain Bourse now catching a ride on the increased levels of investor confidence in the GCC countries, reflecting the overall recovery of both regional and global markets. “Some money is already spilling over into the Bahrain market and investors are catching up to exceptional value opportunities,” states Jarmo Kotilaine, chief economist at the Bahrain Economic Development Board (EDB).

In order to facilitate access to the exchange and encourage listings by smaller companies, BHB has greatly simplified the procedures that must be observed before an IPO can be launched. In close cooperation with regulatory authorities,

the bourse has now exempted smaller business from going through the full IPO process before obtaining a listing. Also, companies no longer need to proof that profits have been realised during the two years prior to a listing application being submitted. This liberalisation works in conjunction with the revised rules regarding corporate governance and transparency. “On the one hand, the bourse has streamlined the listing process ensuring easy access while on the other hand it moved decisively to safeguard transparency to foster investor confidence. It’s a win-win scenario,” says Mr Rashid. Unlike the GCC exchanges, Bahrain places no limit on foreign ownership of stocks in government policy. This gives BHB a distinct competitive advantage over other regional stock markets as it seeks inclusion in MSCI’s coveted Emerging Markets Index. While both the UAE and Qatar markets are set to be reclassified as Emerging Markets (from their current status of Frontier Markets) during the Semi-Annual Index Review scheduled for May 2014, the Bahrain Bourse is widely considered well on its way to attain that status. The upgrade from Morgan Stanley Capital International (MSCI) is essential for markets aiming to attract the attention of large, globally active institutional investors. | Capital Finance International

Over the past couple of years the Bahrain Bourse has suffered from a dearth of liquidity without which there was little incentive to invest. To escape the resulting chicken-and-egg conundrum, BHB has concentrated its efforts on creating a broad range of new services geared toward encouraging market liquidity. So far, the strategy has paid off handsomely with trading volumes tripling in 2013. The Bahrain exchange may still be relatively small but it has succeeded in transcending the confines of its domestic market and now operates on a truly global scale. Cross listing are still quite rare, but close cooperation with other bourses in Europe, Asia and closer to home, in the GCC countries, could soon change that too. An ambitious, yet open and solid, policy framework – closely aligned with international best practices – has been firmly put in place. It lays the groundwork for an exchange with not just plenty of room for growth, but also for a trading hub that rivals any in both scope and efficiency. As such, the Bahrain Bourse merely answers to the kingdom’s historic calling as an unobstructed gateway – always open for business – to the Gulf Region and its vast hinterland. i


Cover Story

The EDB’s numbers show that market dynamics are shifting into positive gear which, in turn, may lead to a renewed interest in listings by established privately-held companies seeking to make the most of the current upturn and the business opportunities these much improved conditions generate. BHB CEO Fouad Rashid agrees and expects to expand the listings within the exchange. “Some companies are enticed to open up their capital to the public. It is our impression that some very well run corporations are close to issuing IPOs. They have been sitting on the side-lines waiting for the markets, and their valuations, to rebound. This is now happening.”

CEO: Fouad Rashid receiving an award from for Best Corporate Governance in GCC.

> Saudi Arabia’s Capital Market:

Foreign Investors Told “Not Just Yet” By Wim Romeijn

Cover Story


he regulator of the Saudi Arabia stock market – by far the largest of the Gulf Region – isn’t making any promises to foreign investors yet. Former World Bank executive director Mohammed al-Sheikh, now chairman of the Capital Market Authority (CMA), recently said that the kingdom remains “interested” in foreign investors. However, no timetable has been set for the opening up of the market. Mr al-Sheikh indicated that his agency is still hard at work on a series of regulatory changes that aim to make the Saudi Arabia stock market 38

less volatile and more transparent. Reporting requirements are being tightened and caps are being put in place that limit price fluctuations of newly listed stock on their first day of trade. “There are still a few logistical difficulties to overcome and we are not entirely satisfied yet. These imperfection will, however, be ironed out and the result should be a market that is attractive to foreign and domestic investors alike,” said Mr al-Sheikh. Since 2008, foreign investors enjoy indirect access to the Saudi Arabia capital market | Capital Finance International

through swaps. Though the discussion has been ongoing for years, no firm decision has been reached on allowing more direct forms of foreign participation. The kingdom is feeling a tiny bit of heat from Bahrain and the United Arab Emirates where markets have been liberalised and trade is booming. Analysts and assorted pundits are quite unanimous in their belief that the foot-dragging has its origin in the fears of King Abdullah bin Abdulaziz al Saud and his ministers about the possibly destabilising effects an opening of the market may bring. It is thought that big swings

Spring 2014 Issue

Over 2013, the Tadawul benchmark index rose 25.5% but now seems to have hit a plateau. Economic activity, though, is picking up with sustained growth rates of close to four percent annually forecasted up to 2020. While in the Bahraini capital Manama for a finance conference, Saudi Fransi Capital Chief Executive Yasir Al-Rumayyan could barely hide his excitement: “2014 is going to be a big year,” he said, “it’s three things: It’s the regulators and their requirements; it’s the issuers and their willingness to come; and it’s the ability of the adviser to execute. I think this year, the regulator is very excited to get more companies in; issuers are coming in; and financial advisers want to close deals in every quarter and not just once a year.” Mr Al-Rumayyan also expressed confidence in that in 2014, IPOs (Initial Public Offerings) should exceed in volume those issued in 2012 when seven companies went public and raised a combined total of $1.4bn. Saudi Fransi Capital is currently putting the finishing touches on the IPO of an as of yet undisclosed company that Mr Al Rumayyad expects will raise in excess of $210m. However, the IPO generating most excitement among the kingdom’s investors is one being now prepared by the Saudi Finance Ministry for the National Commercial Bank – the country’s largest lending institution. Mr Al Rumayyan sees signs that the erstwhile very strict Capital Markets Authority is embracing a more handsoff approach, focusing instead on corporate disclosure requirements and due diligence while allowing the market more leeway in setting the price of newly introduced stocks. Just last year, the regulatory authorities discouraged Astra Food, a Saudi producer and distributor of foodstuffs, from going through with its IPO plans after it was found the company could not satisfactorily substantiate its financial performance projections.

Medina, KSA: Prophet’s Mosque

Still, the timing would seem just about right for a gradual opening of the Tadawul, the only stock market in Saudi Arabia listing 156 publically traded companies. After again taking a nosedive in 2008, the market has shown resilience of late with prices stabilising and gaining ground. | Capital Finance International

Mr Al Sheikh also expects movement on the Mergers and Acquisitions front, especially in the insurance sector where he anticipates consolidation of various market participants. Meanwhile, foreign investors must make do with swaps. However, nearly all stakeholders in the Saudi stock market agree that their time will come – probably sooner than later. i 39

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“Economic activity, though, is picking up with sustained growth rates of close to four percent annually forecasted up to 2020.”

in stock prices could hurt the Saudi economy. The kingdom’s policymakers are also reluctant to change because of the market crash of 2006 that wiped out some $500bn in value, destroying the savings of countless families. Market volatility has been foremost on the minds of regulators ever since.

With a series of IPOs now lined up for launch, the Saudi stock market looks for improved liquidity, though this is not necessarily one of the regulator’s priorities. “What is important to the CMA is the development of more stable market conditions. This may be attained by attracting a class of perhaps slightly more sophisticated investors to the market. Against this light, the opening up of the Tadawul to foreign investors would seem to make sense,” says Anas Al Sheikh of Clifford Chance, the first law firm to operate a partnership in the kingdom.

> IFC:

Thoughts on Corporate Governance and Its Future By Philip Armstrong and James D. Spellman


he global financial crisis revealed considerable weaknesses in financial institutions’ corporate governance, leading critics to question whether corporate governance has any influence in safeguarding investors’ interests by promoting well-run companies operating with complete transparency. The authors first point to corporate governance is fundamentally flawed through the agency problem, that inherent conflict of 40

interest in which one party is expected to act objectively in another’s best interests. This and other dynamics led companies to being shortterm focused, leading, in some well publicized cases, to their eventual demise. So how do you fix the problem? To answer show that the “fixes” for corporate governance (including the latest wave of responses to the financial crisis) are really seeking to address issues at the margin. Too often these “fixes” are formulaic, such as | Capital Finance International

splitting the CEO and chairman roles between two people. Given the increasing sophistication and complexity of global financial markets, it is argued that little attempt has been made to address the deeper structural issues now pervading our financial system, leaving our markets vulnerable to ongoing crises. There is a need to tailor global corporate governance principles to a country’s particular economic, social, and cultural dynamics. Another area

Spring 2014 Issue

for attention is the rapid and transforming implications of technology both as a risk and an opportunity, and for boards to consider this a key skill set in its future composition. Strengthening the expertise of board directors remains crucial but it is also about boards being more conscious of ethical values and judgments exercised in their decision making, and not relying on rules alone. Equally, the role of asset managers in the responsible exercise of their voting rights, especially with an eye on other peoples’ money under their stewardship, is now a heightened area of concern. But, so should be the caliber and competence of pension fund trustees and the need for more focus to be given to the fiduciary role of pension funds in defining the governance standards through their investment mandates. The question really is, are we going to continue playing at the margins or are we really going to take the tough decisions needed to address the recurring crises that have pervaded the 21st Century? FORECASTING IS PERILOUS What seems likely now to occur in the years ahead, typically doesn’t. Events far outside one’s prediction more often than not, often overnight, disrupt what seemed to be inevitable trends. In corporate governance, nowhere is this clearer than with the 2007-2010 global financial crisis. The enormity of its scale, severity, and longevity far exceeded anyone’s prognosis, with total bank losses of US$2 trillion according to the International Monetary Fund. This calamity forced boards to re-examine their management oversight and strategic direction. The skeptics posed many valid questions, putting the foundations of corporate governance in doubt. They challenged the relevance of the OECD Principles for Corporate Governance , given the magnitude of the latest crisis and its having emanated from the very economies on which those principles are premised.

“Chief financial officers manage the finances by taking actions to increase the value of the company’s stock and profits in each quarter, even if that comes at the expense of long-term viability.”

SEVEN MYTHS OF CORPORATE GOVERNANCE • The structure of the board always tells you something about the quality of the board. • CEOs in the U.S. are overpaid. • Pay for performance does not exist in CEO compensation contracts. • Companies are prepared to replace the CEO if needed. • Regulation improves corporate governance. • The voting recommendations of proxy advisory firms are correct. • Best practices are the solution to bad governance. how much trouble the firms were in. Its own board, too, was left blind, it seems. Yet, these same institutions all purportedly had corporate governance best practices in place. But, then again, wasn’t the same said for Enron and Satyam, the two discredited icons of good governance? The disturbing feature that confronts us is that, despite the relevance of corporate governance as a key policy instrument, following the early pioneering steps of the Cadbury Report in the United Kingdom in the early 1990s and the subsequent promulgation of the OECD Principles on Corporate Governance in 1999, we continue to lurch from one crisis to another. We do so seemingly without learning the lessons before us and notwithstanding the proliferation of codes, standards, and rules worldwide. It is, here, then, that an attempt at divining the future of corporate governance should perhaps start, specifically the credibility problem over the promise of good corporate governance to tackle wrongdoing and ensure that shareholders’ interests are well served.

Add to this the controversies surrounding climate change, resource depletion, population aging and its implications for labor market imbalances, vendor risk-management arising from outsourcing, human rights, and the many other potential and quantifiable risks facing business in the 21st Century. As a consequence, the complexity of corporate governance and forecasting becomes ever more hazardous for policymakers and boards alike.

The Lehman case and others gave cynics ammunition to question how much does corporate governance matter in influencing behavior and making companies more transparent. As one group of researchers aptly put it: “Shareholder value and private ordering may not in fact be the best means of promoting efficiency and corporate responsibility, and the mechanisms that have been traditionally used to ensure management accountability may not be effective.”

The role of corporate governance in the global financial crisis - and the subsequent responses in policies, practices, laws, and regulations - is a good place, as any, to start considering the future of corporate governance.

What matters most in pressing companies to keep their promises to shareholders are the market-driven mechanisms, including the price that the market values the company at and the company’s attractiveness as a merger or takeover prospect. Studies and anecdotal evidence “seem to indicate that ‘the most innovative’ and ‘best performing companies’ (which show ‘high growth’ and a ‘robust’ stock price performance) often deviate from the pre-defined, agencybased, ‘check-the-box’ framework.”

We saw major financial institutions such as Lehman Brothers in the United States collapse as a consequence of highly leveraged strategies and accounting methodologies that deceived shareholders from understanding ostensibly | Capital Finance International


Two recent books suggest the range of the debate over the merits of corporate governance and shed insights into the paths corporate governance may follow in the years ahead. The first, by Colin Mayer, Firm Commitment, sees the problems arising from a fundamental misunderstanding of shareholders. We see shareholders owning companies in the same way that we own property, such as a house or car. But that is not the case. Shareholders trust others to run the company using their money. Ownership is also dispersed. Within those arrangements sits the agency problem, that conflict of interest inherent in any relationship where one party is expected to act in another’s best interests. Managers and board directors are tempted to use money that is not theirs for their own gain or assume high risks for launching a business venture that could be extremely lucrative should it escape the high odds of failing. The intense focus the board must have on shareholders’ interests, their fiduciary responsibility, leads to other problems. Chief financial officers manage the finances by taking actions to increase the value of the company’s stock and profits in each quarter, even if that comes at the expense of long-term viability. This short-term focus also encourages a high turnover in share ownership, which undermines what a company is supposed to do, namely to focus employees on working together to achieve long-term goals. What’s good for shareholders, too, may be disastrous for such stakeholders as employees (low wages to achieve high profit) and surrounding communities (pollution). Mayer postulates a new class of company the trust company - overseen by a board of trustees. These trustees would balance various stakeholders’ interests. Shareholders could choose among different classes of shares, each offering its own degree of power. Voting rights, for example, won’t matter to an investor who wants to sell the stock minutes, if not a few weeks, after it rises or falls on news. The trustees, using various classes of non-voting and voting shares and other reforms, would strengthen the commitment a company needs to achieve its long-term goals with shareholders holding differing categories of shares to fulfill their particular portfolio strategy. This question of whether shareholders “walk the talk” arises in other areas, such as stewardship codes in the United Kingdom, South Africa, and the Netherlands, for example. These codes’ intent is to empower shareholders to enforce and improve their role as principals and stewards of capital. While these codes vary from country to country, the core approach in all is a “comply or explain” requirement. More broadly, these codes all “coalesce around the promotion of a public commitment, monitoring, regulator reporting, and disclosure of stewardship activities by institutional investors as a means of ensuring investor responsibility for the promotion of good


governance in the companies in which they invest.” Key principles include a policy on how stewardship responsibilities are discharged, conflicts of interest are managed, and voting procedures conducted and disclosed. (See charts.) But are these codes truly empowering shareholders? With a few years of experience underway, it is too early for a definitive conclusion. In contrast to Mayer’s book, Corporate Governance Matters by David Larcker and Brian Tayan compiles empirical evidence to show that often the “fixes” for corporate governance (the latest wave of responses to the financial crisis) fail. (See box on “Seven Myths.”) While it is a U.S.-centric perspective, some of the authors’ insights are worth contemplating. “Our research shows that many emerging developments that were intended to improve governance - purportedly to avert the kind of financial disaster we just experienced - just don’t hold water,” Larcker explains. These include: 1. Compliance drowning out strategy - “A checkthe-box approach is not what we need from directors. We need instead their best thinking and ability to manage risk appropriately for corporate growth.” 2. “Federalization of corporate governance” - “As corporate governance becomes increasingly, and probably inexorably, ‘federalized’ through regulations such as Dodd-Frank, there is a real question as to whether these laws make boards govern better,” he says. “We’re still debating whether the 10-year-old Sarbanes Oxley was good for the economy.” 3. “Shareholder democracy” movement - “The fight for ‘say on pay’ and proxy access has gotten a lot of ink but it is unclear whether it will actually create shareholder value.” 4. Rise of proxy advisory firms - “Proxy advisory firms exhibit substantial influence over the proxy voting process. What is the evidence that their recommendations lead to the kinds of positive outcomes that stakeholders really care about?” From the vantage points of both books, then, what lies ahead for corporate governance? Corporate governance remedies will become more uniquely tailored for each organization out of necessity, drawing on experiences. Perhaps this is too optimistic, but hopefully we can move away from the reflex-like, formulaic approaches, as illustrated by standard calls for “independent” directors and the “separation” of the chairman and the CEO roles. While there is value in these and other suggestions, often such reforms fail because companies have neither the capacity nor the experience to immediately implement the changes. Cultural contexts may be an obstacle, | Capital Finance International

Spring 2014 Issue

Commitment to improved performance, transparency, accountability and value creation are the common denominators throughout, as an IFC (International Finance Corporation, the private sector arm of the World Bank) compilation of cases in the MENA (Middle East and North Africa) region demonstrates. Changes that clarify the composition, diversity, independence, capacity, role, authority, and evaluation of boards, committees, and individual directors help to improve company performance, profitability, and organizational efficiency, sometimes with immediate impact. Equal benefits are observed through actions that improve risk-management practices, internal audit functions, disclosure and transparency standards, succession planning, and shareholder rights. What matters is that these provisions are uniquely fitted to the company. Board directors need more expertise as demands on their capabilities grow. More compliance burdens are being placed on board directors from stock exchanges, national regulations, global organizations, stakeholders, and shareholders. Many issues are highly technical, such as accounting approaches for valuing assets and liabilities in a balance sheet. Directors also may not have the expertise about the company’s business to weigh in on strategic decisions or provide informed oversight. Building capacity has been a major focus of the IFC Global Corporate Governance Forum with its donors and other partners worldwide. By training Institutes of Corporate Governance, Institutes of Directors, and other organizations, the IFC is expanding and deepening the resources directors can use to become more effective in board deliberations.

Table 1: Summary of Country and Regional Stewardship Codes

Table 2: Key principles Contained within regional Stewardship Codes

too, including deference to senior leaders, tribal/ family norms, and religious beliefs. In some emerging market and developing countries, the pool of qualified directors, for example, is small. Many have business and family ties with one another, disqualifying them as “independent” directors in the strict sense of the term. In emerging markets, at least, the focus remains not so much on the nomenclature of various types of directors, but simply on the enormous task of ensuring that directors are suitably trained and equipped for their demanding role as directors. While much has been made of the rise of key emerging markets economies following the global financial crisis and the suggestion that these markets might deviate from the internationally

recognized principles defined by the OECD, this appears unlikely. This remains the aspiration for most markets. In working with different companies - private, family-owned, state-owned, and public - we have seen how corporate governance succeeds when it evolves gradually, with a timetable for progressive improvements as experience is gained and the rewards of success fuel interest in deepening the reforms. Tailoring corporate governance reforms to an economy’s unique circumstances promises to yield the greatest results but it is a process that requires patience, steadiness, and consistent policy setting. Often, the success or failure of peers drives action to embrace or resist reforms. | Capital Finance International

For pension fund trustees, expertise is particularly important, since their advocacy for reform is one of the most powerful drivers in encouraging, if not forcing, companies to improve their governance. Among the world’s largest investors, pension funds have not necessarily demanded that their investment advisers and asset managers focus on achieving long-term growth, taking into consideration environmental, social, and governance factors. Hence, there is a huge deficit in how asset managers are mandated, poorly or not at all, by pension fund trustees who are simply not equipped with the expertise to do so or are led along by intermediaries (investment advisors) but not necessarily for the pension fund’s members benefit. Boards will be under increasing pressure to demonstrate the benefits of corporate governance through assessments and business performance. With a slow-growth global economy likely to continue, companies worldwide are finding it harder and harder to boost performance and profits. The case for implementing reforms will need to be presented in business terms, and, if enacted, evidence will need to be amassed to validate the expected benefits. Boards will need


to invest more time and resources in assessing how corporate governance is enhancing their individual and collective performance in strategic assessments, prudence in the level of risks assumed, and decision-making. Some of this is being driven by the use of corporate governance scorecards and indices, stock market listing requirements, and shareholder demands. Some of this, too, is being driven by the need to understand and address the weaknesses of directors’ capabilities and expertise as technology-driven changes demand competencies that were not a concern two, three years ago. These assessments are critical for investors in evaluating whether a company is a good investment opportunity. One researcher, London School of Economics Law Professor Eva Micheler, has proposed creation of an online review facility where all market participants are able to review and rate all companies listed in a particular market. This, she suggests, “would solve a number of problems that currently prevent shareholders, in particular, institutional investors and the ultimate beneficiaries of investment vehicles such as pension funds to engage with companies.” This demonstrates how technology can foster greater engagement through assessments of boards, their directors, and senior management. Boards will need more complex information management systems, including data visualization tools, to select out salient data from a maelstrom of information. A decade ago, researchers lamented that boards typically did not have sufficient information to make decisions. Harvard Business School Professor Jay Lorsch, in his book Pawns and Potentates, has argued “that boards of directors often have insufficient information with which to perform their duties.” Today, the opposite is the norm as technology facilitates instantaneous access to information, a virtual fire hose of data that overwhelms individual and collective abilities for assimilation 44

and analysis. Notes Professor Lorsch, editor of The Future of Boards: “It is hard enough for directors to grasp the facts about a company with complicated products, but even more difficult when these products are changing rapidly and frequently.”

remains challenging for many emerging markets for any number of reasons, while conditions that gave rise to the “comply or explain” approach to corporate governance standards are often absent or erratic, therefore compelling regulators to err more on the side of mandatory rules.

The staggering pace of technology change, and as a growing number of both people and devices connect to the Internet, boards need to expand their focus beyond the more conventional aspects relating to data privacy and security, social media controls and reputation management, and protection of intellectual property to consider the transformational impact of game-changing technologies to drive their business and operational strategies. IT governance and risk will surely be elevated on board agendas with consequent implications for the kinds of skills boards will need to respond to these challenges.

While the refrain in the past has been one of “where were the directors?” it seems that this has shifted somewhat to “where are the shareholders?” Research indicates that in 2010, pension funds, mutual funds and insurance companies held nearly half of the listed equities in the world – an increase of some 40% since 1995. In the UK, for example, direct individual ownership in listed companies has dropped from 54% to just 11.5% in the past 50 years. This is not to mention the increasingly diverse composition of institutional shareholders in companies.

For the first time ever, in 2012, developing economies absorbed a greater proportion of global FDI (foreign direct investment) flows with the larger proportion going to countries noted for their good corporate governance. However, questions remain regarding whether a “principles-based” approach to corporate governance standards and practices should prevail against the more rigid “rules-based” approach. It seems that the weight of opinion, at least among regulators, is tilting towards a more mandatory application of corporate governance with all its contradictions and potential for restraining private-sector enterprise. Looking at the recent banking crises in the UK and the US, cynics suggest that neither worked well, which leaves us all with something of a quandary. This is one area that perhaps distinguishes the emerging markets from the more advanced markets. Research has shown that, aside from the UK and the US, widely dispersed shareholding is the exception and influential ownership or voting blocks are generally common. Equally from our observations, the question of enforcement | Capital Finance International

In a recent study, researchers looked at the frequency and timeliness of interactions with investors. Companies “should not underestimate the power of investor ’relations’ strategies,” they found. Boards need to identify and understand the increasing diversity of shareholders (what they care about the most?) and then develop an engagement strategy that goes beyond traditional investor relations. Shareholder engagement with companies is changing as more demands are put on institutional shareholders to fulfill their implied “fiduciary” responsibilities. These demands have led, for example as earlier mentioned, to the introduction of the Stewardship Code in the UK. South Africa, the Netherlands, and Singapore have introduced similar initiatives. It is apparent that this is inspiring greater levels of shareholder activism in the emerging markets such as Brazil, South Africa, and Malaysia, among others. However, the one area that seemingly remains open to more consideration is the role of pension funds (asset owners) and their trustees. It seems incredulous that with some pension funds larger than even the world’s biggest companies, that

Spring 2014 Issue

little concern is raised regarding the composition and caliber of trustees appointed to these funds. These trustees often owe their positions to their affiliation to the employer or the employee union, for example, rather than through any special criteria assessing their professional competence (as investors often demand of boards of companies with significantly less capital at risk). This is not a simple issue to resolve and brings focus to bear on intermediary advisors and their professional objectivity and accompanying conflicts. Over the past two decades, considerable steps have been taken to regulate markets, companies, and, more recently, investors. One wonders just how much more - in practical terms – can boards can be regulated to “behave?” Perhaps now, it is time to focus not just on the “top down” regulatory responses to crises and enforcement but also to consider two things: first, the platform dictating investor behavior, and, second, the company response through a greater consideration of how asset owners set their investment mandates in a more defined “bottom up” process. Modest steps are being taken in these areas, mainly in more advanced markets where pension systems are more structurally established. But much more needs to be done. There is much more to contemplate, especially in terms of sustainability and its mainstreaming through such initiatives as the International Integrated Reporting Council. As boards and markets absorb the long-term implications of these developments on corporate reporting; another area starting to gain some attention, is the question of ethics. Larcker and Tayan found that “companies that successfully foster high level of trust between employees and monitors benefit from lower bureaucracy, simpler procedures, and higher productivity.”

vastly different context in culture, history, and traditions. This it is not the case! It is more the question of how boards worldwide think beyond the rules and regulations that govern their actions and decisions. It is about the basic principles and values upon which boards exercise their judgment in a considered and thoughtful way, regardless of what the rules permit or don’t. Corporate governance will continue to matter. More stock markets include adherence to corporate governance best practices as a criteria for listing. Investors are demanding strong corporate governance to safeguard their equity through “codes” or pressure on boards. Many familyowned businesses are in the third generation of existence and facing demise from intrafamily rivalries and other issues that are not being properly handled. Evidence mounts that companies governed and controlled by best practices perform better and their business model is more sustainable. Corporate governance remains the bedrock of business sustainability and sound stewardship serving the long-term interests of investors and societies. Numerous case studies that the IFC has developed reveal that governance success requires the concerted and sustained effort of multiple reform champions, including corporate governance institutes, regulators, media, and other market participants along with the private sector. Cases demonstrate how key principles can be translated into visible operational procedures relevant to the company’s priorities but requiring strong internal champions to inspire and lead efforts for business transformation and improvement. We have outlined a host of issues that are likely to constitute a discussion on corporate

governance in one form or the other, but given the sheer enormity of the issues it is not possible to cover all the issues and circumstances that warrant consideration. As we inevitably find ourselves in another crisis at some point in future, we are bound to learn of other issues not yet contemplated. If we can just avoid a repeat of some of the mistakes of the past decade, surely boards -- and indeed policy makers and regulators -- will have heeded some of the lessons that have had such a devastating effect on markets worldwide in the 21st Century. As we close, it is worth reflecting on the following statement by David Larcker and Brian Tayan:

“…the structural attributes of the board of directors…determine [and] contribute to [its] effectiveness. Despite what you read in the popular press or professional literature, this is not a simple exercise.” i

ABOUT THE AUTHORS Philip Armstrong is currently Head, IFC Global Corporate Governance Forum and a member of the Board of Governors of the International Corporate Governance Network representing a coalition of investors with some US$15 trillion of assets under management. James D. Spellman is a strategic communications consultant and author of numerous publications on corporate governance. He is also an adjunct professor in public relations at George Washington University.

Please see the online version at for references.

This might elicit a sensitive response in some quarters, particularly those who see this as a discrete attempt to impose western ethics on companies operating in markets that are | Capital Finance International


> Meets the CEO of Jáuregui y Del Valle:

Luis Gerardo del Valle Torres Luis Gerardo del Valle Torres is the managing partner of Jáuregui y Del Valle, S.C. and a practitioner specializing in tax consultancy services including domestic and cross-border transactions; structuring of investment funds for real estate funds and pension plans; private clients, tax litigation and consultancy on tax policy matters.


e is a member of the Cambridge Overseas Trust, International Fiscal Association, the Mexican Bar Association (Barra Mexicana, Colegio de Abogados), the College of Professors and Researchers of Tax Law and Public Finance (Colegio de Profesores e Investigadores de Derecho Fiscal y Finanzas Públicas) and the National Association of Corporate Counsels (Asociación Nacional de Abogados de Empresa). Mr Del Valle was awarded the Eduardo García Maynez and Gabino Barreda medals by the authorities of the Universidad Nacional Autónoma de México for obtaining the highest academic achievement in his class. He has also been awarded the first place in the National Contest of Administrative Justice organized by the Federal Tribunal of Tax and Administrative Justice (Tribunal Federal de Justicia Fiscal y Administrativa). Mr Del Valle has written articles on tax law, tax litigation and amparo proceedings and is the author of The Mexican Federal Tax System - Its review under Economic and Legal Principles (Sistema Fiscal Federal Mexicano - Su Revisión ante los Principios Jurídicos y Económicos) edited by the Federal Tribunal of Tax and Administrative Justice. Mr Del Valle graduated from the Universidad Nacional Autónoma de México Law School magna cum laude in 1999. He also read law at the University of Cambridge, Faculty of Law, where he obtained a Master of Commercial Law, British-Chevening Scholarship, in 2001. At New York University, School of Law, Mr Del Valle obtained a Master in International Tax Law in 2002. i


CEO: Luis Gerardo del Valle Torres | Capital Finance International

Smart. Resilient. Sustainable.

APRIL 22, 2014 THE TIMESCENTER NEW YORK CITY New York Times architecture critic Michael Kimmelman hosts this timely forum bringing together 400 thought leaders, public policy makers, government urbanists and C-suite executives from the energy, technology, building and transportation industries to discuss the wide range of challenges and opportunities in creating an urban environment that meets the needs of its citizens, while running cleanly and efficiently.


Michelle Addington Professor of Sustainable Architectural Design, Yale University School of Architecture

Allison Arieff Editorial Director, SPUR; Contributing Columnist, The New York Times

Vishaan Chakrabarti Holliday Professor and Director, Center for Urban Real Estate, Columbia University; Partner, SHoP Architects

Shaun Donovan United States Secretary of Housing and Urban Development

Rick Fedrizzi President, C.E.O. and Founding Chairman, U.S. Green Building Council

Michael Kimmelman Architecture Critic, The New York Times

Gregg Lindsay Senior Fellow, World Policy Institute

Jonathan F.P. Rose President, Jonathan Rose Companies

Janette Sadik-Khan Bloomberg Associates; Former Commissioner, New York City Department of Transportation

John Tolva President, PositivEnergy Practice

Zia Yusuf President and C.E.O., Streetline, Inc.

Dawn Zimmer Mayor, City of Hoboken





Smithsonian Cooper-Hewitt, National Design Museum

A series of “Three Minutes to Launch” presentations are co-organized by Michael Kimmelman, architecture critic at The New York Times, and Cynthia E. Smith, curator of socially responsible design for the Smithsonian’s Cooper-Hewitt, National Design Museum, featuring socially responsible new ideas, designed projects and innovative products.





> Spring 2014 Special:

Financial Innovators Of Complexity and the Application of Common Sense


s a concept, financial innovation is not unlike a double-edged sword: It can cut both ways. All too often, financial innovation is but an old idea rebranded as a contemporary solution to any given problem. The world of finance is, of course, intimately linked to economic science – money being the means of exchange that allows humans to trade the fruits of their labour. As such, economic science contains a dichotomy since it attempts to amalgamate the exact with the human. This inherent contradiction causes economists no end of trouble. Not just that, academics from other branches of science tend to look down on economists for being hopelessly misguided souls trying, perhaps foolhardily, to accomplish the impossible – to capture and define human behaviour in mathematical formulae. Luckily, many brilliant minds the world over refuse to accept that premise and insist on figuring out how human societies organise their economic lives so as to attain the realisation of both collective and individual ambitions. They do so in order that lessons may be drawn that enhance the efficacy of future policy initiatives.


In this issue of, focused as it is on capital markets and their governance, we feature ten original thinkers who made significant contributions to the furthering of our understanding of the world of finance. Their endeavours are of particular importance now that the world is emerging from the ravages left by the Panic of 2008. The economists’ insistence on unifying the mathematical and human universes may yet pay off. Perhaps one of the most promising innovations is the use of big data as a tool for analysing the mind-bogglingly complex interactions of stakeholders in an economy. Complexity also sits at the heart of Bitcoin, the world’s premier virtual currency that has scarcity – and thus deflation – built right into its algorithm. Professor Robert Shiller, one of the financial innovators featured, considers the Bitcoin phenomenon as “an amazing example of a bubble.” In 2013, the digital currency – a financial innovation if there ever was one – appreciated thousands percent in value only to tumble from its perch when a trading exchange in Japan folded after losing 850,000 bitcoins (valued at $474m) in a digital stickup masterminded by hackers exploiting | Capital Finance International

a flaw in the currency’s programming code. Emphasising the shaky premise of the virtual currency, the robbed exchange later somehow “found” 200,000 bitcoins, now valued at $116m, in an old-format digital wallet. To counterpoise these digitalised follies, we also feature the venerable John Maynard Keynes among our financial innovators if only because Steve Forbes seems to dislike his teachings. While Mr Forbes’ only innovation of note may be summarised as managing the magic-like shrinking act performed on his family’s fortune, Mr Keynes (1883-1946) actually left the world something of value: The notion that good governance through a competent civil service has the power to promote the common good through a liberal application of common sense. This, then, brings us back to yet another of the themes around which this issue of was built: Good governance and its many and varied uses as a tool for fostering lasting development. We hope you enjoy meeting our celebrated financial innovators as much as we did writing about their oftentimes amazing findings. i

Spring 2014 Issue | Capital Finance International


> BARRY E. SILBERT Going Out on a Limb, Reinventing Capital Markets

SecondMarket was set up in 2004 and has since expanded into multibillion dollar trading platform with well over 53,000 registered participants. The exchange offers a bewildering array of securities ranging from public debt instruments to bankruptcy claims and credit derivatives. More recently, Mr Silbert moved his company – conservatively valued at about $200m and generating an annual revenue of about $35m – headlong into the growing Bitcoin craze with the launch of its Bitcoin Investment Trust (BIT). Mr Silbert does not mince words and calls the digital currency “the ultimate winner”. Also, he expects Wall Street investors to pour hundreds of millions – “if not billions” – into Bitcoin within the next three to six months. 50

The optimism is not misplaced. Only six weeks into its existence, the trust has already received $70m in deposits whereas success had initially been defined as capturing $10m by year’s end. The value of shares in BIT fluctuates according to the highly volatile Bitcoin exchange rate. Investors are in for a rocky ride: In the first week of February Bitcoin slumped from a high of about $1,200 to a low of barely $650 after Apple decided to pull a popular Bitcoin wallet app from its on-line store, apparently over legal concerns. Mining exotic financial opportunities such as Bitcoin is precisely what Mr Silbert thrives on. Nothing seems too bizarre or risky not to take a shot at. This should come as no surprise since Mr Silbert got his first taste of trading at the tender | Capital Finance International

age of 13 with that quintessential of American investments – the baseball card. The dollars thus accumulated, plus his bar mitzvah money, got him started trading stocks. A financial innovator par excellence, Mr Silbert has gathered an impressive number of accolades: Ernst & Young named him Entrepreneur of the Year (2009) as did Crain’s New York Business. In 2011, the World Economic Forum awarded SecondMarket its coveted Technology Pioneer of the Year prize. Barry Silbert’s name also features on Fortune Magazine’s prestigious 40 Under 40 list of most successful young entrepreneurs.

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> BLYTHE MASTERS The Risks of Spreading the Risk Out of a tragic oil spill came forth a new financial instrument: The credit default swap – to some a financial weapon of mass destruction; to others a nifty way to spread, and thus diminish, credit risk. The credit default swap sprung from the brain of Blythe Masters, at the time one of the most promising bankers at JP Morgan. The US investment bank sensed trouble when Exxon was facing up to $5bn in punitive damages for the Valdez oil spill which saw up to 750,000 barrels worth of crude oil leak into the pristine water of the Prince William Sound in Alaska. As it happened, JP Morgan had extended some $4.8bn in credit to Exxon. A team of wizard bankers was duly convened and went to work finding a solution to the risk. Mrs Masters suggested selling the credit risk of these loans to reduce the JP Morgan’s exposure to an Exxon default and – as an added bonus – reduce the volume of reserves the bank was required to carry. A dupe of sorts was found in the European Bank of Reconstruction and Development. Following this, the Exxon loans were sliced into more manageable packages which found their way onto the market – and off JP Morgan’s books – as Broad Index Secured Trust Offerings, BISTROs for short. These were the first-ever investment vehicles specifically aimed at spreading a greater than acceptable financial risk over a large number of investors who are led to believe that they are acquiring prime rate securities. While a great way for banks to make money without the attendant risk, Mrs Masters later admitted that the credit default swaps she invented might have been structured differently in order to avoid an increase in systemic risk. Mrs Masters told an investigative committee of the European Parliament in April 2010 that the recent financial meltdown indeed contains “valuable lessons”. However, Mrs Masters maintains that credit default swaps do not deserve the blame they have been apportioned: “They are only as good as those who manage them”. Most bankers would agree and consider CDSs as manna from heaven. Just before the 2008 meltdown, the total amount of outstanding CDSs approached an astonishing $65tn. That number has now fallen to about $25tn but has been picking up as of late. Mrs Masters is quite right in asserting that managing credit default swaps requires expertise and good sense. Both were lacking in Bruno Iksil,

a trader for JP Morgan who became known as the London Whale for the huge iffy positions he had taken. These triggered heavy opposition from other traders betting on the whale’s sinking. | Capital Finance International

Even other JP Morgan traders happily joined the party. The bank eventually lost about $2bn, demonstrating yet again the folly of markets unleashed and unbound.


> INEZ MURRAY Women in Business: Bankers Advised to Take Note

Getting banks to notice women is quite the challenge. Whereas research consistently shows that women are exceedingly good at managing money and budgets, banks often ignore the female demographic or fail to put processes in place that facilitate the financial inclusion of women. The Global Banking Alliance for Women (GBA) aims to change this pattern and by doing so foster wealth creation for women. Ms Inez Murray is CEO of the Global Banking Alliance since November 2012 and works tirelessly for the empowerment of women at every economic level – business owners, household managers, and community leaders. “Women are critical to progress. For banks this means that catering to the specific needs of 52

female customers is of institutional importance.” Though most bankers readily agree that women are essential to their business, few understand the needs of female customers. One of the GBA’s flagship programmes tries to change this by mentoring banks willing to offer financial services and products to low-income women entrepreneurs.

either tap or identify. Ms Murray emphasizes that women entrepreneurs are creating businesses at an ever increasing rate that in some countries already surpasses that of their male counterparts. “We now are suggesting banks take a closer look at this dynamic segment. The business case then often builds itself. Banks can simply not afford to ignore the female demographic any longer.”

In January, the MetLife insurance company, through its MetLife Foundation, awarded GBA a sizeable grant to help develop this mentoring programme further, recognizing that the women’s market represents “the single biggest untapped opportunity” in the financial services sector.

The Global Banking Alliance for Women was founded in 2000 and is the leading organisation striving for female financial inclusion and wealth creation. GBA has 25 member institutions working in 135 countries to provide womenrun business with access to capital, markets, education and training. GBA provides member institutions with technical assistance, peer learning and best practice guidelines.

GBA’s mentoring programme mainly aims to help member banks capitalize on talent and expertise they may already have in-house but have failed to | Capital Finance International

Spring 2014 Issue

> JACQUES DELORS Despite Design Flaws Euro Success Assured Hindsight may offer some comfort and solace from contemporary reality. It is thus that Jacques Delors – aka Mr Euro – concludes that Europe’s much-maligned common currency suffers from a few design flaws. Those imperfections may even have doomed the euro from its inception and lie certainly at the root of the debt crisis that erupted in 2008. Even so, Mr Delors – three-time president of the European Commission – has no regrets other than not giving enough pushback to overly excited politicians who at the time choose to ignore red flags and other warning signs. The euro – Delors’ masterwork in unifying the continent – will ultimately survive. For all the bridges burnt, he sees no way back. When Jacques Delors assumed the presidency of the European Commission in 1985, the then European Community found itself relegated to the doldrums, suffering from what came to be known as eurosclerosis – an affliction not unlike the one presently haunting the continent’s economies whereby lacklustre growth results in high levels of unemployment. In 1985, Mr Delors promptly set out to reinvent European integration and provide the process some new momentum. Within a year he had cajoled or otherwise convinced member states into accepting the Single European Act (1986) which served as the basis for the scaffolding of the much broader Treaty of Maastricht (1992) that foretold the creation of a common currency and changed the community’s name to European Union – a name much better suited to cover the bundling of not just economic forces but of entire nations. Jacques Delors also laid the groundwork for the EU’s rapid expansion. Austria, Sweden and Finland joined in 1995 while in 2004 ten Eastern European countries were welcomed into the fold. At times controversial and perhaps a tiny bit authoritarian, Mr Delors did succeed in putting Europe back on the agenda. The euro is – if nothing else – a project of a most ambitious nature. As such it is also most admirable. Notwithstanding its flaws, the common currency did help forge a common identity and create bonds, albeit discomforting ones. Mr Delors was one of only a handful of politicians who recognized the fact that Europe’s many and varied headstrong nations are condemned to live with each other in a rather cramped geographical space. Not just that, Mr Delors was found willing and able to pursue policies based on that fact

as opposed to the many who engaged in navelgazing or worse. Should the euro indeed succeed and prosper – as Mr Delors predicts it will – this French politician | Capital Finance International

will have pulled off a unique feat in the economic history of mankind – attempts at introducing and maintaining common currencies have never before met with lasting success.


> JOHN MAYNARD KEYNES Keynesianism to the Rescue: It Still Works Wonders invented and shaped modern macroeconomics. Mr Keynes’ insight was that money controls the production of goods and services. Thus it is not merely a tool for commerce, but in fact reigns supreme. Mr Forbes regularly calls John Maynard Keynes “a quack” for pointing out that injecting money into a recessionary economy will cause a resumption of growth. The stimuli packages unveiled in both the US and Europe following the financial crisis of 2008, are shining examples of Keynesianism at work. The forces of monetary orthodoxy severely dislike the thought of governments and their central banks fiddling around with money. They argue that currencies should be kept stable at all times and that the market will eventually find a way out of any quagmire it may have ventured into. To see how this works, just look at the countries of the euro area. Here stimuli monies were released rather late in the downturn. They were also much more modest in scope and ended up benefitting the banks more than the overall economy. As a result, Europe is taking much longer to crawl out of the crisis. The euro economies are now at risk of becoming stuck in stagflation. Compare this to the UK which had the foresight to appoint an unashamedly Keynesian banker to head the Bank of England. That was a smart move: The British economy is now thundering ahead. Mr Keynes is hailed as one of the 20th century’s most influential thinkers not least because the analysis he posited were generally proved right after the fact. So it was in 1944 when Mr Keynes led the British delegation of the World Bank commission that was to result in the Bretton Woods System of global monetary management. Though during the negotiations most of his ideas were overruled by the Americans, Keynes’ ideas and suggestions were vindicated by later events. John Maynard Keynes was also one of the last exponents of the idea that government and its civil service are powers that promote the common good by adhering to common sense. As such, the body of thought that is Mr Keynes’ legacy stands diametrically, and most refreshingly, opposed to the much more cynical game theory of ulterior egocentricity that has guided later macroeconomic thought and brought the world much sorrow. When Steve Forbes rallies against someone, as he often does, the world takes (some) note: Libertarians and conservatives are apt to make noises of approval while all others suspect the object of Mr Forbes’ ire to be a person of interest, if not outright admiration. The man who expertly


directed the decline of his family’s vast fortune thoroughly enjoys shouting from rooftops. Mr Forbes latest rant was directed at none other than John Maynard Keynes (1883-1946), the British economist who almost singlehandedly | Capital Finance International

Mr Keynes ideas are now in dire need of revaluation. The likes of Margaret Thatcher, Ronald Reagan and their many heirs have held sway far too long without producing anything near the results promised.

Spring 2014 Issue

> LUTHER GEORGE SIMJIAN ATM Inventor Misses Out on Fame and Fortune Born in 1905 in Turkey when that country was still known as the Ottoman Empire, Luther George Simjian became separated from his family in the chaotic aftermath of the Great War and fled to the United States via Beirut and Marseille. He arrived in New York age 15 with a bundle of optimism and a knack for anything technical. It wasn’t long before young Mr Simjian started inventing gadgets. The selffocusing camera, the teleprompter, the flight simulator, and the ubiquitous automated teller machine which made him famous. Few devices shaped retail banking into its present form as the ATM – aka hole in the wall – did. However, in 1939 when Mr Simjian had cobbled together his first fully functional Bankmatic few banks saw any use for the device. After much prodding, he found the City Bank of New York – the forerunner of today’s Citibank – willing to give the machine a chance. The Bankmatic worked as advertised but the bank was not impressed and after six month pulled the plug. The machine was used almost exclusively by ladies of the night, gamblers and other assorted outsiders who preferred not to deal with human tellers face-to-face. For Mr Simjian, his invention, though revolutionary, was not to bear any fruit. Commercial success did come eventually but in the form of the Optical Range Estimation Trainer – an early flight simulator – of which Mr Simjian sold over 2,000 to the US Army Air Corps. After languishing in oblivion, the ATM was at long last made feasible by Scottish inventor John Shepherd-Barron who developed the first fully electronic teller machine. This device was first installed at the Barclays Bank Enfield branch in North London. Mr Shepherd-Barron’s used special cheques impregnated with trace amounts of radioactive carbon-14 that could be matched against a personal identification number (PIN) entered on a keypad. At first this PIN number was to have six digits. The number was reduced to four after it was found that Mrs Shepherd-Barron could not readily manage to memorize a longer string of digits. She is owed a debt of immense gratitude. | Capital Finance International


> NICHOLAS BRADY Soccer Finance and the Pragmatist Who Fixed a Debt Crisis Back in the days when a top-scoring soccer player could be enticed for a few million, Brazilian attacker Romario set a record when PSV put down all of six million dollars to have him play for the club in Eindhoven, The Netherlands. It was an unheard of sum except that the Dutch paid but a fraction of the contracted amount. Smart thinking on the part of the club’s bankers meant that PSV got its star player for barely $1.5m. They came up with a cunning plan. Since Brazil couldn’t meet its debt obligations and was technically still in default, the countries bonds could be had for a song and a dance from bankers all too happy to pass on the proverbial buck. In order to pay Romario’s Brazilian club, ING bought up Brazilian bonds for pennies on the dollar. Next, the bank offered the Brazilian Central Bank an opportunity to buy back its own securities at a whopping 75% discount. The Brazilians – fairly amazed at the simplicity of the deal – readily agreed. Thus money was created out of nothing and Romario went on to score many a goal for PSV while the ING debt buyback scheme got hijacked by the Americans. No harm done. Nicholas Brady served as Secretary of the US Treasury from 1988 to 1993 and as such had to deal with the significant fallout from the Latin American debt crisis which erupted with Mexico’s 1982 default. Mr Brady took the debt swap idea first developed by the Dutch ING Bank a step further and to its logical conclusion. Under the Brady Plan, indebted countries would be able to issue new bonds with which to redeem old, devalued ones. The standardisation of emerging market sovereign debt that followed facilitated both risk-spreading and securities trading. This secondary debt market is still fully functional today and operates on the same principles first formulated by Mr Brady. The Brady Plan fixed the debt crisis of the 1980s imposing a “haircut” before that term had been invented. Brady Bonds were the main component of debt restructuring schemes and benefited tens of struggling countries. Most have now bought back all their outstanding Brady Bonds. The only country to ever default on its Brady Bonds was Ecuador. It did so in 1999.

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Spring 2014 Issue

> MICHAEL JOSEPH Banking for the Masses Fuels Mobile Networks

M-Pesa, mobile money, is the lasting legacy of Michael Joseph’s decade-long term as CEO of Safaricom, the largest mobile network operator in Kenya. M-Pesa allows mobile phone users to send each other small amounts of money, and access a host of other financial services via their handsets. It is, by far, the most developed mobile money system in the world.

subscribers. Part-owned (40%) by Vodafone, the expectation of corporate strategists at the time was that Safaricom could grow to about 400,000 subscribers given the best of circumstances. For the new CEO that was just not good enough. After Michael Joseph was done with Safaricom, the network boasted no less than ten million paying customers.

M-Pesa is nothing short of a financial revolution and it took a revolutionary to conceive it. A South African by birth, Mr Joseph – a self-described “Bolshevik character” without the finishing school polish of his peers in the business – left his country in the 1980s to flee the restrictions of apartheid. He went on to tramp the world setting up mobile networks wherever he went: Hungary, Spain, South Korea, Greece and Brazil. In Argentina, he engineered that country’s first mobile network in record time – a feat that is still unmatched.

Over the past three years the company added another three million to its subscriber base. In 2012 the company reported revenue of $1.25bn and an operating profit of about $300m. Safaricom is currently the most profitable business in East Africa and keeps growing both its revenue and its profits at double digit rates.

When he arrived at Safaricom in 2000, the fledging company had about 20,000

M-Pesa has been the key ingredient of this astonishingly successful business. As a branchless banking service, M-Pesa enables anybody with a dollar or two to spare for the acquisition of a basic mobile phone to move and keep money – no matter how modest the amount. Customers must provide some form of | Capital Finance International

identification in order to sign up for the service but need not have a fixed address, proof of income or any other document. Paperwork is kept at a bare minimum. The expanding gamut of M-Pesa services is offered at the tiniest of fees, promoting financial inclusion and allowing millions their first taste of banking. Not one for false modesty, Mr Joseph calls M-Pesa “the mobile phone industry’s greatestever innovation”: Perhaps an overstatement, but not by much. M-Pesa now moves about $3m daily in Kenya and neighbouring Tanzania. The service has been rolled out in Afghanistan, South Africa and India with Egypt following shortly. After leaving Safaricom in 2010, Mr Joseph accepted an offer from the World Bank to join its fellowship programme which aims to tap into development expertise. Earlier this year, Kenyan president Uhuru Kenyatta appointed Michael Jospeh as the chancellor of the Maseno University.


> PAUL KRUGMAN A Plea for a Return to Basics in Finance Author of no less than twenty books, over 200 scholarly essays in peer-reviewed academic journals and more than 750 articles as a columnist, Nobel laureate Paul Krugman is not one to hide his mostly liberal opinions. As an economist, Mr Krugman repeatedly draws attention to the dangers of tinkering with established financial practices. He argues quite tirelessly against the exotic and highly complex financial instruments that entice investors and aim to create paper wealth. Mr Krugman is a saltwater economist pur sang and vehemently defends a rather prominent role for the state in the conduct of macroeconomic affairs considering that it alone is able to avoid frightful booms and even more terrible busts. Still, Mr Krugman is no exponent of Keynesianism in economics. He has been heard to say that sweatshops are preferable to unemployment and has likened the opposition to unfettered free trade to denying the theory of evolution through natural selection. In a word, Paul Krugman finds his own way. He has been particularly vociferous in his opposition to the untold billions spent in the US and Europe to bail out faltering banks. Mr Krugman thinks that money would have been better spent stimulating the wider economy. In fact, Mr Krugman finds that monetary conservatism by central bankers is apt to needlessly prolong economic crises. The continued focus on reducing budget deficits may even lead to a third depression that would leave “millions of lives blighted by the absence of jobs”. Needless to say, Mr Krugman is not impressed by the US Federal Reserve’s drawing down its stimulus spending. In his Manifesto for Economic Sense, cowritten by British labour economist Richard Layard, Mr Krugman argues that the major industrial economies of the world are mired in a liquidity trap since interest rates cannot be lowered any further in an attempt to jumpstart growth. Krugman and Layard propose deepening counter-cyclical government spending as an obvious way out of this trap. What Mr Krugman mostly advocates though is a return to common sense economics and finance, considering that most deregulatory experiments have either failed or produced unforeseen, and often painful, side-effects. In today’s world, it’s rather innovative to plead for an end to financial innovation.

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Spring 2014 Issue

> ROBERT SHILLER Making Sense of the Irrationality of Markets

The question of what motivates a trader to buy or sell shares at any particular moment is probably as old as the stock market itself. Given that trading securities often is a pursuit largely devoid of rational behaviour – though many would have you believe otherwise – the answer remains elusive as ever, and that’s not for a lack of trying to devise ways and methods with which to foretell the conduct of the market and the players therein. Nobel laureate Robert J Shiller has made a distinguished career analysing the world of finance in general and more particularly the way it responds to events. Professor Shiller takes as his starting point the premise that in a fully rational market, investors would base stock prices on the expected receipts of future dividends. That, of course, is not the way it happens in real life. By analysing vast amounts of data,

Prof Shiller concluded that investors are mostly guided by emotions, hunches and other, often rather primeval, feelings. Now that the crunching of big data is in vogue, these conclusions are yet again put to the test. They still hold true. In the course of his academic work, Prof Shiller warned in 2006 of an impending housing crisis. He had identified a bubble that just had to burst. With the benefit of hindsight, this may not seem like rocket science but at the time pundits were almost unanimous in their verdict that housing prices would not just be sustained but increase further fuelled by an ever buoyant stock market. We now know what happened and who was right all along. So, the smart money would want to heed Prof Shiller’s latest warnings about the digital currency Bitcoin that has a growing number of | Capital Finance International

investors enthralled. He calls it “an amazing example of a bubble.” Prof Shiller is at a loss to explain the excitement of his students at Yale University over Bitcoin. “I tell them ’no, it’s not such a great idea at all’”. In 2013, the value of a Bitcoin increased by over 6,200%. “It may be an inspiration because of the computer-powered crypto science Bitcoin relies on, but in fact represents a return to the dark ages for the lack of clarity surrounding the digital currency.” Still, Bitcoin fits the mould when it comes to behavioural finance and as such constitutes a most interesting phenomenon to watch. The prestigious Foreign Policy journal has named Prof Shiller as one of the top global thinkers. His contributions to creating a deeper understanding of market volatility, asset pricing and the lifespan of bubbles have been nothing less than formidable.


> Meets the Chairman of Farazad, Investments, Inc.:

Korosh Farazad It is not often one finds the words banking and ethics in the same sentence. However, ethics is a core value and a founding principle for Farazad Investments Inc (FII). The founder and Chairman of the company, Korosh Farazad, adheres to strict market integrity and deploys an unconventional approach to structured financing.


his unique approach has been at the forefront of the firm’s success. It also paved the way for international recognition from regulatory bodies that now actively seek out Mr Farazad’s expertise. Regulatory compliance is a necessity that should be adopted by all reputable firms. KYC (Know Your Customer) checks and antimoney laundering practices are all common terminology firmly incorporated into today’s business language. This has had a positive impact on business transactions as it enables lenders to identify the end receiver and avoiding the bad practices common in the past.

has new and innovative funding ventures in the pipeline. It is Mr Farazad’s transparent approach to financing and his creative business philosophy which introduced an award winning in-house financing formula. This approach has been widely praised by international institutions wanting to adopt the formula to enhance their traditional funding methodology. The 2008 world crisis severely impacted on structured funding as the lending markets were crippled. The effects of this crisis linger on, even today. FII certainly encountered challenges during these turbulent times. The survival of the firm required a redirection to seek out new partners with the financial capability, and the understanding, to invest in profitable ventures. Mr Farazad was fortunate to be introduced to prominent family offices that not only evidenced the funds but also the risk appetite to invest Worldwide.

FII fully supports regulated practices and complies with all the guidelines issued by regulatory bodies, thus ensuring that all transactions are likewise fully compliant. Internal due diligence on all transactions is conducted as a matter of course, along with comprehensive KYC checks. It was back in the early nineties that Mr Farazad started his first job as an investment banker for a small cap IPO company, based in New York and with subsidiary offices in Maryland. He was an ambitious stock broker trainee, learning from the giants in the market and watching them rise and fall, like a bad trading day on Wall Street. Mr Farazad took an immediate interest in gaining a deeper understanding of the markets. After several years working the US markets, he had both the confidence and skillset to take a chance on his own. In 1996, Mr Farazad founded Farazad Oil Company Inc. and initiated his focus on the financing of oil wells in Mississippi and Louisiana. This first step and venture into the world of business soon led to the expansion of operations. Key relations were developed with the world’s leading financial institutions and global oil suppliers. The business diversified concentrating on the buying and selling of prime bank instruments. Mr Farazad’s unrivalled knowledge of international banking catapulted the core of the business and led to the foundation of Farazad Investments Inc. FII’s key activity was to facilitate medium to large scale structured finance plans for major 60

FII’s capability in the lending market strengthened with access not only to regulated funding houses but also to the private family offices that often demonstrated a willingness to compete in the market. FII’s survival during these difficult times depended on Mr Farazad’s ability to both diversify and establish a secure platform by adapting the traditional mechanics of conventional financing to the conditions prevalent in a volatile market. Over the last eight years, FII has successfully assisted in advising and structuring projects with funding requirements totalling more than $2.1bn. For 2014, it is projected that the total combined funding in the pipeline exceeds $3bn. FII’s operations in Australia will take lead and attract Worldwide accreditation for a fresh new concept in financing. Chairman: Korosh Farazad

corporations. Mr Farazad’s ethical approach and sound reputation resulted in solid relations with heads of states and senior officials within governments. FII currently operates across five continents, with a presence in the United States, Europe, Middle East, Asia Pacific and Australia. The firm boasts an ever-expanding portfolio and | Capital Finance International

Mr Farazad’s vision for the future of banking is optimistic. He can identify opportunities aplenty in emerging markets and sees clear signs of solid recovery. Mr Farazad considers that the increases in both GDP and FDI (Foreign Direct Investment) to be experienced by emerging markets may soon challenge those registered in more developed countries. i

16 – 18 June 2014, Fairmont Le Montreux Palace, Montreux, Switzerland

DISTINGUISHED SPEAKERS INCLUDE Todd Benjamin, Former Financial Editor, CNN International Martin Staub, Chief Executive Officer, Envisage Family Office Tim Jenkins, Business Commentator & Former Global News Presenter, BBC Raymond Kamp, Chief Executive Officer, Guidato Family Office Adi Divgi, President, EA Global Mitch Harris, CEO & Founder, Heritage Institute UK

An interesting and well organised summit with very high quality attendees. All in a friendly atmosphere. Partner, Gutzwiler & Cie

CONTACT US FOR MORE INFORMATION ABOUT SPONSORSHIP OPPORTUNITIES If you are interested in attending, sponsoring or speaking at this event please call 312-540-3000 ext. 6683 or email

> MIGA (World Bank) - A New Boon for Emerging-Market Financing:

Achieving Investment-Grade Bonds with MIGA’s Credit Enhancement By Olga Sclovscaia

Many investors, lenders, and government officials are familiar with the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group. For 25 years, the agency has insured investments in developing countries against political risk. This insurance facilitates productive foreign direct investment that boosts development, creates infrastructure, and produces jobs.


ncreasingly, MIGA is becoming known in banking circles for its ability to reduce the risk profile of a broad range of financing structures. This was made possible through the introduction of new products that protect investors and lenders against nonpayment by a sovereign or sub-sovereign entity, or state-owned enterprise. 62

Until recently, the primary users of this credit enhancement have been commercial lenders that provide loans to public-sector entities for infrastructure and other investments that require large amounts of capital and project financing. The benefits of MIGA’s insurance accrue to the developing countries where these investments are made, in the form of reduced | Capital Finance International

borrowing costs, longer tenors, and compliance with environmental and social standards that represent international best practices. But we wanted to go further and have been looking for more creative applications of our credit enhancement tools, in the knowledge that it has tremendous potential to bridge

Spring 2014 Issue

emerging-market financing gaps. This is now more important than ever, as countries need new financing options in the face of constraints faced by commercial lenders and reduced official development assistance from donor countries and entities. The perfect opportunity presented itself toward the end of 2013. At the end of September, MIGA backed a EUR400-million bond issue by Hungary’s Export-Import Bank (Exim) that made big financial news. The bonds will expire in February 2019 and carry a coupon of 2.125 percent. The novelty was that MIGA’s nonhonouring of financial obligations cover – which in this case protects investors should the Hungarian government not stick to its commitment to cover Exim’s debts – raised this bond issue from noninvestment grade to investment grade. The very positive results of this rating improvement were several. First, Exim achieved a savings of approximately $25 million that it will use to directly support Hungarian exporters. Second, the issue was significantly oversubscribed, garnering very strong interest from international investors. Bond buyers included investors from the Benelux countries, Germany, Japan, Norway, and Switzerland who would not usually have bought Hungarian or Exim bonds. Last, the issue introduced a new model for emerging markets to raise capital that harnesses the power of the private sector with the backing of an international development institution: A win-win-win situation indeed. WHY DO HUNGARIAN EXPORTERS MATTER? The answer is simple: They are a bright spot in Hungary’s economy – an important source of commerce and jobs. In fact, according to Exim’s head Roland Nátrán, 85-90 percent of the country’s GDP has its roots in the export sector which is dominated by small- and mediumsized enterprises. Even in the face of the global financial crisis, the country’s export sector stayed buoyant and credit demand remained robust.

Hungary: The Chain Bridge in Budapest

“The benefits of MIGA’s insurance accrue to the developing countries where these investments are made, in the form of reduced borrowing costs, longer tenors, and compliance with environmental and social standards that represent international best practices.” | Capital Finance International

But the crisis did exact its toll as lending for the Hungarian corporate sector declined sharply, mainly as a result of tighter credit allocation from the banking sector. In this context, exporters play an even more important role: As domestic consumption and investment fall, outwardlooking sources of economic activity are more critical. As an export credit agency, the mandate of Hungary’s Exim is to provide alternative or supplementary financial tools to fill gaps in trade finance created by commercial banks’ lack of capacity or willingness to absorb risk. Ultimately, this serves Exim’s mission to create and maintain jobs in the country and develop the national economy. During the credit crunch, the Hungarian government mandated Exim to provide more 63

affordable financing to Hungarian exporters. The agency was hard-pressed to deliver on a tough mandate in difficult market conditions – in short, to look for a creative solution. And here is where MIGA’s search for new applications of its credit enhancement products and Hungary’s development priorities met. Covering this bond issue represented an important milestone for MIGA, representing the first time the agency used its non-honouring of financial obligations cover for a capital markets transaction. An additional, indirect development effect of bolstering Exim’s lending ability deserves note. As it does not possess its own branch network, Exim closely cooperates with Hungarian commercial banks in order to reach small and medium enterprises through their distribution networks. This cooperation supports the stability of the Hungarian banking sector in general, as Exim provides long-term refinancing facilities, strengthening liquidity. MORE MIGA SUPPORT TO CAPITAL MARKETS TRANSACTIONS ON THE HORIZON, BUT SELECTIVELY In the wake of this successful bond issue, we have received significant interest from banks and issuers. Exim also reports that other institutions in Europe and Central Asia have been requesting information about how the transaction works.

While just over ten years ago development assistance was overwhelmingly provided by traditional donors, today other sources of funding continue to expand. These include less-concessional flows, and assistance from philanthropists and global funds. The use of private-sector instruments, blended with support from the public sector and multilateral institutions, is also increasing – and with good reason. Done well, investors can make their profits while public institutions can fulfil their mandates as industries create jobs. Research suggests that developing countries are welcoming this additional choice and the increase in the array of tools they can now use to meet their financing goals. From the perspective of capital-markets investors and issuers, the financial crisis had an important impact as well. It resulted in a significant dearth of highly-rated capital market issues. This means that there is a market gap that needs to be filled, and instruments like MIGA’s credit enhancement products are very well-placed to help accomplish this. i

ABOUT THE AUTHOR Olga Sclovscaia is MIGA’s Sector Manager for Finance and Telecommunications.

But the path blazed by Exim was not always smooth. The bond investors to whom the offering was marketed were not necessarily familiar with MIGA and we had to spend time and effort explaining both our agency and its products. However, the work paid off and we now have every indication that investors will more easily understand the full implications of our guarantee the next time a MIGA-supported bond goes to the capital markets. However, this by no means implies that MIGA will begin to insure a flood of bond issues. What this means is that – as with any investment the agency insures – there needs to be a strong development rationale. Why do Hungarian exporters matter? There was a strong answer to that question. Potential clients need to be prepared to convince MIGA that they have similar narratives to tell. Also, MIGA will conduct extensive due diligence on any project it is asked to insure. THE POST-INTERNATIONAL FINANCIAL CRISIS WORLD: HOW EMERGING-MARKET FINANCING AND CAPITAL MARKETS HAVE CHANGED The global financial crisis and its aftermath put the need for diversified financing options for developing countries in perspective. National governments that were traditional donors around the world reduced official development assistance as they tightened fiscal belts. This happened at a time when the overall aid landscape had shifted significantly.


Budapest: Heroes Square | Capital Finance International

THE SKILLED BANK IN INVESTMENT AND SAVINGS Self Bank, established in Spain in 2000, is an online bank born of the agreement between Boursorama, part of Société Générale Group and CaixaBank, the leading financial group in retail banking in Spain. Self Bank offers the most complete range of investment and savings-related products and services to give the best service to our clients with independence and transparency.

> Nykredit:

Danish Covered Bonds - The Largest Bond Market You Never Heard About By Morten Bækmand Nielsen

The Danish covered bond market is one of the largest in the world, both in absolute terms and relative to the size of the Danish economy. Danish covered bonds have for decades been the most popular deal for domestic investors because of their very high level of security and liquidity. International investors are increasingly taking an interest in the market.


he market value of all outstanding Danish covered bonds exceeded DKK 2,700bn (approx. EUR360bn) at the end of 2013. The outstanding volume of covered bonds is around 140% of Danish GDP. In comparison, the outstanding volume of government bonds amounts to approximately 35% of GDP. In Europe, where covered bonds backed by mortgages are issued in almost all countries, the Danish market ranks second ahead of countries such as Germany and France. Due to its size alone, the covered bond market plays an important role in the Danish financial markets. Danish covered bonds – which are almost exclusively used to fund mortgage loans – are considered very safe investment objects for a number of reasons: • Danish covered bond legislation is among the strictest in Europe, dating back to 1850. • Virtually all Danish covered bonds are rated AAA by one or more international credit-rating agencies. • The covered bonds are repo-eligible with Danmarks Nationalbank (the Danish central bank), and some bonds issued in other currencies than DKK are repo-eligible with other central banks. The high level of security and the ensuing high ratings are rooted in Danish legislation and the way Danish mortgage banks operate, which minimises the risk of loss. All mortgage banks fund their mortgage portfolios on a pass-through basis, which eliminates all market risks. This set-up is referred to as the “balance principle”. The result is that mortgage banks are in effect left with only credit risk and the task to manage the mortgage portfolio. Mortgage banks are therefore considered very safe institutions by investors and with a high degree of transparency. This proved a decisive advantage during the


“All mortgage banks fund their mortgage portfolios on a pass-through basis, which eliminates all market risks.” financial crisis when investor confidence remained high in Danish covered bonds during a period where it had disappeared in many other markets. High investor confidence meant that the Danish covered bond market remained open for new issuance and trading every day during the financial crisis. Moreover, the mortgage banks could 80 fund their lending without having to resort to government guaranteed bank bond like many European peers. 70

Nevertheless the repercussions of the 2008/2009 financial crisis did reach the Danish bond market as well. Research shows that liquidity declined significantly during the crisis in the mortgage covered bond markets. However, the impact was of a similar scale as that on government bonds. Thus, the study seems to confirm that Danish benchmark covered bonds are almost as liquid as government bonds even in times of severe stress. The peaks in issuance of Danish covered bonds each year in December are due to the annual refinancing auctions of maturing short-dated bonds. The Danish covered bond market’s resilience to market stress was tested after the collapse of Lehman Brothers in September 2008. Danish mortgage banks needed to refinance 1-year bullet bonds during a period of two weeks in early December for an aggregate amount of DKK 600 billion or approximately EUR80 billion. Spreads widened, but the refinancing was effected in a period when most covered bond

60 50 40

30 20 10 0

Danish covered bonds

European Covered Bonds

Government Guaranteed Bank Debt

Chart: Issuance of covered bonds and government guaranteed bank debt, EUR billion. | Capital Finance International

Spring 2014 Issue

Copenhagen, Denmark: Round Tower

markets in Europe were effectively closed WHAT IS A MORTGAGE COVERED BOND? for new issuance. A mortgage covered bond is a debt obligation issued by a bank and secured by both a pool of mortgage loans (the cover pool) and a claim against the issuing bank. Investors in covered bonds enjoy a preferential claim to the assets in a cover pool in case of the issuing entity’s default. The mortgage loans stay on the balance sheet of the issuer, but are ring-fenced by law to protect the bondholder’s claim on the cash flow from the loans. Covered bonds are a funding model that has been used in Europe since the 18th century. The first Danish covered bonds issued under the current covered bond act were issued in 1850. Covered bonds come in many varieties and can be issued by specialised banks that are only allowed to fund themselves via covered bonds or by banks that also take deposits. Apart from mortgage loans, covered bonds are used to fund public sector lending and in some countries also ships. INCREASED FOREIGN INVESTOR INTEREST The high level of security has attracted broad interest in Danish covered bonds – among Danish as well as foreign investors. The majority of bonds are owned by commercial banks, mortgage banks, investment funds, insurance and pension companies, which together account for 70-75% of the bonds. Traditionally, life insurance and pension companies have large portfolios of long-term, fixed-rate covered bonds. These companies have long-term investment horizons and are therefore particularly interested in secure long-term bonds. Commercial banks, on the other hand, often invest in shorter-dated covered bonds. INVESTORS IN NYKREDIT’S COVERED BONDS Historically, foreign investors have held 10-15 per cent of the Danish covered bonds. Just prior to the collapse of Lehman Brothers foreign investors held approx. 15% of all the issued bonds. Post Lehman, many investors shied away from mortgage-related assets, and foreign investors reduced their holdings in Danish covered bonds to just over 10%. The sell-back proved short-lived as investors came back when the financial crisis evolved into a sovereign debt crisis in Southern Europe. Northern European bond markets attained a status as a safe haven for fixed income investors, and many banks, fund managers and central banks bought covered bonds from Denmark and other Scandinavian countries. Today around 20% | Capital Finance International

of Nykredit’s covered bonds are held by international investors. INVESTOR APPETITE AND SPREAD PERFORMANCE Danish mortgage banks basically issues three types of mortgage covered bonds: • Most bonds are issued in a standard fixedrate bullet format with maturities from 1 to 10 years. The majority of these bonds are issued with 1-year maturities, and the rest primarily has 3- and 5-year maturities. • The second type of bonds is long-dated fixed-rate callable bonds that amortise over the life of the bonds. The vast majority of these bonds are issued with 30-year maturities. This is the traditional Danish covered bond. • Fixed-rate callable bonds are used to fund standard 30-year fixed-rate mortgage loans. Home-owners’ mortgage payments match the cash flow on the bonds issued to fund their loans plus a margin to the mortgage bank covering loan administration and credit risk. Homeowners are entitled to redeem their loans early either by prepaying (calling) the loan at par or by buying back the underlying bonds in the market if they are trading below par and surrendering them to the mortgage bank. The 30-year bonds issued are standardised and open for daily tapping for three years, and hence fund thousands of mortgage loans with identical features. • The third broad type is floating-rate bonds. They come in a wide variety of designs with or without imbedded rate caps. International investors primarily invest in bullet bonds and long-dated callable structures. Even though most of the bonds are issued in Danish kroner (DKK), many investors see them as proxy-EUR investments because the Danish currency has been pegged to the euro and its predecessors for more than 30 years. The 30-year callable bonds are primarily bought by pension funds and insurance companies in both Denmark and abroad as the long cash flows match the longterm liabilities of these investors. Investors are compensated for the prepayment risk inherent in callable bonds, and yields are therefore considerably higher than for other AAA rated bonds in Europe. In early 2014 the benchmark 30 year Nykredit callable bonds which mature in 2044 are offering a coupon of 3.5 per cent and a yield-tomaturity of approx. 3.6 per cent. i

ABOUT NYKREDIT Nykredit is Denmark’s largest lender and the largest issuer of mortgage covered bonds in Europe. Nykredit is a mutually owned financial institution and was established as a as a mortgage bank in 1851.


> European Policy Centre:

A New Deal for Growth and Jobs in the Eurozone Revisited By Fabian Zuleeg, Chief Executive, European Policy Centre


t the EPC breakfast on 28 January, IMF Managing Director Christine Lagarde launched a book on Jobs and Growth: Supporting the European Recovery, containing detailed policy analysis and recommendations. The book is a further sign that there is now wide-spread recognition that it is high time for Europe to take more action to deliver jobs and growth. THE NEED TO FOCUS ON GROWTH AND JOBS With the immediate ‘euro crisis’ subdued by 68

the substantially reduced danger of a country exiting the euro area, the actions of the European Central Bank (ECB) and a range of policy actions, including progress on the Banking Union, the EU and its members need to think more about the real economy. While there are undoubtedly flaws in the European Monetary Union’s (EMU) new governance structure and further steps are still needed (with complacency a real danger), the risk/threat of immediate and catastrophic collapse is off the table. This creates the much needed space to deal with Europe’s dual growth | Capital Finance International

crisis: low aggregate growth and a divergent economic performance of some countries, which are falling further and further behind. The need to focus on the real economy is a political and economic imperative if the EU wants to avoid getting trapped in a low growth/ high debt scenario with deflationary tendencies, which would also imply, at best, a stagnating labour market. Not only would this be a loss of economic potential and a human tragedy for those trapped in unemployment but it would

Spring 2014 Issue

European Financial Stability Facility / European Stability Mechanism, the IMF and indirectly the ECB have provided plenty of support. However, the focus has been ensuring that countries can continue to meet their debt obligations and to ensure the stability of the financial system, rather than boosting economic growth. Of course, many have rightly argued that a stable macroeconomic and fiscal environment with deficits under control creates conditions for growth and that reform of the financial sector is an essential step towards restoring bank lending which is crucial for investment. But while these actions are clearly necessary, they are not sufficient to restore growth. Ideally, structural reform should boost growth in the longer term. By removing product and labour market imperfections there will be a greater incentive to invest and employ. However, this does not necessarily happen: many structural reforms are, in reality, merely public spending cuts without a long term growth-enhancing effect. But even if these reforms are effective in raising the level of growth, they usually take a long time to work, especially with respect to employment. And if there is an absence of labour demand in the economy or a lack of available and affordable credit for private investment, even painful reforms might not bring the desired effect. What remains? Monetary policy is another key factor, with the ECB continuing its low interest rates, as well as signalling that monetary policy will remain loose for some time to come. While the ECB is considering a more active stance, such as buying up packages of bank loans, it is difficult to imagine much more being done, given the institutional limitations of the ECB and the current political debate, especially in Germany. Tolerating higher inflation and European-style quantitative easing are likely to be a political step too far.

Brussels: Royal Palace

“The need to focus on the real economy is a political and economic imperative if the EU wants to avoid getting trapped in a low growth/high debt scenario with deflationary tendencies, which would also imply, at best, a stagnating labour market.�

also favour political forces that will undermine European integration – as will be demonstrated by the populist anti-EU/euro vote for the European Parliament. THE CURRENT CRISIS RECIPE What can be done? So far, there has been a strong emphasis on fiscal consolidation and structural reform, with an asymmetric adjustment mostly carried out by the countries in crisis. This is not to say that there has been no support: the | Capital Finance International

Improving export performance could help, and to some extent is already happening, with countries in crisis improving their external economic balance, albeit in some cases through import compression rather than better export performance. But becoming more balanced alone will not provide a positive growth impulse, especially if there is no adjustment towards a greater focus on domestic demand in the strong export-surplus countries, which is unlikely given their strong political resistance. EU ACTIONS: EFFECTIVE AND SUFFICIENT? In the long term EU actions can help. But, even if effectively implemented, most growthenhancing actions often mentioned at EU level, be it trade deals, such as the Transatlantic Trade and Investment Partnership (TTIP) with the US, regional funds, industrial policy, further development of the Single Market or the digital agenda, will take time to implement and even longer to impact on growth. In addition, they 69

are also likely to benefit mostly the strongest economies, which have the economic structures to maximise returns from more open and developed markets and can also access support more effectively.

helping them to reallocate their investments more profitably, from companies which have amassed significant unused funds, and from globally mobile capital, which is looking for safe returns.

The 2013 Compact for Growth and Jobs is supporting the recovery through, for example, the expansion of lending activities for the European Investment Bank (EIB) but the reality is that implementation is too slow and there is little in terms of new growth impulses. There is no convincing answer to the problem of high unemployment, particularly youth unemployment, risking the credibility and longterm stability of EMU. The Youth Guarantee has too little funding underpinning it and there are serious doubts about its practical implementation, especially in countries in crisis. In the end, only a recovery in growth can boost employment levels.

Most importantly, such a plan could create confidence in the EU’s longer-term future, triggering investment and consumption and thus truly setting Europe on a path of sustainable recovery. An ambitious New Deal could be Europe’s ‘Befreiungsschlag’ – a decisive move to create a new economic trajectory. However, to do this, a New Deal must go beyond small-scale action and repackaging of existing initiatives. Despite the positive long-term impacts structural reforms and policy initiatives may have, without such decisive short term action Europe’s recovery might never get off the ground, with economic, social and political consequences which would undermine the European integration project and peace and prosperity in Europe for years to come. i

A NEW DEAL FOR THE EURO It is time to revisit the idea of an EU-wide plan to boost growth: as the EPC has termed it, a New Deal for the Euro. This could include a dedicated investment fund – a new Stability and Growth Fund (SGF) of around 0.5% of EU GDP, aiming specifically to deliver investment for growth in countries unable to make the necessary investments themselves. Funds from the SGF would not be a bail-out but long-term investment – not a transfer union, but an ‘investment union’. Such an ambitious public investment programme should go beyond current plans for frontloading European Structural and Investment Funds, project bonds and the Connecting Europe Facility. More public investments financed by euro-infrastructure bonds and new financial instruments should be complemented by boosting private investment, including through a European Investment Guarantee Scheme (EIGS) to provide a form of insurance for excessive risks incurred when investing in crisis countries. The EIGS would create investment opportunities and help to boost sustainable growth and employment in Europe’s periphery, addressing the direct consequences of the crisis. Of course such a New Deal would not come for free and additional money would need to be found. This will not be easy, especially since it will be difficult to reallocate any part of the EU budget now that the overall framework has been agreed. But the ongoing discussions around the fiscal capacity for the Eurozone could be an opening, if the willingness exists to see this funding as a means of investment rather than an instrument to incentivise structural reform.

ABOUT THE AUTHOR Since October 2013, Fabian Zuleeg is the European Policy Centre’s (EPC) chief executive with overall responsibility to lead the centre. Mr Zuleeg provides the EPC’s strategic direction, manages its staff and resources and represents the centre. He remains chief economist at the same time – a post he has held since January 2010 – in charge of the Europe’s Political Economy Programme. His research focuses on the economic and Euro crises and in particular how European policy and economic governance can address the continent’s dual growth crisis: A low aggregate growth rate and a growth divergence – increasing disparities between countries. He also has a long standing interest in the single market, European labour markets and the EU budget. Mr Zuleeg works closely with decision makers at European institutions, EPC members and partners and the wider Brussels stakeholder community. Mr Zuleeg regularly comments on current EU political and economic issues in the media. He also chairs and contributes to a wide range of debates, conferences and seminars and has researched and published widely on European economic and social policies.

Disclaimer: The views expressed in this Commentary are the sole responsibility of the author. References online.

A NEW CONFIDENT BEGINNING Such a New Deal based on investment would help all of Europe. While targeted especially at crisis countries, it would also create opportunities for companies across the EU and attract global and European investments from pension funds,


Cityscape of Brussels | Capital Finance International

Spring 2014 Issue | Capital Finance International


> Norwegian-African Business Association (NABA):

Private Business as Educator Bridging Africa’s Job-Skills Gap By Hedda Wingerei and Halfdan Broch-Due

In the wake of the global financial crisis, Africa’s sustained economic growth over the last decade has compelled the global investment community to take note. Foreign direct investment has skyrocketed and top international law firms are opening up offices from Luanda to Maputo, eyeing the continent’s vast untapped economic potential. Yet, the long-term sustainability of growth is challenged by the demographic explosion of restless unemployed youths – the continent’s largest financial asset and simultaneously most pressing political risk.


he key challenge and responsibility for business and governments alike lies in connecting Africa’s vast labour supply with the skills necessary to meet industry and employment demands.

The burgeoning growth rate and influx of foreign investment is placing an increased strain on the knowledge capacity of local labour markets. Capital absorption hinges on the availability of qualified labour resources. In many countries the saturation point has already been reached. It is particularly prevalent in specific industry sectors such as mining, energy and transport infrastructure where a lack of engineers hampers investment opportunities. The presence of high vacancy rates alongside high levels of unemployment underlines the issue and confirms the presence of a skills mismatch. The problem spans the entire continent from Egypt, where 1.5 million young people are unemployed while private sector firms struggle to fill over 600,000 vacancies, to South Africa, where 600,000 unemployed university graduates live alongside 800,000 vacancies. The problem is compounded in many countries due to stringent local content requirements on labour supply. This forces the hand of private businesses unable to recruit adequately trained personnel. DEMOGRAPHIC EXPLOSION Africa has more people under the age of twenty than anywhere else in the world. The continent’s population is set to double to two billion by 2050. Researchers and economists alike argue that, if properly managed, this massive potential work force can be forged into one of the main catalysts of economic development. With youth making up 40% of the working age population, inclusive and capacity-building steps are 72

“Where the public sector falls short, the private sector should embrace the possibilities of filling the gaps between skills and labour supply.” needed to harness this demographic dividend. Although the private sector is screaming for qualified workers, local universities often do not adequately equip graduates with the skillsets needed by employers. Mr Eddo, a former BBC journalist covering the Africa Business Reports, places part of the blame on national education systems where critical and independent problem solving skills are often trumped by the old fashioned prerogative of memorisation and submission to pre-packaged ideas. Many students therefore end up lacking key transferable skills [1]. Where the public sector falls short, the private sector should embrace the possibilities of filling the gaps between skills and labour supply. There are many ways this may be achieved from setting up partnership programs with local universities and schools to well-structured job training programmes with adequate follow up. Businesses as educators are in the privileged position of knowing exactly what skills are required at any given moment. SHIFTING PARADIGM The paradigm of global development is also steadily shifting away from the traditional topdown approach of money dispensed as generic foreign aid toward a more earmarked cooperation with a wider range of actors and intended to | Capital Finance International

strengthen local capacity building and knowledge transfer. Within this framework, much attention has recently been given to the development of private-public partnerships. This was recognized as a key outcome at the World Economic Forum in Davos as surmised by Julian Robert, the CEO of Old Mutual, in the panel discussion “Africa cannot succeed without a real handshake between private enterprise and the public sector”. [2] The United Nations has included this as a priority for the post-2015 development agenda. Companies that take the lead on training strategies will thus find themselves on the right side of public policy momentum. For example, the Norwegian Agency for Development Cooperation (NORAD) has a funding scheme intended to increase FDI (Foreign Direct Investment) in developing countries. This scheme is based on giving Norwegian companies the means to fund pilot projects in order to determine the feasibility of investment opportunities. Many companies have already taken advantage of the momentum, recognizing the long-term benefits of raising the educational level of local staff with the aim of supplying them with sector specific skills and knowledge. Statoil, one of the world’s leading companies in oil and gas production, provides attractive training opportunities for local employees. COLLABORATIVE INITIATIVES In Angola, where Statoil has operated for nearly two decades, the company has established collaborative higher education initiatives between two Norwegian and Angolan universities. Since 2008, 36 students have carried out master degree studies in petroleum sciences. This initiative has further helped the company comply with local content regulations. Of the total

Spring 2014 Issue

Norway: Parliament in Oslo | Capital Finance International


In Pictures: NABA is the only Norwegian-African chamber of commerce, and provides strategic advice, joint-venture facilitation, business exploration journeys, information products (country analysis, political risk, sector studies, market reports, legal aspects), seminars and conferences.

workforce, 89% have been locally recruited. Similar programs have been introduced in Tanzania and Mozambique. Yara International, a Norwegian firm specializing in agricultural products, initiated in 2008 the Ghana Grains Partnership (GGP) – a public-private partnership aimed at improving the efficiency of the maize value chain in Northern Ghana. The project features an educational component that gives farmers access to knowledge and advice on agricultural best practices with a view to increase crop yields. Now that it is widely acknowledged that entrepreneurship can transform economies, drive innovation and change communities, Ernst & Young (EY) has linked its global presence with supporting local entrepreneurs. In 2012, the company launched Next Gen, a programme directed at empowering the next generation of women in Africa. With Africa holding 25 percent of the global workforce by 2050, EY supports the notion that active participation of women is needed to sustain economic growth across the continent. The NextGen programme includes leadership camps and access to bursaries that will help disadvantaged young women complete tertiary education. Piloted at ten schools in South Africa, it is now set to be extended to other African countries. CRITICAL FACTORS There are some critical factors underpinning successful capacity enhancement which should form the backbone of any training strategy, whether on the job or in the classroom. This strategy should not just focus on technical skills but should leave room for the development of key behavioural skills such as listening, 74

In Pictures: Norwegian-African Business Association (NABA) flagship event the “Norwegian-African Business Summit” will take place on October 30th 2014 at the Radisson BLU Scandinavia Hotel, Oslo, Norway. The conference will also draw attention to the “skillsgap” in the African market and how to address the challenge.

empathy, curiosity, flexibility and trust-building that bind together a good working and learning environment. Programmes should also make sure to adapt to local knowledge and contexts, seeking to find solutions in terms of ‘best local fit’ rather than ‘best global practice’. Foreign businesses should use training programmes as unique opportunities to gain in-depth knowledge about the place that hosts their operations. They may also benefit from harnessing the vast stores of local knowledge of their employees. This will in time facilitate and strengthen the exchange of ideas which in turn is key to building mutual trust. By nurturing critical mind-sets and lowering cultural barriers to giving and receiving feedback, a better – and ultimately more profitable – relationship may be forged between subordinates and executives. The expectations of companies have changed over time. Whereas a certain amount of philanthropy in a company’s hometown was once | Capital Finance International

thought sufficient, recent notions of corporate citizenship and corporate social responsibility are changing the relationship between businesses and consumers. A company’s reputation is not only confined to its financial expertise but to its moral leadership as well. The private sector has a lot to gain by taking its role as an educator seriously on the African continent, both in terms of increasing its revenue and its moral capital. In order to realize the economic potential of African countries, businesses should ally themselves with development objectives aimed at curtailing youth unemployment. These comprise mutually reinforcing solutions that meet the challenge of Africa’s demographic explosion. i References [1] Mr. Mark Eddo, speaker at NABA business saminar on Business Culture in West Africa, February 2014. [2] Julian Roberts, Panel discussion speaker at World Economic Forum in DAVOS, January 2014.

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> Meets the CEO of Bramer Bank:

Ashraf Esmael Mr Ashraf Esmael, 46, is the Chief Executive Officer of Bramer Bank – the third largest lender by market capitalisation listed on the stock exchange of Mauritius. Bramer Bank provides retail, business, private and international banking solutions to both the domestic and international markets in addition to leasing and micro finance.


ramer Bank is part of the British American Investment Group, one of the largest conglomerates in Mauritius with investments in banking, asset management and insurance amongst others. During his tenure at Bramer Bank, Mr Esmael expanded the retail network, launched a new head office for the bank and introduced new customer propositions in private and international banking as well as in the credit card business. Under his leadership the bank’s asset base grew ahead of the industry by more than 30% and the bank achieved a brand awareness rating in the top 5 of the Mauritius banking industry. Prior to his position at Bramer Bank, Mr Esmael was the CEO of Mauritius Leasing – a pioneer of the industry and now the largest asset finance company in Mauritius. Here, he successfully crafted new industry-leading solutions such as full maintenance fleet leasing. Mr Esmael also led new developments in Islamic financial services – such as Ijaarah, Murabaha and Mudharaba based solutions – including real estate leasing and floor plan financing. He has been instrumental in motivating changes in legislation and regulations to allow for the implementation of pioneering concepts in financial services in Mauritius. In 2011, Mr Esmael pioneered a new micro financing model which has made Bramer Bank into the premier provider of microfinance in Mauritius. Mr Esmael is a member of the board of the Mauritius Bankers Association. He also serves as a council member on the board of the Mauritian Chamber of Commerce & Industry. Until 2012, Mr Esmael also was the chairman of the Association of Leasing Companies in Mauritius. He also participated as both a panel member and a speaker in various financial services workshops organised by the Financial Services Commission and the Central Bank of Mauritius as well as at Global Conferences in the African and EMEA regions on topics such as broadening access to financial services, retail banking, housing finance, private equity and Islamic finance & capital markets. 76

CEO: Ashraf Esmael | Capital Finance International

Spring 2014 Issue

Mr Esmael holds qualifications in management accountancy and information technology including a master’s degree in business administration from the Surrey European Management School. He has cross-industry experience in FMCG (Fast Moving Consumer Goods), professional services, technology, corporate finance and financial services. He is a Mauritian citizen, married and blessed with two children. GROWTH AT AN ACCELERATED CLIP Bramer Bank made headlines for its remarkable growth in recent years. It has recently been awarded as Best Emerging Bank Mauritius 2014 by Capital Finance International. Here are some of the key factors that led to this win. Since its acquisition by British American Investment in 2008, Bramer Bank has made significant investments with regards to the modernization of its core banking system and the integration of an eBanking platform. The bank has also strengthened its human capital and extended its geographical footprint across the country so as to be closer to the customer. Much attention was paid as well to the development of new product lines such as credit cards and the opening up of new business segments such as private and international banking. For Bramer Bank, 2013 was marked by a major expansion of its presence in Mauritius with the opening of a new head office at Place d’Armes, in the heart of the Port Louis financial district, and a state-of-the-art branch in Ebène Cybercity, a hub for knowledge-based industries and home to the Mauritian global financial services sector. Over the next few months, the new premises in Ebène are to become the nerve centre for the bank’s operations. A clear vision and intense focus, combined with key strategic investments as well as an

experienced and talented team of professionals, have all contributed to propel the bank to new heights.

“In 2011, Mr Esmael pioneered a new micro financing model which has made Bramer Bank into the premier provider of microfinance in Mauritius.” As one of the fastest growing banks in Mauritius – with total assets now exceeding $512m and with over 80,000 customers across retail, private, business and international banking – Bramer Bank has its remarkable success underpinned by a simple, yet effective, mission statement that seeks to inspire a continual pursuit of multidimensional excellence: To generate enhanced shareholder returns through the delivery of excellent, differentiated banking products and services to growing businesses and aspiring individuals alike. It is through the realization of this ideal every single day that the bank constantly sets the bar higher and aims to shatter the confines of the merely possible to reach for solutions that suit the needs of all stakeholders.

Bramer Bank has ambitious plans for growth and development in the region and already gained considerable exposure in the region over the past few years. The opportunity to work with a major African bank would mean direct access to a massive market that is characterised by a growing demand for robust financial products and services. Overall, Bramer Bank remains positive on the outlook for the Mauritian economy though considers that future growth is dependent on external conditions and economic reforms. The GDP growth, currently around 3.7 to 4% annually, is expected to be driven by the financial services and manufacturing sectors. The tourist industry remains for now stagnant while the construction sector suffers from contraction. The fiscal consolidation programmes implemented in advanced economies and the increasing debt and financial worries in Europe continue to affect the Mauritian economy despite recent efforts to diversify the country’s export markets.

In February, Bramer Bank announced a merger with an African bank. It has entered into an MOU (Memorandum of Understanding) to initiate discussions with an African Bank for a merger or amalgamation of the respective businesses in order to create a larger banking concern that would operate across Africa.

Bramer Bank, however, continues to believe that a strong performance by Mauritius’ financial sector and the sustained growth of the export oriented sectors (manufacturing and tourism) will continue to support economic expansion in 2014. The financial services sector of Mauritius remains one of the most important economic pillars of the economy with a GDP contribution of well over 10% and an average annual growth higher than 4% over the last three years.

The Board of Directors of Bramer Bank believes that this represents a formidable opportunity for it to capitalize on the growth potential of the African continent. The merged entity will benefit from its presence both in Mauritius, an international financial jurisdiction, and the African market to offer a wider range of banking services and products to create operational efficiencies and enhance execution capabilities.

The future of the financial services industry looks very promising indeed as a growing number of operators look at establishing footprints locally across various sub-sectors – ranging from global business and investment banking to investment advisory, management and structuring, broking services and international legal services with a view to capitalising on emerging opportunities along the Africa-Asia corridor. i | Capital Finance International


> African Century Leasing:

Providing the Funds that Reinvigorate Zimbabwe’s Economy The Board, Management and Staff of African Century Leasing Zimbabwe (ACL) take this opportunity to thank Capital Finance International readers, subscribers, partners and judges for nominating ACL for the Best Leasing Company in Zimbabwe Award. It is truly an honour for us to receive this prestigious accolade recognising the contribution that ACL is making towards the growth of businesses in Zimbabwe. These annual awards by Capital Finance International (CFI), which recognise top performers in the financial services sector continue to provide inspiration to previous and current winners of the awards as well as other firms in the sector. COMPANY BACKGROUND ACL is a registered leasing company established post the introduction of the multicurrency regime in Zimbabwe to provide leasing finance to productive sectors in the country. The company which opened its doors in 2011 was founded after the realisation that there was a dearth in institutions with the risk appetite, capacity and willingness to fund industrial recapitalisation in the country. The major shareholder of the firm is a Mauritian firm, African Century Leasing, which is part of the African Century Group (ACG), an investment company that has developed a portfolio of investments in sub-Saharan Africa, principally in East and Southern Africa. African Century creates value to local communities by operating in a socially and environmentally responsible way with the intention of creating lasting employment and above all, by supporting the development of local skills and infrastructure. OUR REASON FOR BEING De-industrialization in manufacturing and other sectors in Zimbabwe continues to affect capacity utilization which is reported to be below 40% for most sectors. This is creating massive layoffs of workers, reduction in tax revenue to the government, and affecting the government’s ability to fight growing poverty. Aged equipment has also affected the country’s capacity to refurbish key infrastructure, the ability of manufacturers to process raw materials into finished goods that are competitive in global markets and the ability of mining companies to create value by refining their minerals through beneficiation processes. The lack of foreign direct investment and lines of credit for the recapitalization of the productive sector has left a yawning gap which will require 78

“Dealing with ACL is a refreshing experience. Their turnaround time comes second to none. The ACL team commits itself to becoming a business partner and goes all the way in ensuring that businesses achieve their goals by assisting them to acquire capital equipment for business growth on sustainable terms.” Albert Chigova, Company Secretary, Radar Holdings

over US$27Billion in FDI to fully resuscitate the economy. Financial institutions such as African Century Leasing are well positioned therefore to play a key role through the provision of leasing finance to companies seeking to recapitalize their businesses. OUR CUSTOMERS TThe success of ACL hinges on our ability to satisfy existing customers and attract new clients to take up our products and services. We continue to analyse our markets and the capacity of our customers to service their facilities, so as to provide leasing products that result in win-win situations for our shareholders and our clients. Our portfolio is spread across different sectors of the economy, from mining to manufacturing and we will continue to source for credit lines to finance other sectors in due course. ACL has made it possible for agricultural equipment producers and companies to acquire the equipment that they need to grow and expand their businesses. ACL appreciates the growing need for infrastructural development in the country and therefore the construction industry is another major beneficiary of the company’s products and services. | Capital Finance International

Zimbabwe’s mining sector has continued to be the leader in economic performance, contributing an estimated 16 percent to GDP in 2012, up from 13 percent in 2011. The sector also continued to lead in export earnings, rising to US$2 billion in 2012, from US$1.8 billion in 2011. The major drivers of this growth in export earnings were diamonds, platinum and gold. This trend is expected to grow further in 2013 and 2014. Militating against higher growth rates, however, is the unavailability of medium to long term credit facilities for working capital and recapitalization requirements. Being number six in the world in terms diamond resources and having 90 percent of world platinum reserves between Zimbabwe and SA, as well as extensive gold deposits, Zimbabwe has massive natural resource potential. The discovery of new mineral deposits in the country and government’s empowerment drive has created viable opportunities for leasing companies able to find lines of credit for these capital intensive sectors. ACL has put in place leasing finance schemes

Spring 2014 Issue

Zimbabwe: Harare

for clients in the mining sector to cost effectively extract and refine minerals in the country. As this sector grows, ACL will be at the forefront in developing more innovative products for mining companies. In order to empower the health sector, ACL is also supporting medical institutions and doctors with funding for specialist medical equipment. Leasing finance to the transport industry absorbed 24% of the ACL lease book as at December 2012. In 2013, ACL continued to support transport companies in the country by providing financing for firms such as haulage, freight and public transport companies. The manufacturing sector will play a key role in the revival of the Zimbabwean economy by stimulating economic growth and job creation through the development of micro, small and medium enterprises. ACL is working with companies in this sector to offer vital leasing products for this segment. Since its inception, in 2011, African Century Leasing has been privileged to count on team of experienced and dedicated professionals who add value to the firm and its clients. ACL aims to attract the very best talent in the financial services sector and to become the employer of choice in this market. The Board and management also realises the importance of a robust, fully integrated IT system that enhances the company’s performance. Investment in IT has assisted in building a loyal customer base and in promoting ACL as a customer centric financial services brand. In order to stay top of mind amongst our customers

we strive to offer innovative products with flexible terms to our clients because we are cognisant of the financial challenges that companies in the country face. Our understanding of the financial sector in the country, our corporate governance framework and prudent risk management, coupled with the trust that our investors have in the company, makes us a company that firms want to do business with. We have also succeeded thus far because of the financial partners around the globe who are willing to support the firm by availing lines of credit for our customers. THE FUTURE The future of ACL is bright and will be driven by the capacity and quality of its balance sheet, which is expected to allow the company to take advantage of opportunities to underwrite a broad range of high quality leases. The thrust going forward is to maintain our yield margins by securing long term credit funding to match the tenor of our leases and to strengthen the cost containment measures already in place. ACL shareholders have undertaken to always ensure that the company’s capital adequacy ratio is greater than 15% which is higher than the minimum prudential requirement of 10%. In addition ACL’s Board of Directors has directed management to step up efforts in mobilizing lines of credit to enable the leasing business to grow its balance sheet. The company’s loan book has grown tremendously from year to year and going forward, ACL will aggressively market its services to niche markets while maintaining prudent risk management strategies.

opportunities that exist in the region for ACL. Zimbabwean companies can also leverage off ACL’s regional presence to grow their businesses in the region. We are confident that the leasing business in Zimbabwe, which has remained remarkably resilient, will continue to be an integral part of the financial services sector as companies seek to re-capitalize, against the backdrop of limited financial support from mainstream banking institutions in the country and lack of government financial support. The company’s Board and management envision that ACL will continue to make a real difference in the sectors that it is serving as well as the community at large by providing financial empowerment to its clients and the country’s businesses. i

As part of ACL’s future outlook, there are opportunities to extend its presence into the SADC region. The SADC (Southern African Development Community) economy is projected to grow by at least 7% and there are many | Capital Finance International


> Chinua Achebe (1930-2013):

A Great Tree Has Fallen By John Marinus

“Imaginative literature does not enslave; it liberates the mind of man. Its truth is not like the canons of orthodoxy or the irrationality of prejudice and superstition. It begins as an adventure in self-discovery and ends in wisdom and humane conscience.” The Truth of Fiction in Hopes and Impediments: Selected Essays 1988


n the mid-20th century Africa was starting once more to find its own voice, having been gagged by centuries of colonial oppression. For all that time, the story of Africa had been told by Europeans. The narrative they presented was mostly an ugly one. The prevailing view was that the black man, if in fact a brother, was certainly a junior sibling. This view was shattered by the devastating eloquence of Chinua Achebe. This new voice was poignant and undeniably African. Known as the father of modern African literature, the Nigerian-born Chinua Achebe is the most widely read African author. His work has been translated into fifty languages. Mr Achebe’s style of writing, though novel for English literature, is well rooted in the oral tradition of the Igbo 80

people. Though his stories are set amid the turmoil of colonial and postcolonial Africa, they remain intimately character driven - often tragic, but also vitally universal. Throughout his life, Mr Achebe spoke out against the corruption and moral failings of colonial and postcolonial governments alike. In his essays and academic work he has laboured to undo the worst of colonial perceptions and rehabilitate the cultural identities and heritage of Africa. Mr Achebe’s works added to an ever growing stream of refutations of that most hopelessly naive moniker: The Dark Continent. Mr Achebe first book, Things Fall Apart, was published in 1958. He had sent manuscripts to several publishing houses where they met with prompt rejection. The manuscripts were | Capital Finance International

saved from obscurity by Donald MacRae, an educational adviser at Heinemann who convinced the hesitant publishers with his succinct report: “This is the best novel I have read since the war.” In Things Fall Apart, Mr Achebe tells the story of Okonkwo, a proud village chief struggling with his father’s legacy and his experience of white missionaries coming to his village. Mr Achebe borrowed themes from his own childhood. He was brought up Christian in a traditional Igbo village, forbidden to speak his native language at school. Things Fall Apart went on to become one of the most important books in African literature, selling over 8 million copies around the world. In 1960, Mr Achebe published his second book

Spring 2014 Issue

dangers of living in a war zone. Mr Achebe was a firm supporter of Biafran independence. He went on a US tour with fellow writers Cyprian Ekwensi and Gabriel Okara in an effort to raise support for, and awareness of, the cause. In January 1970 the Biafran forces surrendered. The war had left some three million dead including Mr Achebe’s close friend, Christopher Okigbo. After the war Mr Achebe took up a job at the University of Nigeria. He was unable to accept job offers from abroad: Authorities had revoked his passport in response to his support for Biafra. While at the University of Nigeria, Mr Achebe helped start two magazines: The literary journal Okike, and Nsukkascope, an internal publication. In 1972, Mr Achebe with his passport restored, accepted a professorship at the University of Massachusetts Amherst and moved his family to the US. During his time there, he published the, at the time quite contentious, essay An Image of Africa: Racism in Conrad’s Heart of Darkness. In this essay, Mr Achebe accuses Joseph Conrad of being “a thoroughgoing racist” for depicting Africa as “the other world”. Though opposed by his colleagues, Mr Achebe’s criticism eventually worked its way into the mainstream perspective on Conrad’s work. In 1976, Mr Achebe returned to Nigeria. He retired from academia six years later. In the following years, Mr Achebe spent his time editing a literary magazine and working on novels. He also became involved in his country’s politics, becoming deputy national vice-president of the People’s Redemption Party (PRP). However, elections marked by violence and fraud caused him great disillusion. Mr Achebe gave up on party politics and distanced himself from the PRP. After the military coup of 1984, the party was banned.

about Obi Okonkwo, No Longer at Ease, who leaves his village in order to obtain a British education and subsequently a job in the Nigerian colonial civil service. Mr Achebe based this novel on his personal experience working in Lagos, the capital city of a country on the cusp of independence. Mr Achebe continued to produce books while being employed at the Nigerian Broadcasting Service until civil war broke out between government forces and the secessionist Biafra Republic. The war forced the Achebe family to flee their home and relocate to Aba, the Biafran capital. During his time in Aba, Mr Achebe concentrated on his poetry. Later, he explained that the short, intense form of poetry was more in keeping with his mood, set by the challenges and

In 1990, three years after the publication of his fifth novel, Anthills of the Savannah – one of his greater successes, Mr Achebe was severely injured in a car crash in Lagos. The damage to his spine was such that he remained confined to a wheelchair for the rest of his life.

of Arts and Letters (1982), and over 30 honorary degrees from universities in England, Scotland, Canada, South Africa, Nigeria and the United States. In 1986, Mr Achebe celebrated as Wole Soyinka, his friend and fellow countryman, received the Nobel Prize in Literature – the first African ever to do so. Mr Achebe’s body was brought back to Ogidi, the village where he was born. Thousands of Nigerians gathered outside the St Philips Anglican Church as friends, family, and dignitaries, including Nigerian President Goodluck Jonathan, paid their last respects. A colleague at Brown University, Professor Corey D.B. Walker summed up his feelings on the death of Professor Achebe with the phrase, “A great tree has fallen.” Nelson Mandela, recalling his time as a political prisoner, once referred to Mr Achebe as a writer “in whose company the prison walls fell down.” Chinua Achebe knew the power of storytellers. He knew the damage done when a people are defined solely by the stories of others. What transpires when people are robbed of their own stories may be seen throughout postcolonial Africa: War, poverty, and stagnation. Despite everything Africa has endured, hope remains. It may prevail yet. Stability is slowly gaining a foothold in a number of regions, including Nigeria, with Lagos becoming an economic powerhouse. Chinua Achebe life’s work was dedicated to reestablish a balance of stories. When Mr Achebe went to school, he only could read books by the likes of Shakespeare and Dickens. Today, millions of school children may too read not just the works of these literary giants but also those by home-grown authors such as Chinua Achebe. Today, Africans continue to tell their story. i

ABOUT THE AUTHOR John Marinus, who also contributes to our Editor’s Heroes section, is a freelance writer based in the Netherlands.

Soon after this tragic accident, Mr Achebe became the Charles P. Stevenson Professor of Languages and Literature at Bard College in Annandale-on-Hudson, New York – a position he was to hold for more than fifteen years. In the autumn of 2009, Mr Achebe joined the Brown University faculty as the David and Marianna Fisher University Professor of African Studies. Professor Achebe died after a short illness on 21 March 2013 in Boston. He was 82 years old. During his lifetime, Chinua Achebe received numerous awards and honours, including The Man Booker International Prize (2007), an Honorary Fellowship of the American Academy | Capital Finance International


> Sarit Centre:

The Success of Two Men and their Allegiance to a New Nation In the early 1960s, Indians in Kenya faced a dilemma: Independence was coming and their way of life and their businesses – especially in up-country townships – were threatened. Unlike most of the Indian community who were leaving the country in their thousands, SV Shah and Maneklal Rughani opted to stay and merge their family interests in Murang’a and Karatina and start anew in Nairobi.


oth men wholeheartedly committed their future to the new nation. Sympathising with the Africans’ thirst for learning, they perceived education would become a sector offering great opportunity as schools and student numbers rapidly expanded. Thus Text Book Centre (TBC) was born. The company provided text books and school stationary. True to its slogan “More Than Just a Bookshop”, Text Book Centre also supplied sports equipment, typewriters – and in more recent years, computers, printers and all other technological requirements and gadgets – besides a great assortment of other items. TBC flourished, as did the nation, inspired by the foresight of Kenya’s first president, Jomo Kenyatta, and his Harambee call: An appeal for all to get involved in the building of the nation. The TBC founders soon made another innovative move with their decision to build the first-ever enclosed shopping mall in East Africa - the Sarit Centre. DRIVING THE ECONOMIC BOOM IN EAST AFRICA Africa has now reached a turning point. This holds particularly true for the East African Community of which Kenya is the preeminent member. This community of nations represents a region of increased political stability and societal peace which have fostered a vastly improved investment climate. Major ventures were undertaken to upgrade both national and regional infrastructures. A significant number of ambitious projects are scheduled to commence shortly. Kenya’s dynamic economy is the largest of the region and its anchor. Kenya is well linked to the other economies in terms of investment flows and trade. Thanks to Kenya’s more advanced human capital base, its more diversified economy, and its advanced role in the information-communication


“The TBC founders soon made another innovative move with their decision to build the first-ever enclosed shopping mall in East Africa - the Sarit Centre.” revolution, the country is widely expected to remain a regional powerhouse in the medium and long term. In this favourable economic climate, Kenya’s middle-class has burgeoned and the ongoing boom in consumer spending is set to double over the next ten years. This has resulted in the construction of scores of new shopping malls, hotels, and educational institutions that are complemented by the development of the necessary infrastructure, especially roads and wind and geothermal power systems. PIONEERING A NEW BUSINESS CONCEPT The Sarit Centre opened for business in April, 1983. It is now a far cry from the original architectural concept that was conceived barely a year after civil unrest had erupted and caused yet another mass departure of Indians. It also destroyed the good economic times enjoyed until then. It took a couple of years before the Sarit Centre became the hub of the fast expanding Westlands Suburb of Nairobi. The self-managed centre benefitted from a controlled tenant mix which eventually resulted in the realisation of its slogan “A City within a City” enabling shoppers to satisfy virtually all their needs with a single stop. A major component of its marketing strategy kept from the early years is the staging of community events, alongside small consumer and trade | Capital Finance International

exhibitions. These initially took place in the open areas of the mall. The highly popular annual Holidays Domestic Tourism Fair has now run consecutively for 31 years. The second phase of the mall’s development saw the incorporation of a dedicated 1,500m2 exhibition centre built to full compliance with sector standards. This proved very successful in attracting international exhibitions and boosting footfall. A recent Middle East Trade Fair drew in well over 50,000 visitors. Now eyeing major international events, the Sarit Centre’s development master plan includes a 5,500m2 convention centre encompassing a 3,750m2 exhibition hall (the largest currently in Nairobi and capable of being partitioned into four separate units), meeting rooms and accommodation facilitated by an adjoining 220-room hotel. Work has already started with completion scheduled for 2016 and bookings accepted from January, 2017. Nairobi shoppers have long considered the Sarit Centre the city’s friendliest. This remains unchanged even today when there are more than a score of more recently built malls open for business in the greater Nairobi metropolitan area. Over the years, tenant seminars have been organised and South African consultant hired to emphasise customer service as a basic component of business conducted at the mall. As a concept, excellence in customer care has been reinforced through a rewards programme for regular shoppers via the centre’s Value Card. This card is now the cornerstone of the centre’s Christmas promotions. Regular freebies and prize competitions, based on points awarded through card usage, are available at any of the centre’s 75 retail and service units. Customers are also enticed to do their shopping at Sarit Centre through its prepaid parking card

Spring 2014 Issue

which streamlines the entry and exit procedure of the mall’s parking zones. This is a muchappreciated service particularly in bustling Nairobi where traffic jams are a part of life’s daily routine. With its wide acceptance and popularity, the parking card was a significant contributor to the incorporation into the centre’s master plan of 3,000 additional parking slots. FIRST IN THE SHOPPING MALL CATEGORY Over the years, the Sarit Centre has posted a number of firsts for Kenya, including: • First-ever (1983) enclosed shopping mall in East Africa • First-ever (1985) Christmas lights, mall decorations and shopping promotions in Kenya • First-ever (1997) shopping mall exhibition centre in Kenya • First-ever (1997) shoppers loyalty card accepted by 75 tenant units in Kenya • First-ever (2003) paid parking in Nairobi

Text Book Centre

LOOKING TO THE FUTURE A comprehensive master-plan outlining the Sarit Centre’s future expansion was undertaken by Planning Systems in 2009. The plan includes proposals for new retail areas adjacent to the existing mall, involving the incorporation of adjacent plots. Comprehensive parking strategies and a traffic study call for public road expansion to ease traffic congestion around the new, expanded Sarit Centre. The client has now decided to implement Phases III and IV of this master plan which will create an additional 70,000m² of retail space and 1,500 new parking spaces over four basement levels. The architectural design developed by Planning Systems aims to create a unique shopping experience in the region with the mass of the retail areas lining an outdoor High Street leading up to a delightful covered atrium which will serve as the vertical circulation hub and the focal point of the new wing. The intention is that new retail shops on the ground floor will open out onto the street rather than face inwards as is the case with the existing development. As part of Phase III there will be an anchor tenant taking over 6,000m2 of prime retail area, with the top floor dedicated to a state-of-the-art exhibition centre that will set the standard for expo halls in the region.

Sarit Centre

Sarit Centre Value Card

A small area of the rooftop will be designed for fine wining and dining. The remainder of the roof space will be used to accommodate photovoltaic panels for the generation of solar power. i

Music Store - Hedgehog Creative | Capital Finance International

Atrium Phase I


> Desertec:

Renewables from the Deserts - Time to Get Started By Dominik Ruderer, Philipp Godron and Paul van Son

The deserts in the Middle East and North Africa (MENA) offer a cost-effective, secure and climate friendly renewable electricity (RE) source for local demand and, eventually, for export towards Europe. Over the coming decades, renewables from MENA may help accelerate the long-term energy transition for a population of over 1.2bn people. This gift of nature for durable prosperity – with little or no harm to the environment and offering numerous jobs – does not come bereft of sound practical approaches in international partnership. This article highlights such approaches from the viewpoint of the industry initiative Dii.


hile first renewable projects in the region are already now economically viable, major challenges need to be overcome to untie the deserts’ solar and wind potential on a large scale. This concerns, among others, the establishment of fair market conditions which will allow RE to be commercially competitive. It encompasses the implementation of infrastructure and marketoriented regulation and support, attracting major investments in renewable energy and transmission infrastructure. The energy transition requires effective integration of all decentralized and centralized RE into the markets. This demands a concerted EU/MENA-wide regulatory approach and a clear political mandate for the cross-border promotion of renewables. The availability of huge swaths of barely used land and the exceptionally favourable climate enjoyed by the MENA countries make this vast region an ideal place for renewable electricity generation. A growing regional demand for electrical power and the now economically feasible transmission to remote markets further add to the attractiveness. The solar and wind power generating potential in the MENA region (Figure 1) is quite literally unlimited compared to the electricity demand in the region. This electricity can not only be used to meet the MENA countries’ own fast-growing demand, but may also contribute to decarbonize the European power sector efficiently. [1] The crucial role of international transmission infrastructure is impressively illustrated by its potential savings of up to 10% of the total annual system cost across Europe and MENA as compared to both regions remaining separated. This translates to approx. EUR6bn annually in 2030, EUR22bn annually by 2040 and EUR47bn annually by 2050. [2]


“The availability of huge swaths of barely used land and the exceptionally favourable climate enjoyed by the MENA countries make this vast region an ideal place for renewable electricity generation.”

is still heavily dependent on fossil fuels. Hence, renewable energy projects still have a difficult time finding their way onto the market. A fair and level playing field for RE needs urgently be developed.

Dii’s mission is to untie the renewable resources in MENA by advocating a fair market for renewable electricity across the EU/MENA area. In its recent flagship report Desert Power: Getting Started, Dii focuses on the practical steps necessary to make such a market for renewable electricity a reality, including hands-on recommendations for policy makers and other stakeholders. This mainly concerns the implementation of effective infrastructure regulation and market rules, the In spite of sometimes difficult conditions, phase out of existing subsidies on fossil fuels, considerable progress is already being observed temporary support of specific REs, investment in different MENA countries over the past few in transmission infrastructure and the adoption years. Most governments have adopted national of stable legal frameworks with a clear political energy strategies; including RE targets forand theelectricity region-widedemand promotion of EUMENA Solar and Windambitious potentials [€/MWhmandate and TWh] [TWh] (Figure 2). However, at the same time the region renewables. 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0


EUMENA demand Europe demand MENA demand










Figure 1: EUMENA Solar and Wind potentials [EUR/MWh and TWh] and electricity demand [TWh]. Note: Real values in EUR in 2013, Note: Real values in €2013, no discounting Source:ISI Dii, Fraunhofer ISI. no discounting. Source: Dii, Fraunhofer | Capital Finance International

Spring 2014 Issue

In Pictures: ABB cable. Copyright: ABB.

ATTRACTIVE RE OPPORTUNITIES IN MENA TODAY Already today, economically viable options for renewables exist in most, or even all, countries in the MENA region. Large-scale CSP (Concentrated Solar Power), wind and photovoltaic plants can all generate electricity at far lower cost than oil-fired power plants which are still in use throughout the region.

the “expensive hours” of the day at costs of well below EUR100/mWh and thus, be competitive with simple gas turbines.

Morocco, Algeria and Tunisia meet peak demand with such gas turbines. Photovoltaic plants not only compete on cost, they also add to the security of supply, producing reliably during hours of sunshine – e.g. when air conditioning Based on world market fuel prices, oil-fired power is most used. Today, the production costs of plants produce electricity at a cost of EUR150electricity from wind are EUR50-70/mWh at 200/mWh or more in the MENA countries. CSP good sites. Wind is cost competitive with current projects are able to produce electrical power mid and base load power plants. Fossil fuel day and night at costs less than EUR150/mWh. importers such as Jordan, Syria, and Egypt, can Capacities of non-hydro renewable projects vs. renewable targets in 2020 Photovoltaic plants can produce power during use renewables to reduce pressure on their state



16 14


12 10 8


6 4 2 0



4.2 4.2 2.0 2.0

2.1 2.8 5.0 3.3 1.5 0.6 2.2 0.8 0.5 2.1 0.8 1.2 0.4




Saudi Arabia

MENA – Fossil Fuel Exporters CSP Planned1


Solar (tbd) Under construction

9.1 1.5

4.7 2.5


2.3 1.0






0.4 1.3 1.8 1.3 1.2 0.6


MENA – Fossil Fuel Importers Wind



budgets. Fossil fuel exporters, like Saudi Arabia and Libya, can increase income with the help of renewables. Figure3 illustrates the expected costs for renewable installations relative to the cost of conventional generation in MENA country by country. The countries considered in Dii’s analyses adopted RE targets for 2020 totalling about 50gW. [3] Dii has identified sites with excellent solar and wind conditions in the immediate vicinity of existing roads, grids, and demand centres, extending over 40,000km2, which could host more than 800gW of wind and solar installations (Figure 4). Since RE in MENA is economically and technically viable in a fair market environment, the target of 50gW is definitely achievable. This level of power generation could effectively be reached by 2020 at very little additional expense compared to the current cost of electricity production. NON-ECONOMIC BARRIERS A SERIOUS HURDLE However, apart from market distorting subsidies for fossil fuels, the so-called non-economic barriers – e.g. ineffective or lacking regulation and a lack of RE experience or the absence of private actors in the power sector – currently hinder the development toward more RE. This is particularly so in areas where interesting business cases have been identified. A practical, favourable investment climate and relieve of unnecessary hurdles are needed in order to encourage the private sector to step into this market.


Figure 2: Capacities of non-hydro renewable projects vs. renewable targets in 2020 [GW]. [1] Planned RE projects includes all projects that are either announced, in the tendering process or already awarded. Source: Dii analysis and individual country RE targets.

Note: 1) Planned RE projects includes all projects that are either announced, in the tendering process or already awarded Source: Dii analysis and individual country RE targets | Capital Finance International

Initially, five key conditions are indispensable for the private sector to invest and build utilityscale RE projects: Secure land access, secure


Support scheme types announced until 2020

Expected cost of RE installations in MENA until 2020 [€ct/kWh]

Feed-in Tariff

30 25 20 15 10 5 0

Feed-in Premium Quota Scheme Tender



CSP with 8h storage


Conv. lower cost (base/mid load)





Wind Conv. higher cost (mid/peak load)

Support scheme types announced until 2020. Note: Saudi Arabia Fraunhofer isSource: currently applyingISI a tender for its first round of renewables Note: WACC=Weighted Average Cost of Capital. Conventional generation (= Conv.) has been estimated with 40€/MWh Note: Saudi Arabia is currently applying a tender for its first Figure 3: Expected cost of RE installations in MENA until 2020 [EURct/kWh]. Note: WACC=Weighted Average Cost of Capital. projects. The decisionprojects. whetherThe a tender or awhether feed-in atariff will round of renewables decision tender for Coal, 60€/MWh for CCGT, 90€/MWh for OCGT and up to 200€/MWh for oil-fired power plants or applied a feed-infor tariff be applied further rounds of its will Conventional be thewill further roundsfor of the its renewables program Source: Dii generation (= Conv.) has been estimated with 40EUR/MWh for Coal, 60EUR/MWh for CCGT, 90EUR/MWh for OCGT and renewables program will be taken in 2015. Egypt: In Egypt up to 200EUR/MWh for oil-fired power plants. Source: Dii. be taken in 2015. Egypt: In Egypt competitive bidding will be competitive bidding will be applied to large scale projects and a applied large projects a feed-in tariff will be applied feed-in to tariff willscale be applied forand small scale projects.

grid access, transparent permitting procedures, high quality meteorological data and access to creditworthy customers as a basis for long-term power delivery arrangements.

As mentioned above, the existence of subsidies on fossil fuels makes it hard for RE to compete. In many cases it even leads to an undesirable escalation of support both for RE and conventional energy. For example, the sale of subsidized gas or oil to power generators hampers the deployment of renewables. In the MENA region energy subsidies are particularly generous. The International Energy Agency estimates that in 2011 half of the $550bn of worldwide direct and indirect fossil fuel subsidies was spent here. [4]

Dii GmbH

GRID INFRASTRUCTURE ESSENTIAL TO RENEWABLES DEVELOPMENT While cross-border transmission grid infrastructure among the different MENA countries already exists (Figure 5), it is underused from a technical and economic perspective. The proper use of lines could make existing and future generation assets more profitable, in particular with rising shares of renewables. As most of the MENA power systems are rather small – compared to the European ones – regional integration brings particularly significant benefits in terms of system stability and efficiency. As a first step for system integration, MENA countries need to adopt network codes allowing for international power trade. As a second step they need to ensure liquid cross-border markets;

for small scale projects. Source: Fraunhofer ISI.

implement electricity market reform; unbundle generation and transmission; and, introduce a competitive generation segment. With respect to the power system integration between Europe and MENA, to date only one interconnector is operational. The AC cable between Morocco and Spain is used at a rate of more than 70% to export power from Spain to Morocco. Another interconnection between Turkey [5] and Syria is in place; however, it is currently not operational. In order to allow for increased power exchange between Europe and the MENA region, additional

April 2013

Figure 4: Dii identified attractive sites for 800GW of Wind and Solar installations in the proximity of existing roads, grids, and demand centres.

88 | Capital Finance International


Spring 2014 Issue Energy subsidies in MENA in 2011

transmission infrastructure is needed. European network development plans [6] already account for two additional projects between Italy and both Algeria and Tunisia. Dii’s simulations have shown that crossMediterranean interconnectors are the most valuable part of a power system spanning Europe and the MENA region. [7] Dii currently analyses business cases for interconnections between Italy and North Africa with support from the European Commission (under the TEN-E program). In the long term, the development of an interconnected EU/MENA-wide power system would require common regulatory instruments at a supranational level. This includes, in particular, supranational institutions for international transmission planning and investment cost sharing. CONCERTED “EUMENA” APPROACH TOWARD RE NEEDED In the EU, the European Renewables Directive sets the framework for national renewables support by the different member states. All European countries have implemented national support schemes. However, to this date, no common European market for RE (or also “green power”) exists as national support schemes are typically only open to RE generated in the respective countries’ territories. In the MENA

region, most countries have plans to introduce public support for RE. The absence of a common market for green power makes it difficult, if not impossible for investors to receive support in one country – e.g. for investment in the country with lowest production costs per mWh of green energy. In order to achieve a better energy mix at lowest costs for all citizens and industries, a common European resp. EU/MENA market for green power is strongly recommended. The revision of the European Renewables Directive for the time after 2020 seems to provide an opening for such a reform. Many of the reform ideas discussed, such as the introduction of a Europe-wide green certificate scheme are consistent with this idea. Green certificate schemes allows for the disentanglement of the trade in green power and the actual physical electricity power flows, preventing market distortions. It will give both the consumer and the industry a free choice to buy green power instead of power produced from non-sustainable resources. POLITICAL COMMITMENT INDISPENSABLE The energy sector is subject to strong involvement of the civil society and of political sentiment. The increased awareness of major climate and energy security issues puts a high pressure on

(% of GDP) 11 10 9 8 7.2 7.1 7 6.0 NA 1.1 6 NA 5 4 6.2 3 6.0 5.0 2 1 0 Morocco Algeria Tunisia Electricity subsidy

10.7 8.5


10.6 8.5


1.8 5.4 6.7


8.0 3.1

Libya Egypt Jordan Saudi Arabia Fossil fuel subsidy

Note: Electricity subsidies based on IEA price-gap Energy subsidies in MENA in 2011. Note: Electricity subsidies approach to int. fuel prices. Electricity subsidies are capped LCOE and underestimated for MENA. based on at IEACCGT price-gap approach to int. fuel prices. Electricity Jordan Subsidies for 2012. Source: Algeria, Libya, Egypt, subsidies are capped CCGT2012), LCOE and underestimated Saudi Arabia (IEA –atWEO Morocco (Reuters for MENA. Subsidies for 2012. Source: Algeria, Libya, 2011),Jordan Tunisia (IMF 2012), Jordan (MEMR 2013) Egypt, Saudi Arabia (IEA – WEO 2012), Morocco (Reuters 2011), Tunisia (IMF 2012), Jordan (MEMR 2013)

the energy agenda. Political leadership is of the essence in order to obtain political and social acceptance for improved regulation, support of RE, abolition of subsidies for fossil fuels, coordinated transmission policies, and stable international frameworks. First steps include the promotion of additional cross-border interconnections, opening up the electricity sectors to private investors, as well as the introduction of long-term transmission

Figure 5: Existing and planned grid connections around the Mediterranean and the Arab peninsula. | Capital Finance International


rights on new interconnections. No single government can perform such a task alone. Local, national and international politicians, industry, universities, NGOs, and many others must cooperate to manage change. International cooperation is already shaping up. The Mediterranean Solar Plan (MSP) and projects undertaken by the League of Arab States are encouraging RE and grid integration around the Mediterranean and the Middle East. Institutions for specific tasks, such the Association of Mediterranean Regulators and the Association of Mediterranean TSOs (transmission operators) have also been created.

In Pictures: First Solar, Tucson Electric Power, Springerville (Arizona), USA, 500 kW. Copyright: First Solar.

Dii, Medgrid, Friends of the Supergrid and Res4Med are examples of industry-sponsored initiatives aimed at connecting Europe and the MENA countries. Many NGOs such as Greenpeace, WWF, Germanwatch and the Desertec Foundation are gradually reinforcing their attention and support for sustainable development in this area. Given that all these actors have entered into the debate, the focus must now be on increasing the effectiveness of existing processes toward an integrated EU/MENA power system based mainly based on renewables. i

In Pictures: Soitec Aquila. Copyright: Soitec.

References [1] Population growth and economic development, as well as cooling and desalination needs, lead to increases in electricity demand of 5-9% annually across the entire MENA region. [2] The figures cited are based on the most detailed system model for the region available to date. These analyses were conducted by Dii in cooperation with Fraunhofer ISI and TU Vienna.

About the Authors Dominik Ruderer Manager Regulation and Markets at Dii where he has worked on transmission and market regulation topics since June 2012. He studied economics in Munich (Germany), Copenhagen (Denmark) and Cambridge (UK) and obtained his PhD in 2012 in the field of energy and regulatory economics. He started his career at the German energy regulator, was an IMPRS research fellow with the Max Planck Society and a researcher at the University of Munich. Philipp Godron is Director Regulation and Markets at Dii. He has worked on market, regulation and transmission issues at Dii since January 2011. He has studied political science at Cologne University (Germany) and in Bologna (Italy) and obtained his Master’s degree in 2001. In 2002 he obtained a Master of European Studies from Humboldt University, Berlin. He has worked for German utility E.ON’s

[3] Morocco 4.0gW; Algeria 4.6gW; Tunisia 1.0gW; Libya 2.5gW, Egypt 9.1gW, Jordan 1.8gW, Syria 2.6gW, Saudi Arabia 22.0gW. [4] See IEA (2012). [5] Turkey is synchronized with the UCTE system via connections to Greece and Bulgaria. [6] See ENTSO-E (2012). [7] For the detailed results of Dii’s simulations, see our report Desert Power: Getting Started available at our website.

political affairs and regulatory offices until the end of 2008. From 2009 he spent two years in Amman, Jordan, in the framework of German-Jordanian development cooperation, advising the Jordanian Ministries of Planning and Energy on renewable energy policies and projects. Paul van Son joined Dii in 2009 as CEO. He has been active in various management and executive positions in the international (renewable) electricity and gas business for over thirty years at Siemens AG, SEP/TenneT, and KEMA Consulting. He was also CEO of Essent Energy Trading, Managing Director of Essent Sustainable Energy and Chairman of the Management Board of Deutsche Essent GmbH in Düsseldorf, being responsible for the German activities of Essent NV. Mr van Son has been instrumental in the development of the use of non-food biomass for power supply, wind power development and marketing of green power (an invention of Essent in 1998). During

2008/9 Mr van Son was Executive Director of Econcern NL. He is Chairman of the Energy4All Foundation, a nonprofit organization promoting decentralized energy and communication systems in Africa. In addition, Mr van Son was President of EFET, the European Federation of Energy Traders from 1999 until 2012. About Dii GmbH Dii GmbH was founded as a private industry initiative in October 2009 and today comprises companies from more than 16 countries around the world. Together with a wide range of stakeholders, Dii enables an industrialscale market for renewable energy in MENA. Dii has formulated a long-term strategy for renewables across EU/MENA Desert Power 2050 and has provided practical recommendations in its most recent report Desert Power: Getting Started.

The DESERTEC Foundation is a global civil society initiative aiming to shape a sustainable future. It was established on 20 January 2009 as a non-profit foundation that grew out of a network of scientists, politicians and economists from around the Mediterranean, who together developed the DESERTEC Concept. Founding members of DESERTEC Foundation are the German Association of the Club of Rome, members of the international network as well as committed private individuals.

90 | Capital Finance International

Spring 2014 Issue

> Meets the Managing Director of African Century Leasing:

Stanley Matiza Stan Matiza has been the Managing Director of African Century Leasing (ACL) since its inception in June 2010. ACL is a registered, stand-alone leasing company in Zimbabwe providing asset finance to the productive sectors of the economy. Stan is responsible for the strategic, operational, marketing, developmental, and financial performance of the institution. He is also the Chairman of the Finance House Association of Zimbabwe.


rior to joining African Century Leasing, Stan was Head of Wholesale banking at Zimbabwe Allied Banking Group (ZABG) at which he also served in a number of senior management roles. He successfully steered the Bank through the liquidity challenges in the economy from 2007 to 2008. He has also worked at the Leasing Company of Zimbabwe (LCZ) as Managing director, gaining invaluable skills in asset finance, and before that as General Manager in the Group Risk Management Unit at CFX Bank.

continues to work closely with policy makers to influence appropriate policy measures to support agricultural productivity. Stan affirms that “We have created a solid platform for growth and an exciting working environment at African Century. We are well positioned to execute our unique leasing strategy which is anchored on future sustainability. Each day we make a difference to our customers and this is what really keeps me going.” Commenting on his success, Mr Matiza adds “I thrive in difficult situations. I embrace challenges at the workplace with open arms. These help us to shape and refine our processes as we strive for continuous improvement. The current operating environment is the best one can ever dream of. A smooth sea does not make a good sailor.”

Stan is encouraged by the growth and performance of the company over the past four years, since inception. The strong relationship that ACL has with funders and partners is enabling the company to satisfy the growing demand for asset finance. He is also cognisant that the company would not have achieved this growth without its clients and is grateful for their continued support.

In spite of the challenges in the country, including a decade long period of de-industrialization and the resultant massive retooling required by businesses. Stan contends that Zimbabwe is a compelling case for Leasing. The country’s infrastructure remains largely intact while Zimbabwe’s human capital is arguably second to none in the region. The country also has the highest literacy rate in Africa and is endowed with people who are resilient, resourceful and well-known for strong work ethics.

Stan takes pride in the team that he leads and the passion that they have for business excellence and serving the company’s clients. “The greatest lesson I have learnt in my leadership role is to attract the best people for the organization and keeping them on their toes through perpetual optimism.” says Mr Matiza. He is a proponent of a strong organizational culture. His beliefs and values are his greatest asset while the goals that the team sets offer continuous inspiration and are a source of motivation for him and his staff. Stan readily accepts that there are a number of challenges facing the leasing sector in Zimbabwe. Chief among them is the unavailability of funding as a result of perceived country risk. Due to massive de-industrialization of Zimbabwean industries over the past decade, there exists a large pent-up demand for equipment machinery to retool businesses across all sectors of the economy. As a result, the country needs extensive lines of long- term credit to meet this demand particularly in areas of renewable energy, infrastructure development (including water

Managing Director: Stanley Matiza

reticulation and sanitation), power generation, mining, and agricultural mechanization. AGRICULTURE IS KEY Agriculture is a key sector for the revival of the Zimbabwean economy; however, without security of tenure for farming operations, it is difficult to extend credit to farmers as the risk profile is high. As a progressive leasing company, ACL has explored various ways to mitigate this risk and | Capital Finance International

“My vision for ACL is to become the leading asset finance company in Zimbabwe and the region guided by three pillars comprising of a high quality lease book, a robust risk management framework, and a sustainable funding base. My advice to other business leaders is that passion is contagious to your team, therefore be passionate about your business and everything you do. Acknowledge good performance as it promotes good behaviour and motivates staff. Vision is the glue that binds the organization together, and keeps the team striving for better results. Your vision must be anchored by perpetual optimism as this shapes the attitudes of employees in any organization.” concludes Mr Stanley Matiza. i 91

> Meets the CEO of Sarit Centre:

Nitin Shah Nitin Shah has registered over thirty years as the chief operations executive of the Sarit Centre – the first enclosed shopping mall in both Kenya and East Africa – a responsibility entrusted to him by the developers in 1982, barely a month after a coup attempt shattered the country’s economy.


espite that inauspicious start to what in retrospective has been an outstanding career, Mr Shah assembled a basic management team and quickly got down to leasing the units of what in effect was a severely truncated project.

Certified Accountants (ACCA) qualification to which he later was to add the Certified Public Accountants of Kenya (CPA) certificate. Back in Nairobi – in July, 1982 – Mr Shah married Priti. The couple was blessed with three daughters who all attended university and are now established with professional careers in their own right.

Given the unrest in Nairobi and the exodus of Asian businessmen, the developers had been forced to halt construction of what for its time was an architecturally ambitious mall project. Thus Sarit Centre opened with only 20% of its planned retail area.

“As Mr Shah now confesses, he had at the time no clue about shopping centre management practices.” As Mr Shah now confesses, he had at the time no clue about shopping centre management practices. He had to learn his trade on the job, figuring out the importance of an optimal tenant mix, the absolute need for optimal customer care, the essence of responding to shoppers’ requirements and the many other aspects and challenges of the mall business. Mr Shah was born in Murang’a during the Mau Mau Emergency. He grew up and went to primary school in the upcountry township where his grandfather Vidhu Ramji Shah had started the family businesses comprising a hardware store, dairy and bookshop.

Mr Shah achieved national recognition as a badminton player and was also a strong volleyball player. However, his big love remains golf – a somewhat more relaxing pursuit and a weekend hobby which he took up in the early 1990s.

CEO: Nitin Shah

Aged 13, the young Mr Shah moved to Nairobi and enrolled at the Duke of Gloucester School (now Jamhuri High School) for his secondary education culminating in A levels. In 1974, he enrolled at the City of London Polytechnic to take the Higher National Diploma in Business Studies. After graduating, Mr Shah returned to Nairobi in 1977 where he spent the next year in the family bookshop business before gaining a job at the local audit firm Kassam Lakha Abdulla & Co, now devolved to PKF Kenya – the leading audit and business consultants of East Africa. In 1980, Mr Shah moved back to London in order to study for his Association of Chartered

Mr Shah is widely travelled and is a regular participant of International Council of Shopping Centres (ICSC) meetings. He was the main speaker at an Africa Congress of the South African Council of Shopping Centres in Johannesburg. Mr Shah has visited the US, Canada, Australia, many of the Far Eastern countries, India, and much of Europe. His extensive travels and research outside Kenya is being facilitated by the high level of expertise present in the expanded mall’s management team which was built up carefully over the year and now boasts a large number of dedicated and seasoned professionals. Mr Shah is now looking forward to the opportunities that arise from the expansion of the mall which will allow him to head-up the planning team working on the next phases of the Sarit Centre’s development. The centre is set – and now well on its way – to become, over the next couple of years, one of the largest malls in Africa. i

“Mr Shah is now looking forward to the opportunities that arise from the expansion of the mall which will allow him to head-up the planning team working on the next phases of the Sarit Centre’s development.” 92 | Capital Finance International


AWARDS 2014 SPRING HIGHLIGHTS Once again brings you reports of individuals and organisations that our readers and the Judging Panel consider worthy of special recognition. We hope you find our short profiles interesting and informative. All the winners announced below were nominated by audiences and then shortlisted for further consideration by the


panel. Our research team gathered additional information to help reach a final decision. In many cases, senior members of nominee management teams provided the judges with a personal view of what sets their companies and institutions apart from the competition. As world economies converge we are coming across many inspirational individuals and | Capital Finance International

organisations from developing as well as developed markets - and everyone can learn something from them. If you have been particularly impressed by an individual or organisation’s performance please visit our award pages at and nominate.

Spring 2014 Issue


Deutsche Bank is recognised by the Judging Panel as ‘Best Private Bank, Germany, 2014’ in recognition of its outstanding array of asset and wealth management services and high level of professional talent placed at the

disposal of clients. This bank is an innovator in the field, has around one trillion Euros in invested assets and is, of course, a major player amongst the world’s banking elite.

The Panel congratulates Deutsche Bank on their sterling work in the field of private banking.


Root Capital is the winner of our ‘Best Impact Investing Award, United States’ for its outstanding work over the past fifteen years in Latin America and Africa. This is a not-for-profit social investment fund that works to improve the prosperity of rural communities. During

these years Root has disbursed over $600 million dollars in some 1524 loans reaching close to one million producers and enriching the lives of many people that had been surviving at the $2 a day level. The Judging Panel told us that this

award was an easy decision and suggests that ‘Readers visit the Root Capital web site to see what has been going on. There is an opportunity to make online donations. And that’s a big hint about how we feel about these folk.’


Singapore Airlines Business Class provides passengers pleasant entertainment, fine dining and a good night’s sleep in a very well thought out and spacious environment. All in

all, voters in our 2014 Customer Satisfaction Awards Programme make it clear that flying with Singapore is a wonderful experience with outstanding inflight services. The | Capital Finance International

Judging Panel is pleased to award this airline ‘Best Customer Satisfaction, Business Travel, 2014.’



Handelsbanken has been named as Best Commercial Bank, Sweden, in the 2014 CFI. co Banking Awards Programme. This bank can trace its heritage back 143 years and now has over 460 branches in the country. It is the best performing listed bank in Europe and, according

to the Judging Panel, ‘has brought a breath of fresh air to the banking industry’. The Panel comments that Handelsbanken is a very good corporate citizen that truly contributes to communities, shows concern for the environment and is seen to be

a good employer. Significantly, staff members have real power to make local decisions and applauds Handelsbanken on its far sighted approach to relationship banking.


Sultan Properties has been declared winner of the award ‘Best Real Estate Agent, UAE’ in our 2014 Real Estate Awards Programme. The Judging Panel was very impressed by the consistently good quality of advice provided by Sultan. Their clients were

protected substantially during the crisis of 2008 and are benefiting from their outstanding market wisdom in these much happier days. According to the Judges, ‘Sultan Properties has reaped the benefits of a realistic view of the market and this has translated

into good results including those for 2013. The market is moving forward very well and management expects even better results this year. We share their confidence.’


Without hesitation, the Judging Panel confirms Freshfields Bruckhaus Deringer as winner of the award ‘Best Dispute Resolution Team, Germany, 2014. The panel applauds Freshfields as the winner of this award for


the second consecutive year. According to the Panel, ‘Freshfields has an impressive practice in Germany and handles major dispute work across industry sectors with great skill and determination. We are always pleased to see a | Capital Finance International

law firm maintaining its position at the front of the pack and wish the firm success in the coming year’. Freshfields is headquartered in London and is a member of the ‘magic circle’.

Spring 2014 Issue


Afghanistan International is a well trusted bank largely because of its overwhelming concern for and attention to the rigours of good corporate governance. Management’s view is that only a bank with strong corporate governance can truly succeed. The Judging Panel agrees and is delighted to confirm this bank’s award

for, ‘Best Corporate Governance, Afghanistan, 2014’. Performance ratios at the Bank are in line with best practice, board leadership is strong and there would appear to be no political or other interference in operations. The Panel is impressed with Afghanistan International Bank’s

conduct and commitment to a healthy and farreaching corporate governance programme. The Judges commented that, ‘AIB is a worthy winner and an excellent example to the wider business community in the country’.


According to the Judging Panel, Baker Botts LLP, leader in the field for well over 100 years, was the obvious choice for the award, ‘Best Energy Team, United States, 2014’. The practice started out by serving

the Texas oil industry at the turn of the 20th century, has developed comprehensive global expertise and, more recently, acquired valuable alternative energy skills following some significant project work in North America.

The outstanding historical achievements of the practice, its present excellent capabilities and potential for continuing in a leadership role were applauded by the Judges.


Emirates Integrated Telecommunications Company (du) is the Best Sustainability Programme winner, UAE, 2014. The Judging Panel pointed out that, ‘this company has shown a passionate concern about sustainability issues since its establishment eight years ago. Management

sets out to humanise technology and be ever thoughtful about the environment. We sense that they have been successful in these aims. We are also pleased to see that du is encouraging entrepreneurship and were very impressed by the ‘Every Step Counts’ wellness Campaign | Capital Finance International

driven by du’s Chairman which encourages exercise and healthy lifestyles. There is an attitude at du that they are preparing paths for future generations and an acceptance of the important responsibilities that this entails.’




This firm has won a deservedly strong reputation for its arbitration and litigation services since its establishment in Paris in 1987. The Judging Panel

congratulates DVMB on its outstanding team of legal professionals and the services they offer saying that, ‘The respect accorded to the leading names at the firm is easy to understand.

We have no hesitation in naming Darrios Villey Maillot Brochier as ‘Best Dispute Resolution Team, France’ in our 2014 Legal Awards Programme.’


This fast-growing bank - which merged with Mauritius Leasing in 2012 - has twenty branches throughout the island which are offering outstanding retail and business services. Bramer Bank is part of British American Investment Group and is definitely a bank to watch.

According to the Judging Panel, ‘a significant number of substantial companies now operating in Mauritius can trace their early steps in business development to assistance provided by Bramer and the bank is doing a very good job in personal banking

too. We are impressed with Bramer’s efforts in Mauritius and are delighted to make this award. Bramer Bank is our Best Emerging Bank, Mauritius for the year 2014 and we confidently expect to hear of great progress from this bank in the years to come. Well done Bramer.’


The Judging Panel has announced that PartnerRe takes the award for Best Emerging Markets Reinsurance Solutions, Global, 2014. This is a global organisation that acts locally and, according to the panel, ‘does so with 98

great distinction. PartnerRe has twenty offices around the world and is well positioned in high growth emerging markets. Technical services are strong across many lines of business and this company has a good reputation for claims | Capital Finance International

payment. Significantly, PartnerRe shows itself to be totally committed to deliver quality services in the regions in which it operates. We feel that PartnerRe is a very fine partner to have.’

Spring 2014 Issue


Self Bank is the Online Banking Award winner, Spain, 2014. According to the Judging Panel this bank is ‘properly focused on determining appropriate client solutions and providing that which is needed rather than

dreaming up fancy add-ons. Self took full advantage of opportunities created in the wake of the Banking Crisis when people in Spain started to question their traditional loyalties. They are doing very well in the market now

because of a well thought out and innovative focus on actual online banking requirements. This translates to a secure and effective banking platform.’


Farazad Investments Inc. is headquartered in the United States and active across the continents. The award for ‘Most Innovative Structured Finance Project Funding, GCC’ goes to this company after assessment by the Judging Panel. According to the Panel, Farazad are

‘good listeners setting out to rebuild confidence and trust in the banking industry. The firm ensures that transactions are favourable to both sides and that there is maximum transparency in the way business is conducted. Quality of work at Farazad is consistently high, risk management is good with more than adequate

levels of funding.’ Korosh Farazad, the founder and CEO of the firm has an enviable performance record across several industry sectors and is an innovator who is keenly focused on achieving the very highest levels of sustainable growth.


The very real need for affordable, high quality housing in Nigeria can hardly be overstated. The Judging Panel has pointed out that, ‘it is heartening to see that good solutions to the accommodation crisis are coming from the private sector. The judges were pleased to find strong nominations in this category and CMB,

our worthy award winner, stood out from the field because of its realistic and highly effective plan for reducing building costs and the speedy execution of excellent work. This has been made possible because of a high level of governance at CMB, this company’s dedicated engagement with and understanding of community needs | Capital Finance International

and the obvious industry skills of team members. CMB has a track record of delivering a superb product that meets the requirements of the market and often exceeds the expectations of the end user. We feel that CMB deserves full recognition of its fruitful efforts and we applaud this most deserving 2014 award winner.’



The Judging Panel was unanimous in declaring Bakkafrost winner of the 2014 award for Best Sustainability Programme, Denmark. Bakkafrost is the premier producer of salmon in the Faroe Islands, an autonomous country within the Kingdom of Denmark. Established in 1968 and farming salmon since

1979, Bakkafrost realised early in its business cycle that sustainability was crucial to its success and that a healthy environment allows for healthy fish. Bakkafrost has developed techniques that negate the need for antibiotics resulting in significant sustainability gains. The survival rate of fish harvested by Bakkafrost is

significantly higher than that of the competition elsewhere in the world and by any measurement the firm is progressing magnificently. This listed company has experienced phenomenal growth and Bakkafrost has also been named in the CFI. co Top 100 List for the year 2014.

> BEST TAX TEAM, MEXICO, 2014: CFI.CO CONGRATULATES JÁUREGUI Y DEL VALLE’s 2013 Tax team winner in Mexico, Del Valle Torres, merged with Jáuregui y Navarrete effective January 1st 2014. According to the Judging Panel this was a good start to the year for both parties who will now be jointly known as Jáuregui y Del Valle. The Panel went on to say that, ‘This

merger makes perfect sense all round and has created a very strong team that can offer a truly comprehensive service to clients. Theirs is a resourceful and extremely capable tax team and it is always good to see a firm winning our award convincingly over consecutive years. Mr. Luis Del Valle reported a very

strong year 2013 for the tax practice with significant work coming from Mexico’s real estate sector. wishes all success to the lawyers and other staff representing the merged firm and the Panel has no hesitation in naming Jáuregui y Del Valle ‘Best Tax Team, Mexico, 2014’.


Bahamian Brewery and Beverage Company is the award winner for ‘Best Beer Brand, Caribbean, 2014’. The brewery is just six years old but the name Sands that appears on the label is also that of the founder whose Bahamas family name can be traced back over three hundred years.


According to the Judging Panel, ‘The Brewery has already won a number of quality awards for its beers and Sands has proved to be a very popular choice for voters on the web site. We understand that this young company has added two extensions to the original brewery and may be considering offering its products to | Capital Finance International

other islands at a later date. This brewery is certainly one to watch. Mr Sands tells us that he was also thinking of the lovely sandy beaches on the island when giving his own name to the brand. We were thinking about the beaches too.’

Spring 2014 Issue


The Judging Panel congratulates Commercial Bank of Dubai on the award Best Wealth Management Team, UAE, 2013. According to the Judging Panel, ‘A sensible long term client investment view

is recommended by the wealth management professionals at CBD. These people listen to their clients to ensure that the most appropriate investment strategies are recommended. Investment vehicles are tailor made and client

satisfaction is running high. Clients benefit from some very solid professional expertise and sensitive handling from the team. We are happy to confirm the award.’


According to remarks made recently by the Judging Panel, ‘African Century has been a pioneer in equipment leasing and now operates in a leadership role across Zimbabwe. Clients can count on achieving good cost efficiencies when

dealing with a company such as African Century which offers a world class delivery level in leasing finance. The Company is a responsible and respectful corporate citizen and shows concern for all stakeholders. African Century is working

hard to encourage meaningful development in the Zimbabwean economy and is pleased to confirm the award ‘Best Leasing Company, Zimbabwe, 2014.’


The Judging Panel was most impressed by the strong voter endorsements of Sarit Centre in the 2014 Customer Satisfaction awards programme. Sarit was the first shopping centre to be established in Kenya and is an honourable pioneer of these services in East

Africa. The Panel is very pleased to confirm the award ‘Best Shopping Mall Customer Experience, East Africa with Sarit as the worthy winner. According to the Panel, ‘success has built upon success at Sarit with major expansion | Capital Finance International

of its facilities over the years and a record of strong and meaningful customer promotions and other activities that draw in new clients. These efforts have resulted in an excellent reputation for Sarit with many benefits accruing to the retail outlets represented at the Centre’.



The Judging Panel has no difficulty in deciding on Ahmed Hassan Bilal Trading & Contracting Company for the award ‘Best Residential Rental Services, Qatar’ in our 2014 Customer Satisfaction Awards Programme. The Panel confirms that our winner delivers the wow factor in terms of the design,

quality and finish of properties rented out. Moreover, this attitude to deliver in excess of expectations continues during the maintenance of the accommodation and is confirmed through the warm hospitality extended to the (mainly) expatriate tenants themselves. The clincher for the award was the

fact that friendships between landlord and tenant often endure well after the visitors move back home. Tenants are pampered and treated like members of the family in the traditional Arab way. We hope these comforting and generous traditions continue in Qatar.


The award for the 2014 Corporate & MA Team award goes an outstanding boutique law firm namely, The Jordanian Counsellor (JC Law). The firm is seven years old and according

to the Judging Panel, ‘is offering strong service to both its domestic and international clients.’ This firm has worked with the International Finance Corporation and number of banks inside and

outside the country. The year 2013 was a good one for JC Law and the firm is doing well in a highly competitive market.


Private Banking & Wealth Management Fortress Investments has been named ‘Best Derivatives Portfolio Manager, MENA’ in our 2014 Asset Management Awards Programme. The Judging Panel congratulated the firm for its outstanding record of service to both retail 102

and wholesale clients. The Judges remarked that, ‘The Fortress claims to give more back to clients than many of their competitors would certainly appear to be justified. Last year saw good results for this Dubai operation whose | Capital Finance International

strong position in the market reflects the current high levels of confidence in this irrepressible Emirate.’

Spring 2014 Issue


Al-Waseet Financial Business Company is named ‘Best Securities Brokerage, Kuwait’ in the 2014 Exchanges & Brokers Award Programme. The Judging Panel were unanimous in their decision and congratulate Al-Waseet on their success as a well-established, strong and resourceful ISO certified broker.

A leading player in Kuwait for the past seven years, Al-Waseet has captured a very healthy share of the market and boasts a large and extremely capable team of industry professionals. This brokerage focuses most heavily on institutional clients and also services

major international banks. Al-Waseet is well capitalised and ready for further expansion. According to the Panel, ‘Al-Waseet is likely to develop significantly its business in the region as well as at home during the next few years.’


Clifford Chance is of course a massively strong firm across many disciplines but the Judging Panel has singled out its work in Dispute Resolution, Banking, for recognition

in the 2014 Legal Awards Programme. The firm has 500 lawyers around the world available for dispute resolution and litigation work. The team in London has worked on some very interesting

banking matters and is described as one of great litigators with sound strategic thinking. The Judging Panel congratulates Clifford Chance on outstanding performance in this area.


Excellencia Investment Management, Luxemburg, established in 2012, is’s promising newcomer to the market. This firm focuses on long term investment in private companies according to the principles of Islamic finance. The Judging Panel feels that they

may have discovered a rising star as Excellencia is commencing operations as an Islamic bank in 2014. Management is clear that this bank will be offering products and services for nonMuslims as well as Muslim clients and staffed by professionals recruited in Europe. The Judges commented that, ‘The | Capital Finance International

management of this new bank can be relied upon as a responsible ambassador for Islamic banking. Their products and services are likely to attract a diverse client base and encourage the development of Islamic banking services in continental Europe’.



RAK Insurance has won the award for ‘Best Corporate Governance, GCC,’ in the Insurance Awards for the year 2014. RAK is the popular shortened name of one of the United Arab Emirates namely, Ras Al-Khaimah (literal meaning of the Arabic: ‘Top of the Tent’). According to the Judging Panel, the concern for good governance at RAK Insurance

places this company securely at the top of the tent. The Judging Panel is aware that RAK Insurance is operating beyond the letter and spirit of the regulatory system and is at the forefront of industry best practice. As management says, ‘the question that is always in mind here is this: What else can we do?’

Our award winner is healthily obsessed with good corporate governance and the management style at RAK Insurance is that of a sincere concern for all stakeholders. RAK Insurance is a transparent organisation that is passionately concerned about business ethics and it shows.


INVESTBANK has been recognised by the Judging Panel in two Banking Award categories this year (which is rather unusual but, in this case, well deserved). The Bank has been declared not only ‘The Best Internet Bank, Jordan 2014’ but also ‘The Most Innovative SME Bank, Middle East 2014’. In many ways the reasons for these awards were the same namely, recognition of the management team’s ability to combine a passion for innovation with a true understanding

of client needs. The Bank has built an online system that is well thought out, flexible and indicative of some really creative thinking. This approach to online banking has resulted in a platform that is secure, meets the current needs of clients but at the same time has the capacity to grow and meet their future requirements. It is the understanding of a need for flexibility that has resulted in the Bank providing SMEs with a high level of service and quality products that encourage sustainable growth.

Where many banks have rigid approaches to risk management within the SME sector, INVESTBANK has demonstrated clearly that it can reduce risk and foster growth through an intelligent range of cash management services that are tailored to individual business requirements. INVESTBANK is clearly setting an example not only to others in the region but to banks throughout the world.


Cluttons, with a presence in 50 countries of the world, has been active in the Middle East since the mid 1970s. According to the Judging Panel, ‘this firm’s research capabilities are outstanding and we have no 104

hesitation whatsoever in naming Cluttons Best Real Estate Research Team, UAE, 2014. Cluttons’ research helps investors make appropriate sustainable long term decisions. The firm, always conscious of best practice, | Capital Finance International

takes into account the impact of sentiment at the same time as offering high quality analysis of data. Cluttons is a good corporate citizen that shows concern for the environment which is very important too.’

Spring 2014 Issue


Repeating their success of last year, Vestas is named winner of the award ‘Best Corporate Governance, Denmark, 2014’. Vestas is to be congratulated on a second consecutive

year win in a country where the overall standard of corporate governance is indeed very high. Once again the Judges pointed out that, ‘this is a most transparent organisation that stands ahead

of the competition in a very competitive field. Vestas does many important things extremely well and the level of corporate governance is exemplary.’


Thalia SA has benefited since its establishment in 2003 from its connection with Generali Insurance and BSI (a large private bank in Switzerland). It boasts a management team that has adopted a prudent investment strategy that protects during difficult times and brings forth good opportunities in more promising days.

According to the Judging Panel, ‘Thalia has a very good track record. This fund manager not only avoided the worst effects of a troubled 2008 but went on confidently to deliver very pleasing results in subsequent years. 2013 performance at Thalia was very good and the current year looks to be promising

too. Thalia is a transparent manager and well understands the importance of carrying out rigorous due diligence when considering investment opportunities. We are pleased to confirm the award ‘Best Fund Manager of Alternative Assets, Switzerland, 2014.’


The strength of the Intellectual Property team at Ashurst once again propels the firm to the top table in the Legal Awards Programme. This 2014 winner repeats last year’s success by the consistent effective delivery of

a comprehensive range of services and an outstanding roster of professional contacts. The Judging Panel comments that they are always pleased to see a win repeated in consecutive years and that Ashurst truly deserves the | Capital Finance International

prize again this year. Its global presence and impressive coverage of client industries were once again factors in deciding the accolade.


> Emirates Friendship Hospital:

Plying the Rivers of Bangladesh with Medical Care The Emirates Airline Foundation is a non-profit organisation dedicated to improve the quality of life of disadvantaged children worldwide irrespective of political or religious boundaries. The foundation strives to assist children to realise their full potential by providing education, healthcare, food and shelter.

In Pictures: Emirates Friendship Hospital Ship


he charity is considered a pioneer in the delivery of assistance with a bare minimum of overhead thus ensuring that fully 95% of the assigned and donated funds reach their intended beneficiaries with the remainder reserved for administrative costs. Both the Emirates Airline’s staff and passengers are actively involved in the programmes of the foundation. Most of these programmes are set up in places served by the airline to allow staff an opportunity to actively participate in the delivery of the assistance.

Bangladesh, over half a million people eke out a living on the fissiparous edges of the GangesBrahmaputra Delta where they are subject to the whims of the mighty rivers. Here, life takes place on chars – sandy islands and peninsulas created by the rivers’ caprice. Chars have no gates or fences, nor landlords: They are there for the taking. This free land lures farmers from far and wide. Though sandy, chars become veritable Gardens of Eden – a riot of fecundity – when their soil is

mixed with the abundant fertilising silt the rivers carry down from the distant Himalayas. Within two years after emerging from the waters, chars may support bountiful plantations of banana palms, jackfruit, mangos or guava. Still, chars offer their inhabitants but a casinolike existence. That what the rivers freely give, floods may take away at a moment’s notice. That moment may come next year, or in ten or twenty years.

“Most of these programmes are set up in places served by the airline to allow staff an opportunity to actively participate in the delivery of the assistance.” 106 | Capital Finance International

Spring 2014 Issue

SELECTION OF THE FOUNDATION’S OTHER PROJECTS LIFELINE EXPRESS India boasts the world’s largest railway network with over 63.500km of tracks reaching into the far corners of the subcontinent. Lifeline Express aims to make the most of this fact and has built a fully-equipped hospital aboard a train that regularly travels to the remotest parts of the country to deliver primary healthcare services.

TENWEK MISSION HOSPITAL A team of twelve US medical specialists was flown to Kenya by Emirates Airline Foundation to perform open-heart surgeries at the 260-bed Tenwek Mission Hospital in Bomet on children suffering from birth defects and cardiac illnesses. The surgeons, employed at premier university medical centres across the US, donated their time and skills to the initiative of the Take Heart Foundation.


Once in Kenya, the team screened 70 children and admitted nine of them to surgery. All the operations were successfully concluded with the young patients being ensured full recovery. In some cases, the children admitted for surgery had been waiting years for medical attention. Local hospitals were unable to admit them in light of more pressing and lifethreatening cases being granted priority status. The Emirates Airline Foundation has now hooked up for a second time with the Impact India Foundation to co-finance this unique initiative. The Lifeline Express recently completed yet another three-week mission that took it to the Wadi Junction railway station in the Gulbarga District of Karnataka State. Here well over 4,000 patients were treated and 619 surgeries performed.

Twelve-year old Ian, who wants to become a doctor and is one of the sharpest minds in his class, was one of the patients selected for surgery. Ian needed a mitral valve replacement. Prior to the operation, he was suffering from a shortness of breath and swelling in his legs. He tolerated the taxing procedure very well and will make a full recovery. “Knowing that our work is magnified in the lives of the children is very gratifying,” said Doctor Michael Liske who directed the procedure.

Aboard the Lifeline Express train a wide range of medical services are provided. Wagons contain a full operating theatre with three operating tables and a sterilising room. There are also several air conditioned patient wards plus a fully stocked dispensary. The train has its own power generators and provides accommodation for its mostly volunteer staff. Both the engine and the five coaches it pulls have been expertly refurbished at Indian Railways workshops. At Wadi Junction, volunteer doctors treated mostly young patients for burns, cataracts, ear conditions, cleft lips and a number of other debilitating conditions. News of the train’s arrival was broadcast on local radio and announced in the papers.

Chars are, by nature, passing phenomena. As such they go without infrastructure, since there is no knowing how long a char may keep its head above the water. Thus, the vast majority of char dwellers have no access to the basic services and conveniences taken for granted on the mainland. However, ingenuity came to the rescue. A small fleet of riverine hospital ships, drawing but a few feet of water, ply the channels of this green delta – the largest estuary in the world covering an ever-changing geography of some 150,000km2 – bringing medical services to an

In Sri Lanka, the Emirates Airline Foundation has helped the Lady Ridgeway Hospital for Children in Colombo renew its entire intensive care unit with both equipment and furniture. The unit had fallen into disrepair due to a lack of funds. The foundation provided a grant that allowed floors, beds and even window blinds to be replaced and state-of-the-art equipment to be installed. The foundation also helped with the acquisition of a modern vacuum plant that supports life-saving equipment at every bed of the unit. “With the seasonal spread of Dengue fever many more critically ill children are referred to the ICU round the clock. The staff is overworked but very grateful for the lifesaving facilities provided by the foundation,” said Nives Fernandez who coordinated the refurbishment project.

The US specialists also provided their Kenyan peers with training that enables them to perform open-heart surgery on children.

otherwise isolated, and oft forgotten, population. The ships also venture upstream to visit riverside communities of the barely accessible Gaibandha and Kurigram Districts. The ships are operated by Friendship, an NGO founded in 1994 by Yes Marre, a stubborn French seaman who sailed a discarded oil barge across the oceans to Bangladesh and had it remade into a hospital ship. The latest addition to the Friendship fleet is the purpose-built Emirates Friendship Hospital – the first multihull | Capital Finance International

The renewed facility is being put to good use with more children receiving care and mortality rates going down. The foundation provides the Colombo hospital with a monthly stipend with which to defray the cost of medical disposables.

ship built in Bangladesh. The vessel is fully equipped to provide both primary and secondary healthcare services. As its very name implies, the Emirates Friendship Hospital ship owes its existence to the largess of the Emirates Airline Foundation which awarded Friendship a grant of well over $750,000 for the building of the vessel. The foundation also covers the operating costs of the ship, currently running in excess of $150,000 annually.


“The communities in northern Bangladesh are in dire need of basic medical facilities to deal with the unforgiving conditions in which they live. This is the Emirates Airline Foundation’s flagship project in Bangladesh and we hope to be able to do a lot more in the years to come with the kind support of our customers who donate generously on board our aircraft.” Tim Clark, President and CEO of Emirates Airlines

108 | Capital Finance International

Spring 2014 Issue | Capital Finance International


Award Presentation: Mohammed A Al Khaja, Vice Chairman of The Emirates Airline Foundation receiving recognition from

During her tours of the upper reaches of the Brahmaputra River the Emirates Friendship Hospital ship has so far received and treated over a quarter of a million patients. The ship boasts two operating theatres, two eight-bed wards, a pathology laboratory, a dental clinic and x-ray facilities. The floating hospital is staffed by 24 fully-certified caregivers and eight physicians who donate their time and expertise to the initiative. The ship is also fully equipped to respond to emergencies and can carry up to forty patients requiring medical evacuation on her decks. Speaking on his company’s corporate social responsibility projects, Emirates Airlines President and CEO Tim Clark emphasised that projects such as the hospital ship offer a “rewarding way of reaching out and showing that we care.”


“The communities in northern Bangladesh are in dire need of basic medical facilities to deal with the unforgiving conditions in which they live. This is the Emirates Airline Foundation’s flagship

project in Bangladesh and we hope to be able to do a lot more in the years to come with the kind support of our customers who donate generously on board our aircraft.” i

In Pictures: Mohammed A Al Khaja explaining the benefits of the charitable fund. | Capital Finance International

Spring 2014 Issue | Capital Finance International


> Al-Waseet Financial Business Company:

Dedication to Quality Makes the Difference Al-Waseet Financial Business Company is Kuwait’s leading stock trading intermediary provider, offering clients services such as online trading and personal brokers. Established in 1984, with a working capital of KWD 5 million (approx. €13m), the company underwent a rapid expansion process and now employs sixty people in various professions – all striving for excellence in the execution of trades, while maintaining the highest standard of confidentiality.


l-Waseet supplies a broad range of products and services from personal brokers to on-line trading, tailored to client needs. The company has a principal office located in Khalejya Tower, and an operating office within the Kuwait Stock Exchange. Both offices are equipped with the latest technology and tools to provide the best services for our clients. ORGANISATION The company is proud to have one of the most efficient financial teams in the region. These highly qualified professionals are dedicated to providing clients with prompt executions of their transactions whilst maintaining the utmost confidentiality and fidelity. The company’s policy goals are set by a board of directors that is also entrusted with the general supervision of the business and follows up on the performance of the executive management. The board sets out the overall corporate strategy. The board is responsible to draft the work plans to develop the business of the company and


“The company is proud to have one of the most efficient financial teams in the region.” create ways to increase its share in the local market. It also carries out regional expansion plans. The board then follows up with the executive management on the implementation of the strategies set, policies and plans, providing management with their value added experience and knowledge along the way. The executive management warrants the business and is guided by the board’s directives to ensure that Al-Waseet Financial Business Company maintains its position as the leader in Kuwaiti intermediary brokerage services. Additionally, management actively explores new business | Capital Finance International

development opportunities in the country and beyond its borders. Al-Waseet Financial Business Company is dedicated to providing its clients with a high standard of services. In order to accomplish this, the firm is supported by a highly professional customer service centre. Through this centre, the client can phone in requests pertaining to trading lists, as well as obtain answers to any and all queries. The customer service centre also provides any assistance pertaining to trading matters. SERVICES PROVIDED Al-Waseet employs the most advanced technology in order to consistently exceed the expectations of its clients. The company delivers trading formats and standards through the extensive use of electronic trading. Al-Waseet boasts a comprehensive electronic system that is directly connected with the Kuwait Clearing Company (KCC) and local banks in the country. These services encompass all the requirements of the clients and provide a fully-featured outlook to trading. The services can be activated by the

Spring 2014 Issue

“Al-Waseet employs the most advanced technology in order to consistently exceed the expectations of its clients.” push of a button, while ensuring security and confidentiality. Working from within the core of the Kuwait Stock Exchange, the brokerage team ensures the instantaneous execution of trades as required by the clients. The expert Al Waseet traders are well aware of the importance of timely executions and “striking at just the right moment.” Clients can take ease in the knowledge that a confident professional brokerage team is on the floor ready to carry out their transactions. COMPETITIVE ADVANTAGE Al-Waseet Financial Business Company offers its clients three key advantages: • Quality and assurance of the top-ranked brokerage company of the Kuwait Stock Exchange, with a 12.5% to 18% annual market share • Deep market knowledge and experience of the Kuwaiti market with more than 25 years of experience • A commitment to excellence in delivery and execution – anywhere, anytime Al-Waseet Financial Business Company is firmly committed to maintaining its competitive edge through a strong commitment to its clients and a dedication to new business development. Through challenges the company has achieved its current forerunner status in the brokerage market in a remarkably short time. It has been on the rise ever since. The company takes pride in being the premier game changer and has pioneered many of the concepts that have now become the standard for the Central Market Authority of the Kuwait Stock Exchange including: • On-Line Trading (OLT) • Trading Terminals • Mobile Trading Application (for iPhone & Android platforms) • Mutual agreements between clients • Email Report Systems Al-Waseet has, and will always continue, to expand its range of services offered to clients while maintaining its leading and well-respected status within Kuwait’s financial landscape for businesses and individuals alike. i | Capital Finance International


> Booz & Company’s Ideation Center:

Empowering Women Entrepreneurs in the Middle East By Leila Hoteit and Mounira Jamjoom

One of the greatest challenges in the Middle East and North Africa (MENA) is to bring more women into the workforce. The region has a large number of aspiring, young, and well-educated women who lack exposure to work. Over the next decade many of these women will start to participate in the economy, driving growth and prosperity as part of a global trend. In the Middle East there are around ninety million economically excluded women – women poised to become employees, producers, and entrepreneurs.


ne of the most powerful drivers of economic inclusion is entrepreneurship. This is the driver that Middle East governments should focus on. The Middle East lacks women in business. Insufficient encouragement for young women is reinforcing this trend. Women own just 20% of Middle East companies. This compares to nearly 40% in Latin America and the Caribbean. NO EXPOSURE Underlying this fact is the lack of students’ exposure to entrepreneurship and their consequent failure to demonstrate much interest. According to a recent W & Company survey conducted to better understand students’ voices across the countries of the Gulf Cooperation Council, Qatari youth showed the least interest in entrepreneurship. Just 3% of Qatar’s high school and university students expressed any interest in going into business – compared to the regional average of 11%. There is also a striking imbalance between female and male students, in part because young women lack female role models to look up to. In Qatar, 62% of interest in entrepreneurship comes from male students, and just 38% from females. A lack of finance opportunities and the challenging overall business environment tend to make matters even more difficult for women entrepreneurs. Businesswomen do not enjoy easy access to credit since they often lack the required collateral against which to secure loans. This is in part due to unequal access to land and property. As a result, barely 10% of the funding for women entrepreneurs is provided by commercial banks and other formal sources. HOUSEHOLD SAVINGS AND RED TAPE Women are forced to seek funds from family and friends or use household monies or savings to cover new investments and to raise working capital. The few women who do try to run their


“Businesswomen do not enjoy easy access to credit since they often lack the required collateral against which to secure loans.” own business are confronted with excessive red tape and must face steep fees to register their activities. Infrastructure costs are significant as well. Rents for business premises and offices are high, as are the costs for communication systems and other utilities. Another disadvantage that businesswomen face is the lack of entrepreneurial training and support. There are few networks dedicated to supporting women entrepreneurs and almost no chances to obtain an advanced degree in business administration. Men take such support – colloquially known as the “old boys’ network” – often for granted. For Qatar, bringing women into the workforce and ensuring they have access to the tools needed to become entrepreneurs, will advance the country toward sustainable economic growth - one of the core goals of the Qatar National Development Strategy 2011–2016. Encouraging more women to become entrepreneurs has the positive effect of helping more women to participate in the workforce and of putting more women in higher level positions. Currently, women constitute about 25% of the total workforce in female-owned firms in the MENA region, with many at professional and managerial levels. This compares to a 22% female participation in male-owned firms where women mostly occupy low skills positions according to research conducted by the International Finance Corporation (IFC), the World Bank, and Booz & Company. | Capital Finance International

FIVE STEPS Qatar, which has taken steps to advance women in the workforce, can boost these efforts by focusing on five key areas: • Introducing early entrepreneurship education into the school curriculum • Developing an enabling regulatory environment • Facilitating the availability of finance • Providing access to business support services and mentoring • Ensuring openings for collaboration and networking Early entrepreneurship education is important because it instils an entrepreneurial culture among women. This starts in the middle or secondary school classroom and should encompass the fundamentals of entrepreneurship, business, and financial management. One system used by schools worldwide to teach entrepreneurship as a practical skill, rather than just theory, is supplied by the BizWorld Foundation. Students participate in workshops in which they run mock enterprises, allowing them to experience something akin to the business cycle. An enabling regulatory environment is critical because it sends the message that entrepreneurs are welcome. This framework will require the government and stakeholders to establish an institutional body focused on women to collect data, formulate policy, and advocate it. Government should also define public procurement guidelines integrating women-run small and medium-size business into the supply chain. Facilitating the availability of finance involves the government ensuring that female entrepreneurs have access to information about the types of financing being offered. The government should also support their eligibility which may require changes to family and labour laws in order to enable women access to credit. Governments

Spring 2014 Issue

“For Qatar, bringing women into the workforce and ensuring they have access to the tools needed to become entrepreneurs, will advance the country toward sustainable economic growth one of the core goals of the Qatar National Development Strategy 2011–2016.” should furthermore ensure that women become aware of other credit options such as those offered by equity investors, microfinance loan schemes, and state-sponsored programmes. In terms of providing women with access to business support services and mentoring, governments can establish business incubators focused on supporting female entrepreneurs. Developed countries use this technique frequently. Incubators offer women the support they need to successfully run their businesses. This includes basics such as assistance with marketing initiatives, accounting, training, and regulatory compliance. Incubators can also provide female mentors and role models so that potential women entrepreneurs can acquire the necessary knowledge, expertise, and confidence to start their own businesses. STRUCTURES AND NETWORKS Finally, governments and other stakeholders need to come forward with structures for collaboration and networking opportunities for women. Local businesses and associations should be encouraged to offer entrepreneurship and management training. Business development centres and businesswomen’s associations can provide venues for networking opportunities. International women’s associations should also be encouraged to support and partner local

initiatives, thereby creating regional networks of women entrepreneurs. By providing support and services that aim to redress the current bias against women in business, Qatar can help more of its women to become entrepreneurs and thus take advantage of the multiple opportunities arising from the country’s robust economic growth and ambitious development goals. i

Leila Hoteit

ABOUT THE AUTHORS Leila Hoteit - Principal at Booz & Company. Mounira Jamjoom - Senior Research Specialist at the Ideation Center. ABOUT THE IDEATION CENTER The Ideation Center is Booz & Company’s leading think tank in the Middle East. Established in 2007, the Ideation Center provides thought leadership through insightful research, analysis, and dialogue that is true to the Middle East’s dynamics. The Ideation Center brings these ideas to the forefront through their publications, website, and forums.

Mounira Jamjoom | Capital Finance International


> Ras Al Khaimah National Insurance Company:

Corporate Governance A Leading Belief By Andrew Smith

At Ras Al Khaimah National Insurance Company (RAK Insurance), corporate governance is one of the core values that all within the organisation stand and live by. Corporate governance is embedded within the culture of the company and has done much to help its recent growth, stability and image.


lthough not a new concept, corporate governance has become a widely used phrase in many industries – especially those in financial services.

Corporate governance is usually legislated from within governmental regulations for a wide range of corporate entities. The insurance industry is then usually further regulated by dedicated governing bodies that may possess a much wider range of powers than a general one has. These agencies are thus capable of acting in a more precise manner and do so quickly. It is the responsibility of the insurer to meet all of the regulatory requirements. RAK Insurance, however, moves beyond those guidelines and directives and continually considers what may be done “above and beyond”. The manner in which the Board of Directors and executive management oversee an organisation’s business is generally adheres to the corporate governance framework. Such a framework should consist of a number of key parameters and behavioural matrices that include: Corporate discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. Compliance with legal and regulatory requirements by timely and accurate disclosure on all material matters regarding the insurer, including the financial situation, performance, ownership and governance arrangements, is part of a corporate governance framework. In any organisation, the Board of Directors is seen as the focal point for corporate governance. Ultimately this board is accountable for the performance and conduct of the company. Delegation through board committees does not dissipate its responsibilities, but through these committees and the employment of ‘fit and proper’ persons to manage the day-today operations of the company, the Board of Directors maintains control and responsibility in an oversight capacity.


“RAK Insurance, however, moves beyond those guidelines and directives and continually considers what may be done ‘above and beyond’.” RAK INSURANCE CORPORATE GOVERNANCE Within RAK Insurance, the benefits of a supportive board have proven beneficial in setting up the various committees and employing the calibre of staff that has brought the company to the position it is now in – a leader in the field of corporate governance and recognised by its peers in achieving the award for “Best Corporate Governance, GCC” at the Capital Finance International ( Insurance Awards, held in London, for the year 2014. Under the United Arab Emirates (UAE) federal law, the Securities and Commodities Authority and ministerial decrees provide insurers with guidance on how their organisations should be governed and managed. It is entirely possible for an organisation to follow this guidance with the bare minimum adherence and still operate within the letter of the law. RAK Insurance has taken these minimum requirements, and determined that in order to show true regard for the law. In line with our moral and social responsibilities, the law should be used as the baseline to be built upon. In Ministerial Resolution 518 of 2009, it was declared that:

The Board of Directors shall form standing committees to be directly affiliate to the board as follows: • The Audit Committee • The Nomination and Remuneration Committee In addition to this fundamental requirement, the board and executive management of RAK Insurance have instigated further committees | Capital Finance International

and developed internal systems that allow both a broader level of internal oversight and a level of governance that reduces or mitigates risk in various functions of the organisation. While the board has implemented the committees and have an oversight of their working, the organisation’s employees must embrace the systems that the board have, through the implementation of policy, approved and determined to be the right way forward. With the employees’ complete integration into the corporate governance way-of-life, the board’s ultimate role can be fulfilled by ensuring that all applicable laws and regulations are fully complied with. FULL COMPLIANCE Compliance with laws and regulations, however, is not the be all and end all of the organisation. While compliance with the letter of the law is essential, corporate governance requires additional measures, including risk management, internal controls and fiscal responsibility. RAK Insurance has established an Investment Committee, Receivable Committee, as well as a Risk Committee, that sit alongside the previously discussed and mandatory Audit and Remuneration committees. These committees provide the oversight of the company that is required by law, and go further to the corporate governance criteria of internal control. There has been, within the financial services arena, a general belief that the processes, operations and management of companies in these fields is unique and requires special attributes, skills, education and training. Nothing could be further from the truth. While financial and insurance institutions do have certain requirements in the same way that a chemical manufacturer needs chemists, many of the functions in the financial services sector can benefit from external resources contributing new ideas that elevate the company to levels previously unseen.

Spring 2014 Issue

RAK Insurance has, through its philosophy of offering the utmost transparency in all of its dealings, embraced the idea of using best practice not just from the insurance industry but from across the manufacturing, service, retail and IT sectors as well. This has allowed the introduction of new techniques that have helped elevate the organisation and has created a new mentality within the workforce and strengthened the corporate governance philosophy. Whether we talk about risk management, internal controls or compliance – all components of corporate governance – without employee buy-in, there is little chance of success. While the board has the responsibility for directing of the organisation, prudent management of the operations and creating an environment of responsibility at all levels is the only way in which the company can exceed the expectations of the supervisory body. At RAK Insurance a methodology of empowerment has been established that allows individuals within the organisation to own their processes and develop them to achieve the best possible results for all concerned while maintaining appropriate oversight from executive management and board committees as well as the board itself. QUALITY MANAGEMENT A multi-tiered quality management system (QMS) provides a framework that allows policy to be set at the highest level, operational activities to be designed to meet those policy requirements, and internal controls to be developed and built-in. QMS also allows for management reporting of information as required at board level and through compliance functionality to satisfy any requirements of the auditors. By using QMS, work instructions for specific tasks are tied to process maps and procedural overviews, which are in turn derived from policy that is set by the board. QMS furthermore asserts control over the processes and tasks that are identified and maintained in a system control process. This ensures dual control over all processes in the organisation and allows for regulatory requirements to be built into tasks where necessary. By reducing bulky manuals into individual work instructions, control over documented systems is maintained through change management processes and the inherent flexibility of the system allows for continual improvement to become a key goal of the organisation. When QMS is used correctly, it provides both management and the board with a tool that, when combined with risk management | Capital Finance International

techniques, addresses many concerns in the corporate governance framework and strengthens the board’s confidence that the company is being managed properly. Any organisation anticipating or realising this form of corporate governance must take appropriate measures to ensure that every person in that organisation – and every department or division – has the opportunity to get involved, as well as being placed in a position where the risk of operation outside of systems is eliminated. Mistakes can be made in any system or process, however, at RAK Insurance errors and mistakes are viewed as opportunities for improvement and employees are actively guided in operating outside of a blame culture. Instead, they are encouraged to look at why the failure occurred and what can be done to prevent a recurrence. This is most evident in the complaints process that is viewed less as a negative or downgrade of performance, and more as an opportunity to improve the process. RAK Insurance takes the view that anybody who takes time and effort to complain has a reason for doing so, and wants to see changes to the systems. It is not a sign of disloyalty to the RAK Insurance brand, but rather the opposite. This is an extremely important mechanism that allows corporate governance to work correctly and provide appropriate transparency in our dealings. Allowing employees to report conduct that is unethical – which includes private transactions, self-dealing, or inappropriate behaviour – is another cornerstone of the corporate governance framework at RAK Insurance. The company has established whistleblowing procedures and employees are encouraged to use these mechanisms whenever necessary. The adopted procedure ensures confidentiality and allows executive management and the board to further exert control over the affairs of the company. RAK Insurance has taken the route of providing employees with the appropriate tools and systems to allow them to work in a safe environment in the knowledge that by following the processes and systems in place and taking ownership of their individual tasks, opportunities for improvement will arise and a beneficial development of their career and the organisation is assured while built-in controls, when followed, allow a level of transparency to the board, shareholders, stakeholders and regulator alike. i ABOUT THE AUTHOR Mr Andrew Smith is the Chief Executive Officer of RAK Insurance in the UAE.


> Luxury Goods Market:

Crisis? What Crisis? By Wim Romeijn


n the luxury goods market, nothing quite drives sales as brand recognition does. Slap a Louis Vuitton label on a handbag, and shoppers will think nothing of plopping down a thousand euros or more to carry it off. As Europe sank into its post Panic of 2008 phase of doom and gloom, the luxury goods


market did not just take the downturn in stride, the sector positively bloomed and prospered. At this rarefied end of the market, there is simply no such thing as a recession.

The merged French luxury goods provider of Louis Vuitton and Moët Hennessy (LVMH) saw its combined sales jump from EUR17.2bn in 2008 to over EUR30bn last year.

While traditional manufacturers of mass market consumer goods struggled to survive, the likes of Hermès, Salvatore Ferragamo, Ferrari, and a host of other premier brands made a killing.

LVMH’s performance is by no means exceptional. Each year an estimated ten million consumers make their first forays into the high-end luxury goods market, now estimated to include no less | Capital Finance International

Spring 2014 Issue

than 330 million people worldwide – triple the number of discerning buyers counted merely twenty years ago. The luxury goods market currently moves around EUR220bn annually with growth coming mainly from China which is set to shortly replace Japan as the most important market for luxury products and services. However, luxury goods makers are fast discovering that China is not quite as easy a market as it is often mistaken for. A recent indepth analysis by global management consulting firm Bain, concludes that Chinese customers are exceptionally fickle in their buying habits, displaying nothing like the brand loyalty that is taken for granted elsewhere. SAVVY BUYERS Bain researchers found that Chinese consumers are surprisingly savvy. “We discovered a lot of indiscriminate binge buying of status symbols in megacities like Beijing and Shanghai. However, the fad soon passes and consumers become highly conscious of both price and quality,” says Claudia D’Aprizio who drafted the Bain report. While the luxury goods sector gains new clients in new markets, it also loses quite a few customers in more mature markets such as those in Europe, North America and Japan. It is not just the economic crisis that caused dampened sales; a sort of disenchantment seems to have set in. A combination of factors is driving this downward trend: Consumers in traditional markets have become more socially aware than they used to be, shunning brands that are perceived as portraying a lifestyle out of tune with both contemporary values and reality. Steady price hikes, above and beyond inflation levels, have also caused disillusion. Most luxury goods brands have upped prices by as much as 70% over the past two to three years in an attempt to bridge the price gap between China and the rest of the world. As the Chinese increasingly travel overseas, they couldn’t help but notice the comparatively low prices that luxury goods command outside their country. Instead of driving prices down in China, most manufacturers opted to increase price levels everywhere else, instilling a sense of betrayal in their more traditional customers.

“While the luxury goods sector gains new clients in new markets, it also loses quite a few customers in more mature markets such as those in Europe, North America and Japan.”

TROUBLESOME HEDONISTS Another problem faced by the purveyors of luxury goods is that the market has shifted in a somewhat curious, and rather unexpected, direction. According to the Bain market study, the biggest group of luxury goods consumers are the hedonists – people who like to flash their mostly newfound wealth. As it happens, these in-your-face consumers are highly unlikely to recommend luxury brands to their friends. In fact, 47% of consumers deemed hedonist by market researchers said they would | Capital Finance International

most definitely not recommend any of the products they buy to friends or family. However, Bain does propose a solution that may yet stem the trickle exodus of western consumers: Go the Apple route. “Brands should be much more active in creating an experience rather than merely a product, and may also strive for a much improved after-sales service. Opening other sales channels besides high-end shops and branded stores is another of the suggestions made. However, the advice, though sensible, goes against the grain of one of the peculiarities that mark the luxury goods segment. To a fault, successful companies at this end of the market have managed to overcome the difficulties of perceived value – how much can a handbag, or a scarf, really be worth? – by implying that whomever uses their exclusive products becomes, in turn, more desirable and admirable as a human being. This is the stuff money can’t buy and only expert and sustained marketing efforts can deliver. A Jaeger-LeCoultre watch still only tells its wearer the time, give or take a few seconds, but may cost the equivalent to the annual remuneration of a Swiss civil servant on a moderately respectable pay grade. Such a timepiece, however masterfully crafted, is not really good value for money. Still, the company is doing just fine and has no trouble selling its exquisite merchandise. CURIOUS MARKET FORCES Economists dub these high-end products Veblen goods, named after the American economist Thorstein Veblen (1857-1929) who conducted extensive research on conspicuous consumption and is perhaps best known for his book The Theory of the Leisure Class (Oxford World Classics, ISBN 978-0-1995-5258-0). Mr Veblen found that some products generate a demand proportional to their price in an apparent contradiction to the Law of Demand. Thus, the more expensive a given product is, the more demand it generates. The Veblen effect is well-known to the luxury goods industry. It is but one of a family of muchstudied micro-economic effects that propel the sector to ever greater heights such as the snob-effect, the bandwagon-effect, and – most importantly – the common law of business balance, otherwise known as: You get what you pay for – the more you pay, the more you get. Notwithstanding Bain’s expert counselling, a slick website, fancy app or excellence in aftersales service cannot make up for, or even add to, the human vanity factor that lays at the foundation of a still flourishing industry. In fact, there is little to worry about, for vanity is not a trait likely to disappear anytime soon. i


> Meets the CEO of RAK Insurance:

Andrew Smith Andrew Smith is an accomplished senior executive with conventional and Islamic insurance experience gained in the UK and across the Middle East. He has worked for publicly listed multi-national organisations and privately owned businesses and understands the dynamics involved in achieving the best possible result for the organisation.


e possesses strong and effective leadership skills with an in-depth knowledge of insurance products, distribution networks and operational structuring. Mr Smith has significant knowledge in establishing and running insurance entities in the GCC (Gulf Cooperation Council) countries and in the Levant. He has built-up a sizeable financial and technical know-how with a number of years of experience in the financial services, insurance and Takaful sectors. Mr Smith holds a postgraduate diploma in Islamic banking and insurance from the Institute of Islamic Banking and Insurance; a master’s degree in training development and performance management from Leicester University; a financial planning certificate from the Chartered Institute of Insurance and a graduate of business and finance from Kingston University; all acquired in the UK. His areas of expertise consist of corporate governance, strategic planning and forecasting, fiscal management, underwriting, re-insurance, negotiation, organisational development, innovation, market penetration, and project, distribution and training development. Mr Smith’s professional highlights include: Development of an organisation that empowers the employees within the controlled processes that led to improvement in employee satisfaction and resulted in the increase of the company’s profitability. He also managed the development of a complete organisation to operate in the insurance services market. This included the development of products; the establishment of supply chains; and meeting regulatory requirements to obtain licensing and enable the successful operation of the business. Mr Smith furthermore established structured financial reporting controls and mechanisms to allow for day-to-day control and move to proactive development instead of reactive correction. He led the product development activities of the organisation and was instrumental in implementing the products with particular attention paid to meeting underwriting strategy and appetite, negotiating re-insurance treaties


CEO: Mr Andrew Smith

where required and developing the operational models to control the technical requirements. Mr Smith also chaired and managed a number of executive governance committees that led to improvements internally and recognition of the company attitude by local regulators. He has developed a customer care centre in emerging markets that led to a best-in-category culture of care throughout the organisation – not just in the servicing departments – and then expanded the concept into the sales organisation to improve market development and technical development. Mr Smith had established a new organisation within a major multi-national group and led the management team in identification and mitigation of risk along international best practice models. | Capital Finance International

Mr Smith is responsible for the entire organisation of RAK Insurance with its head office located in Ras Al Khaimah and branches in Dubai and Abu Dhabi. RAK Insurance is a public shareholding company listed on the Abu Dhabi Securities Exchange (ADX) and has been a pioneer on the insurance market in the emirate since its establishment in 1974. The company has gained a reputation for having excellent technical resources that are further strengthened by working with some of the world’s leading reinsurance companies, thus providing its clients optimum protection and security. It caters to all classes of business which include: Life, motor, casualty, marine, energy, medical, property, professional liability, travel, financial risks, personal accident, marine hull, aviation, engineering and special risk. i

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> Sultan Group:

An Eye for Detail and Profit With operations spanning Europe, Asia and the United Arab Emirates, Sultan Group is an International real estate company specialized in offering both residential and commercial project solutions. The company has been in business since 1950 and now boasts nine subsidiaries. Sultan has tied up with developers and builders who are well known for quality construction, loyalty and commitment.


ith its consistent emphasis on compliance and style, the group’s projects are specifically designed to adorn strategic points in cosmopolitan cities. As such, these projects represent secure and stable investments that assure solid returns. The group attaches extraordinary importance to helping its clients reach their targets successfully ensuring full customer satisfaction. This simple, yet effective, corporate formula proved key to both success and endurance. Fully 70% of Sultan’s business is generated through referrals. This is why the group’s customer portfolio keeps growing with the attendant expansion of the company’s business. VISION Sustainability, flexibility and timing are essential to remain well ahead of market movements. This enables the company’s management to set the right policy at precisely the right time. These words, written over two centuries ago, perhaps express best the realities faced by today’s economy and the commerce that drives it. We need cultivate a permanent openness to change and to embrace change in order to open opportunity. At Sultan, management strongly believes that in today’s market it is of vital importance to: • Serve the needs of clients with integrity and flexibility; • Conduct ourselves and our business with a view extending over the long-term; • Provide solid financial stewardship; and, • Obtain growth through innovation and creativity.

“I cannot say whether things will get better if we change. However, what I can say is things must change if they are to get better.” The group’s hallmark is to pay close attention to even the most minute of details. Experience has shown that getting the details right often allows for obtaining essential advantages in the future. Sultan habitually takes the time to analyse all aspects of every project under consideration to ensure its clients receive hassle-free solutions that stand out even in the fiercely competitive real estate market. PROJECT FEATURES Sultan is a real estate company that is built – and indeed stands – on the trust placed on it by its valued patrons. The company returns this trust by consistently building new edifices that carry the indelible mark of perfection. Whether a customer requires a place for his administrative centre or a prestigious home, that customer does not need to compromise on anything but may rest assured that only the best will do.

Sultan is setting the pace in real estate services by exceeding customer expectations as a matter of course.

Illustrious architects and engineers work behind the scenes to ensure all projects are well provided with abundant ventilation, natural lighting and other essential contemporary amenities. Another prominent feature is timely completion. Projects are unswervingly completed on time without compromising the group’s traditional emphasis on providing superior quality, comfort and style. Spot-on delivery is a major selling point that has endeared the company to a host of trusted customers.

Counting on more than a decade worth of experience in the real estate and construction fields, the group completed several housing estates in Europe and the UAE. All projects are meticulously designed to meet, and indeed exceed, the customers’ needs.

Some of the appealing features that all Sultan’s ventures boast are: Strategic location, elegant design, convenience, quality, conformity, serene climatic conditions, idyllic surroundings, and affordable rates and strict adherence to all legal aspects.

122 | Capital Finance International

In the UAE, Sultan is currently managing a project portfolio worth $500 million. The company’s international portfolio amounts to $1 billion. OUTLOOK AND LATEST DEVELOPMENTS During the worldwide financial crisis that started in 2008, the UAE real estate market had to face severe financial constraints. However, Sultan has always been able to ensure a solid financial backing for its UAE projects. The group suffered no substantial losses or setbacks and neither did its investors. All the investors that underwrote Sultan’s investment strategy were able to compensate for their losses and now are back in a surplus. SULTAN’S EXPECTATION FOR 2014 AND 2015 The actual situation in the UAE – especially in regard to Ras Al Khaimah and Dubai – shows that the market has now completely recovered from the slump. Vacancies in the projects are decreasing rapidly. Sultan expects a steady growth in demand for new real estate projects. The market has stabilised and the group expects for Dubai a healthy grow of between 10 and

Spring 2014 Issue

“Sustainability, flexibility and timing are essential to remain well ahead of market movements. This enables the company’s management to set the right policy at precisely the right time.” 15%. The potential in other Emirates, such as the ones in the north, still has room for continued growth of between 25 and 35%. It can be stated that the crisis of 2008 had the effect of a market clean-up. The development now is occurring at a much more sustainable

“The economic outlook is positive for 2014/2015, the Interest rate will remain low, hence still good to invest in real estate, but be selective, buy location, buy quality.” Ms. Faega Amini

pace than it was during exuberating years before 2008. Sultan also detects a broad adoption of higher quality standards and more efficient practices overall as investors now demand more comprehensive due diligence prior to committing to any given project. FREE TRADE ZONES Free trade zones attract foreign investors by offering full ownership options and zero taxes. Free trade zones in the UAE are home to more than 17,000 companies. Total foreign direct investment is estimated at $73 billion in the 36 free zones currently operating in the UAE. These free trade zones form a vital component of the local economy, and serve as major re-export centres to other countries of the Gulf Region.

Business Economist and Managing Director: Ms. Faega Amini

Since UAE tariffs are low – or effectively zero on numerous imports – the chief attraction of the free trade zones is the waiver of the requirement for majority local ownership. In the free trade | Capital Finance International

zones, foreigners may own up to 100% of the equity in a business. All free trade zones provide full import and export tax exemption as well as full exemption from commercial levies. Moreover, they offer the possibility of full repatriation of both capital and profits, multi-year leases, ease of access to harbours and airports, cheap energy (often at subsidised prices), and assistance with labour recruitment. In addition, the free trade zone authorities provide significant support services such as sponsorship, employee housing, dining facilities, and security. Foreigners may own property in UAE on a freehold basis in designated investment zones. These attract more investors to the real estate sector due to an expected return on investment of between 8 and 12% annually (on rental property). Residential units in the free trade zones are registered under UAE’s freehold law, with property ownership deeds issued to investors. i 123

> Grant Thornton UAE:

A Defining Period for UAE Capital Markets By Simi Nehra


he economy of the United Arab Emirates (UAE) is set to grow at a significant pace in 2014 due to an overall positive outlook. With investor confidence building momentum, sustainable growth seems assured. The UAE is particularly noted for possessing the dynamism of the West whilst maintaining the culture of the East. For 2014, the IMF has predicted a GDP growth rate of 4.5%. This is supported by Abu Dhabi’s buoyant oil and gas industry and its significant


infrastructure and industrial investment. It is also spurred on by Dubai’s rebounding economy fuelled, in part, by the country’s recent Expo 2020 win.

incorporated into the MSCI’s (Morgan Stanley Capital International) emerging markets index. Commentators widely expect this development to attract over $270 million to those exchanges.

EQUITY CAPITAL MARKETS In June 2013, the UAE’s classification was upgraded from frontier market to emerging market. As a result, in May 2014, the three UAE indices – the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM) and Nasdaq Dubai – are now expected to be

The performance of the UAE stock exchanges in the past year is notable. The ADX ended 2013 with a total of almost $23 billion in share value and a year-on-year growth in volume of 282%. The socio-political turmoil affecting the wider region is seen to be driving trading volumes with investors seeking a safe haven. This is positively | Capital Finance International

Spring 2014 Issue

next 18 months. Grant Thornton (GT) provides IPO readiness assessments and acts as a sponsor to companies seeking to list. GT expects to see several UAE local family groups evaluating listing opportunities in an effort to obtain capital injections and to raise their regional profile. A well-known Abu Dhabi bank expects six companies to go public in 2014. This is estimated to raise $2 billion. In 2013, the only sizable local IPO was that of Damac Properties. However, its management opted to list on the London Stock Exchange. The company was valued at $2.65 billion post offering. The last significant IPO valued at over $1 billion was 15 times oversubscribed and concerned port operator DP World Ltd which raised $4.96 billion in November 2007. After a seven year retreat, it is now widely anticipated that there will be a return to this kind of more robust IPO activity. BOURSE CONSOLIDATION AND REGULATION The UAE’s stock market regulator, the Securities and Commodities Authority, continues to improve and implement higher standards of regulation since its inception in 2002. The regulator thus aims to ensure investor confidence without hindering local capital market activity. According to Bloomberg, Abu Dhabi and Dubai have already completed due diligence on a possible merger of the ADX and DFM exchanges. This will ensure a more efficient and coordinated approach to the global investor community. Also, there is motivation from UAE listed companies to lift foreign ownership limits on their shares. Under current UAE rules, investors from outside the UAE or GCC (Gulf Cooperation Council) are permitted to buy up to 49% of the shares of any listed company. In order to attract further equity from the international investment community, including large financial institutions, an end to these limits on foreign ownership is being suggested. The trend to increase limits is noticeable. In the last quarter of 2013, two major banks and a real estate developer listed on the UAE exchanges approved an increase of foreign ownership limits to between 20-25% of their share capital.

Abu Dhabi

“The performance of the UAE stock exchanges in the past year is notable. The ADX ended 2013 with a total of almost $23 billion in share value and a year-on-year growth in volume of 282%.”

affecting real estate and stock values in the UAE. Moreover, the index opened at 2,631 in 2013, and closed 63% higher at 4,290. In 2013, the DFM was the second-best performing exchange globally. In January 2014, it achieved a new five-year high at 3,819 points, equalling its January 2008 peak. INITIAL PUBLIC OFFERINGS (IPOS) A strong pipeline of issuers looking to launch IPOs regionally is expected to materialise over the | Capital Finance International

DEBT CAPITAL MARKETS New bond rules are expected to give further stimulus to UAE debt securities in 2014. According to the International Financing Review, a Thomson Reuters unit, bond issuance from the region is expected to flourish because of significant infrastructure investment and refinancing. The UAE, which has the largest portfolio of outstanding debt securities in the GCC, has issued new rules for the issuance and trading of covered bonds (bonds which have a preferential claim on the assets in the event of a default). This is a welcomed initiative for the development of the UAE’s debt market, and will allow for a new source of funding for commercial banks. 125

Author: Simi Nehra

ISLAMIC FINANCIAL MARKETS (SUKUKS) In line with the initiative of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Dubai is leading the way to become a global hub for Islamic finance with the aim to drive Islamic banking and capital market activity in both the UAE and the wider region. So far in 2014, Emaar Properties has dual listed a $500 million sukuk, issued in 2011 on Nasdaq Dubai, providing further momentum to the country’s resolve to become a global sukuk centre. Furthermore, UAE based GEMS Education celebrated the listing of a $200 million sukuk on Nasdaq Dubai. DEFINING PERIOD FOR UAE CAPITAL MARKETS The next two years are set to be a defining period for UAE capital markets, with expectations of increased regional and international investment into the region; growth in both debt and equity security valuations; increased trading volumes, and a return to a more frequent and successful IPO listings period. Undoubtedly investors are now becoming more confident to deploy the cash sitting on the side lines into the UAE markets with expectations of robust medium and long term returns. i


ABOUT THE AUTHOR Simi Nehra is the Corporate Finance Partner at Grant Thornton UAE. Mr Nehra has over 15 years’ experience in financial advisory services, including expertise in corporate finance, due diligence, business valuations, mergers and acquisitions and debt advisory. Mr Nehra has led several advisory mandates in the Middle East and North Africa region spanning a variety of industries. He has also provided transaction support to high profile IPOs on the UAE financial markets and advisory services to UAE government entities. Mr Nehra is a chartered accountant and a corporate finance designate from the Institute of Chartered Accountants England and Wales. He also holds a BA from the Manchester School of Accounting and Finance. Mr Nehra practiced alongside leading professionals in London before relocating to the UAE.

ABOUT GRANT THORNTON Grant Thornton is one of the world’s leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, forward looking advice. | Capital Finance International

Proactive teams led by approachable partners in these firms use insights, experience and instinct to understand complex issues for privately owned, publicly listed and public sector clients and help them find solutions. More than 35,000 Grant Thornton people, in over 100 countries, are focused on making a difference to clients, colleagues and the communities in which they live and work. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm forms a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions.

Spring 2014 Issue

> Meets the CEO of Sultan Group:

Bashir Amini Bashir Amini was born in 1962 in Herat, Afghanistan. He attended the Economy School in Kabul as well as the Goethe Institute there and over the course of his education mastered four languages, including Italian, German, Farsi and English.


he family of Mr Bashir Amini led a successful trading company in Afghanistan and invested in various wellness and hammam projects. The company’s business portfolio also included the development of luxury apartments and offices in the Afghan capital and the export of various products, such as dried fruits, lambskin, cashmere wool, carpets and many more. Due to the political unrest and at the request of his European business partners, Mr Amini relocated his company 1981 from Afghanistan to Europe. Since then he lives in Zurich, Switzerland. Mr Amini is married and father of three children.

“My passion is real estate: It’s solid, it’s artistic and it’s historic. Therefore, don’t wait to buy real estate. Buy real estate and wait.” In Europe, Mr Amini developed many real estate projects including hotels, residences and commercial buildings. Together with his family he also founded a trading company. This company is involved in the import / export business and has become a European leader in oriental, modern and branded rugs. “The world economic crises did not only change the entire market, but also people’s mentality. Previously, experience was seen as a guarantee to do things right, even in hard times. However, a deep crisis, such as the one recently suffered, has not occurred in living memory. The United Arab Emirates’ property market was severely hit by the downturn. This caused me both worries and anxieties not just about my company’s future existence, but also for the thousands of investors and the chain reactions the crisis might unleash. I soon understood that this dreadful situation could only be survived by all affected parties sticking close together. Unity was to be key to survival. I immediately set about arranging meetings with all investors in order to find out individual possibilities and situations so as to find tailor-made solutions that would enable us to weather the storm. We established a multilingual team to advise and explain things to our clients in their language. We also started to forge new

CEO: Bashir Amini

ways of cooperation in order to generate at least some return on the investment in completed properties. At that time, I was merely motivated to fight against the effects of the world crisis. However, now I am honoured to see that those efforts have made us one of the best agents in the UAE. We find ourselves, yet again, in an era of new experiences. We now need to learn to act in unison to recover. The economic rules of the past are no longer valid and we have to change in order to do things in a better way. Throughout history land ownership has provoked conflict and inspired grandeur, from civic monuments and sacred spaces to egotistical towers and pleasure palaces, | Capital Finance International

Land ownership is, perhaps, the most ancient expression of wealth. Today the relationship between land – or property – and wealth is more complex and more commercial than ever before. By 2012 the global private wealth invested in the large-deal sector increased by 111 per cent. Meanwhile, corporate investment in the same sector rose by only 43 per cent over the same period. These figures, detailed in a new report by Savills in partnership with Wealth-X, a Singapore-based consultancy, reveal the increasing importance of private investment in the world of property. I recommend trend is your friend for 2014/2015; property investments are well suggested.” i 127

> Commercial Bank of Dubai:

Soaring High and Higher At a time when many banks in different parts of the world were weighed down by the challenges facing the global economy, the Commercial Bank of Dubai (CDB) remained unperturbed and pressed ahead with a renewed focus on the affluent segment. This allowed the bank to further strengthen its bottom-line.


resh from pencilling in a record AED1.01 billion (approx. EUR200m) in net profit for 2013, CBD is soaring high as it carries its winning streak into this year and receives accolades for the successful policies the bank adhered to. Capital Finance International ( – a print journal and online resource reporting on business, economics and finance – became the latest entity to confer an award on the Dubai-based bank. declared the Commercial Bank of Dubai winner of its Best Wealth Management Team UAE award. Commenting on the award, the judging panel hailed CBD’s strategic and long-term wealth management approach, highlighting the commitment of the bank’s team to consistently maintain both high customer service levels and high overall banking standards. The panel said: “A sensible long-term client investment view is recommended by CDB wealth management professionals. These experts carefully listen to their clients to ensure that the most appropriate investment strategies are recommended. Investment vehicles are tailormade and client satisfaction is running high. Clients moreover benefit from some very solid professional expertise and sensitive handling from the team. We are happy to confirm the award.” Indeed, CBD leaves no stone unturned to ensure that clients get the most out of their bank-client relationship, no matter what the economic or investment climate prevalent at the time may be. The bank’s Peter Baltussen commented: “We are delighted to be honoured with this industry accolade. This latest award is yet another vindication of Commercial Bank of Dubai’s single-minded focus on excellence in everything that it undertakes. We are extremely proud of our wealth management team, whose members share a passion for providing exceptional service to our client base which includes individuals, families and business leaders.” THE AWARD AND THE STRATEGY’s awards are designed to recognise


“Indeed, CBD leaves no stone unturned to ensure that clients get the most out of their bank-client relationship, no matter what the economic or investment climate prevalent at the time may be.” banks, teams and individuals deemed to have demonstrated innovation and excellence in their operations. The award programmes identify individuals and organisations that truly add value. Commenting on the award, Murray Sims, general manager of the Personal Banking Group at CBD said: “This award is a true reflection of the commitment our team displays and of the trust that our clients have placed in us. We continually strive to achieve a prosperous financial future for our clients by offering a diverse range of bespoke products and services.” Moukarram Atassi, head of the Investment Group at CBD, added: “This award shows the ‘trusted advisor’ philosophy we follow is gaining recognition. It is reassuring to see that our approach has been appreciated. At CBD we take a holistic view of our client’s needs, as opposed to an opportunistic and product-oriented one. We aim to provide our high-net-worth clients an all-inclusive and relevant wealth management solution that helps them achieve their individual and family’s long-term financial needs and requirements.” Mr Baltussen added that, “2014 has already seen the bank further consolidate its personal banking strategy with the launch of an innovative, virtual and personalized banking service which will provide customers with a unique experience”. WEALTH MANAGEMENT PLANNING CBD’s wealth planning is designed to serve its clients individually. It uses a holistic approach to wealth management that starts with a relationship manager who carefully reviews a | Capital Finance International

client’s entire financial situation and his / her short and long–term goals. The personal manager then personalises a strategy that helps achieve the desired future outcome. For instance, a personalised plan may offer investment solutions under the Al Dana wealth management programme. Proposals are centred on individual clients as the bank seeks to understand their objectives, risk tolerance and investment time horizon. These are all essential ingredients needed to properly design the perfect solution using, amongst others, the Al Dana range of investment funds. The bank also offers investment solutions that are fully Shari’a compliant. Portfolios are designed using investment products that span a wide range of asset classes and regions and cater to a diverse set of investor types. Aside from the deep knowledge that the CBD bankers can provide, clients are likewise offered additional benefits, including: • Al Dana Royal & Al Dana Platinum - Free life insurance cover, a Marhaba ‘meet & greet’, Marhaba limousine airport transfers, free airport lounge access and other attractive lifestyle benefits. Banking service extras include free cash delivery and pick up at doorstep and free safe deposit lockers. • Exclusive personalised current accounts - Your current account will come with enhanced features, a specially designed Visa Electron card, a higher daily withdrawal limit, and a ‘free-forlife’ cheque book. • Access to best performing funds - Al Dana funds use an open architecture platform which ensures that reputed global fund managers with proven track records manage your money in an unbiased and independent manner. • International reach - Get access to a suite of products and services that meet long-term wealth preservation and management requirements, discretionary and advisory investment mandates, estate and succession planning, offshore banking facilities and other advisory services. • Personalised credit facilities - From overdraft facilities to personal vehicle finance, your relationship manager will ensure a swift loan granting process at competitive interest rates.

Spring 2014 Issue

• 24/7 open electronic channels - Whatever your query, qualified phone banking representatives are always within easy reach. Take advantage of this time-saving option by calling 800ALDANA (800 253262). • Al Dana Lounges - Say goodbye to waiting in long queues. Exclusive, designated seating areas in selected branches allow Al Dana customers to relax and discuss their financial requirements with their dedicated RMs (relationship managers). • Exclusive credit cards - Visa Infinite and World MasterCard, offered only to Al Dana customers, come with exclusive privileges and benefits including Attijari Points under the newly launched customer loyalty rewards programme. “The idea is that our clients have worked hard to earn, protect and grow their wealth. It is our commitment to help them manage their wealth,” said a CBD relationship manager. HISTORY Armed with sheer grit and determination, CBD started out in 1969 and from then on has bloomed to what it is today. A decree issued by His Highness the Late Sheikh Rashid Bin Saeed Al Maktoum, founder of modern

Dubai, laid the cornerstone of Commercial Bank of Dubai. The bank started out as a joint venture of Commerzbank, Chase Manhattan Bank and Commercial Bank of Kuwait. A minority stake was held by a few UAE businessmen. By 1982, little more than a decade later, the bank had evolved into a National Public Shareholding company. A feat complimented by an exponential increase in the capital base and a mammoth restructuring of its operations. Later on, the government of Dubai became a key shareholder. Over the decades, the bank has transformed itself into a progressive and modern banking institution, supported by a sturdy financial base and guided by a strong and stable management team. As a result, the bank’s customers have stood by it, and shown exceptional loyalty, throughout the years. “Today, we are in a position to offer a broad range of retail and commercial banking products and services at par with any other bank in the industry. CBD allows for a banking experience better than the best; with a network of branches throughout the UAE,” CBD says on its website. “In the future, we aspire to take on the financial | Capital Finance International

services industry head-on so as to be able to meet and exceed our clients’ expectations of better interest rates, new services, easier access and state-of-the-art technology.” THE ECONOMY AND THE FUTURE Over the coming months, the improving economic performance of the UAE and others countries in the Gulf region should allow for a stable operating environment for banks. In particular, the ongoing recovery of the local real-estate market should lower the nonperforming loans of banks and thus increase their profitability in the years ahead. That, in turn, should help offset the remaining global economic challenges including the tepid growth of the mature economies of the West. In a press statement late last year, Fitch Ratings said: CBD has delivered consistently healthy profitability, despite challenging, albeit improving, operating conditions. Its strong focus on banking to UAE family-owned business groups provides healthy margins and a low cost/income ratio (H113: 30%) versus peers also underpins operating profitability.” Indeed, the future looks bright for CBD. i 129

> Meets the CEO of Excellencia Investment Management:

Ammar Dabbour Mr Ammar Dabbour started his career in finance in 2001 and has since gained a broad scope of responsibilities ranging from clients’ risk analysis to financial advisor. The different activities undertaken to 2007 gave Mr Dabbour the opportunity to develop strong banking fundamentals in risk, sales, credits, and other areas of operation.


n 2007, Mr Dabbour moved to Luxembourg and became senior client advisor for the MENA Region (Middle East and North Africa) and market / associate director at UBS Wealth Management. Over this period, Mr Dabbour developed a robust knowledge of Islamic finance that allowed him to better serve the markets covered. Mr Dabbour also obtained the Islamic Foundation Certificate and Diploma.

(Gulf Cooperation Council) Region. Eurisbank will service both corporate and retail clients. Private banking services will also be provided. At the request of the Eurisbank’s founders, Excellencia IM is working with Deloitte Consultants to handle all procedures for the establishment of the bank. Regulatory approval has been applied for and is expected to be granted in April.

In 2011, Ammar Dabbour was appointed to head the MENA Desk at KBL European Private Bankers. This enabled him to further develop his network in Arabic countries and gain an understanding of the potential of the MENA market.

Excellencia IM is dedicated to comply fully with the principles of Shari’ah banking. The company focuses on long term investment in private companies combining Islamic private equity and structured financial solutions. From its Luxembourg Islamic hub, Excellencia IM targets Middle East and North African markets which are characterised by a dynamic demographic and boast strong economic growth potential.

“The main objective of the company is to set up the first Islamic bank of the Eurozone.” CEO: Ammar Dabbour

A year later, Mr Dabbour founded Excellencia Investment Management. The company offers Shari’ah compliant services. Excellencia Investment Management provides comprehensive financial assistance to businesses.

operations by the end of 2014. The bank will have an initial paid-up capital of EUR 60m and will have branches in Amsterdam, Brussels, Paris, and Frankfurt.

The main objective of the company is to set up the first Islamic bank of the Eurozone. Eurisbank will be based in Luxembourg and is set to start

Mr Dabbour said that the bank will be owned by members of the United Arab Emirates’ royal family, private investors and a bank of the GCC

The company aims to tap European markets as well for their high level expertise across different sectors. Excellencia IM originates and empowers its deals with an experienced investment team that relies on its own extensive global network. The company designs sustainable and profitable securitization vehicles including certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services. Excellencia IM focuses on project finance, Islamic debt issuance (Sukuk) and cash flow management between European-MENA investors and partners. i

“Excellencia IM is dedicated to comply fully with the principles of Shari’ah banking. The company focuses on long term investment in private companies combining Islamic private equity and structured financial solutions.” 130 | Capital Finance International

Spring 2014 Issue




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> PwC Study:

High Demand for Quality Infrastructure in Emerging Markets By Jonathan Cawood

Relentless urbanisation is driving increased demand for higher quality, more affordable and greener urban infrastructure in emerging and developed markets. The world’s cities are already home to more than half the world’s population, and that number is expected to increase to 70% by 2050. The worldwide demand for urban infrastructure will require an investment of $53 trillion over the next three years according to the OECD (Organisation for Economic Cooperation and Development). Governments and political leaders are more focused than ever on cities and their effect on socio-political issues, provision of basic services, economic development, job creation, health, safety and climate change.


t is in this light that PwC, working with the project economists of Oxford Economics, has issued a research paper, Cities of Opportunity: Building the Future, which examines the subtleties and lessons of urban infrastructure across 27 leading centres of business, finance, and culture. In this study, the city of Johannesburg was assessed together with 26 of its global peers. A number of key factors were considered including the gaps in economic and social infrastructure required to make the world’s cities functional, competitive, safe and sustainable. Cities and towns are much more than a statistical aggregate of population numbers, infrastructure and economic capabilities. The relationship between city infrastructure and urban life is transformative, channelling energy and resources more efficiently into a higher quality of life. Those cities that develop and manage their infrastructure and services through smart longterm and integrated planning will attract the jobs, skills and capital that improve livelihoods. DIRECTIONAL FORCES Cities of Opportunity examines a number of directional forces which impact how cities evolve, prosper or fail. The total population in both advanced and emerging cities is forecast to grow as the urban renaissance in advanced cities and the rural-urban shift in emerging cities continue. The population of emerging cities is forecast to grow at a pace almost three times that of the advanced ones. More people will mean an increased demand for more infrastructure and more services. Over the next decade total GDP is forecast to grow twice as fast for emerging cities with shifts in sectorial focus and hence job types and skills.


Ranking of the 27 Cities of Opportunity for infrastructure. The ranking is calculated by averaging each city’s rank in every infrastructure variable. Source: Cities of Opportunities. | Capital Finance International

Spring 2014 Issue

This requires shifts in the type and availability of infrastructure which underpins this changing economic activity. There will still be a substantial wealth gap between advanced and emerging cities forecast to 2025. This gap is forecast to shrink to 43% by 2025 from the current 25% of advanced-city GDP per capita for emerging cities. A recent World Bank report on urban development states that inadequate infrastructure in emerging cities “can drive up the costs of doing business in urban areas and reduce productivity by as much as 40 per cent. Poor infrastructure is implicated in a host of economic ills and even social pathologies. Writing about Africa, the report states that “for many countries the negative effect of deficient infrastructure is at least as large as that of crime, red tape, corruption, and lack of financing.” For the UN, the five fundamental factors that constitute a “prosperous city” are productivity, infrastructure, quality of life, equity and social inclusion, and environmental sustainability. But when we look closer at the definition of each element, we find that one significantly outweighs all others—it’s the development of infrastructure. Some notable observations arise from the PwC study. Johannesburg performed well across many dimensions when compared to its global counterparts in developing countries including Mexico City, São Paulo, Kuala Lumpur, Istanbul, and Mumbai. In terms of ranking current infrastructure provision, Stockholm ranks first, followed by Sydney and Toronto, respectively. Emerging East Asian cities fall somewhere in between, while Latin American and Chinese cities rank toward the bottom third with Johannesburg, São Paulo, Istanbul, and Mumbai propping up the list. STRUGGLING TO KEEP PACE The study shows that some emerging cities are struggling to keep pace with economic growth as the volume of their infrastructure lags in both adequacy and quality. It seems this is due in large part to a combination of limited financing, a lack of prioritisation, weak planning and deficient management. Housing remains a significant necessity of survival that unites urban centres around the world. A number of developing cities such as Johannesburg and Shanghai rank on the same level as many mature cities. It is not surprising that the greatest demand, in absolute terms, for housing will be in the rapidly growing cities of Beijing, São Paulo and Mumbai. What might be surprising is that New York and London have greater future demand than Johannesburg. Demographic changes that have already taken place will continue throughout the next decade. For example, many emerging cities will need to expand classroom capacity while developed cities will need to expand hospital (and elderly care) capacity as the global population ages.

Author: Jonathan Cawood

The demands for infrastructure will vary from city to city based on stage of development, priorities and affordability. The basic needs for power, water and sanitation, transport and logistics, housing and ICT top the list for most developing cities. The wisdom of the choices cities make in balancing political, social and capital agendas will become even more critical in managing finite financial and environmental resources. Prudent and responsible urban development always assumes a general public benefit. It is up to municipal authorities to take advantage of the many opportunities that exist to provide it, wisely and with foresight for the benefit of current and future generations. Infrastructure is expensive and lasts a long time. If people in a city want buses or subways instead of roads or bridges, or basic services instead of | Capital Finance International

opulent landmarks, frustrating their wishes will also frustrate, and perhaps even undermine, responsible and effective governance. Citizens’ wishes can be evaded for a while—perhaps even a long while—but they will reassert themselves in the end. i

ABOUT THE AUTHOR Jonathan Cawood is head of Capital Projects and Infrastructure for Africa at PricewaterhouseCoopers (PwC). ABOUT PwC PwC firms help organisations and individuals create the value they’re looking for. PwC is a network of firms in 157 countries employing more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services. 133

> Meets the CEO of Al-Waseet Financial Business Company:

Khalifa Abdullah Al-Ajeel Khalifa Abdullah Al-Ajeel is vice-chairman of the board and chief executive officer of Al-Waseet Financial Business Company. Mr Al-Ajeel is also chairman of the board of the Safat-Tec Holding Company (Kuwait) and is vice-chairman of the board of the Kuwaiti First Investment Company. He also is a board member of the Seera Investment Bank in Bahrain.


r Al-Ajeel obtained his bachelor’s degree in business administration from the University of Kuwait. He recently expressed his unlimited gratitude to all the employees of Al-Waseet for their commitment and efforts in keeping the company as the leading brokerage firm on the Kuwait Stock Exchange. Mr AlAjeel added that Al-Waseet does not only seek leadership in its field, but also aims to raise the bar when it comes to the brokerage business in Kuwait. The company continually strives to change the pattern of trading and expand its international client base.

“Reigning at the top of the pyramid amongst its 14 competitors in terms of performance, quality and revenue is no mean feat.” Mr Al-Ajeel detailed some of Al-Waseet’s development highlights as the company maintains its position as the lead brokerage firm of the Kuwait Stock Exchange. Reigning at the top of the pyramid amongst its 14 competitors in terms of performance, quality and revenue is no mean feat. The company has now acquired a 12.5 to 18% market share of the total trading done on the Kuwait Stock Exchange. Al-Waseet has kept its leadership position for the past seven years. Mr Al-Ajeel further explains that Al-Waseet Financial Business Company has gained recognition as an ISO 9001 certified organization for its premier brokerage facilitation and outstanding customer service quality. He also stated that this certification is a testament to the board’s vision to transform Al-Waseet from a traditional local entity to a major international player in the field of financial brokerage. The company has become the centre of a regional brokerage network. 134

CEO: Khalifa Abdullah Al-Ajeel

Mr Al-Ajeel added that Al-Waseet has an expanding client base across different segments, including foreign institutions, and corporations in addition to a large number of other stakeholders in the market. He stated that, “80% of our client base is comprised of businesses of which 10% are foreign-owned.” Mr Al-Ajeel emphasised Al-Waseet’s continued efforts to diversify its client base and keep up with the latest developments in financial markets | Capital Finance International

both domestic and foreign. Mr Al-Ajeel concluded that Al-Waseet Financial Business Company is fully dedicated to maintaining its competitive edge in the market through the unparalleled quality of services delivered to the company’s clients. Excellence in service is mainly achieved through the efforts of an ethical, professional, and dedicated team that works tirelessly to provide clients with the best brokerage service available anywhere. i

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> IFC:

Moving to Green Growth in Emerging Europe, Central Asia and the Greater Middle East By Dimitris Tsitsiragos

As global temperatures rise, weather patterns shift and natural disasters dominate headlines seemingly every other week, climate change has become a priority for policymakers across the globe. But businesses and investors would be wise to put it front and centre as well, because related economic, regulatory, and technological changes offer serious investment opportunities for the private sector.


recent report by the World Bank estimated that investment in renewable energy may need to triple by 2030, from an annual $400 billion to $1.2 trillion, in order to achieve universal energy access. Private sector involvement is not merely welcome, but critical to this effort – the UN estimates that four out of every five dollars of climate change investment will need to come from private sources. [1] The good news is that there is great and growing potential for profitable private sector investment. But where are these investments, and will they deliver healthy returns? The International Finance Corporation (IFC), a member of the World Bank Group focused on private sector development, set out to answer these questions. We commissioned a proprietary analysis of climate-smart investment opportunities in emerging economies in Europe and Central Asia and the Middle East and North Africa (EMENA), the most energy inefficient area of the world. EMENA’s CO2 emissions and energy use are similar to those of North America, but the region has a 35 percent lower GDP. Indeed, for every dollar of GDP, the region consumes more energy and emits more CO2 than any other area of the world. It holds more than half the world’s oil and three-quarters of its gas and is home to the four biggest oil and gas producers (Saudi Arabia, Russia, Iran, and Qatar). Low domestic energy prices lead to inefficient energy use. OPPORTUNITY IN FLAWS These shortcomings represent an opportunity. A forthcoming IFC report developed in collaboration with AT Kearney conservatively estimates a potential $640 billion worth [2] of investment opportunities in EMENA. If regional governments institute many of the regulatory and legislative reforms currently under discussion, this total could top $1 trillion. [3] Across a region as varied as EMENA (which 136

“Ranging from large infrastructure projects in hydro and wind power to smaller opportunities such as LED lighting, all have the potential to attract investment and deliver attractive returns.” includes countries in South-eastern, Eastern, and Central Europe), geography plays an important role. But opportunities exist across the region and in many sectors. Ranging from large infrastructure projects in hydro and wind power to smaller opportunities such as LED lighting, all have the potential to attract investment and deliver attractive returns. Investment opportunities include: • $270 billion worth of potential investments in energy generation. This includes renewable energy ($150 billion), followed by improving transmission and distribution grids ($70 billion) and rehabilitating outdated thermal power infrastructure ($50 billion). • $240 billion worth of potential investments in energy efficiency in the commercial and consumer sectors, through measures such as LED lighting, appliances, and green buildings. [4] Factor in an additional $70 billion in improving water usage and practices in agriculture and at least $60 billion in industrial sectors and the grass starts looking quite green indeed. Little surprise, then, that support for clean power and greater efficiency is on the rise across the region. PROJECTS IN THE WORKS In the Middle East and North Africa, renewable energy investments reached $2.9 billion in | Capital Finance International

2012, up 40 percent from the previous year. Abu Dhabi has committed to sourcing seven percent of its electricity from renewable energy by 2020, and in March launched the region’s largest solar array. Earlier this year, Morocco started construction on a $1.16 billion, 160-megawatt solar project near the desert city of Ouarzazate. It’s only the first phase of a national plan to produce 2,000-megawatts of solar energy by 2020. Tunisia, Saudi Arabia, and Jordan have also launched major wind and solar projects. Energy efficiency – called the ‘invisible fuel’ by some – has gained greater significance and is now firmly on the radar of policymakers. The Russian Federation is the region’s largest energy consumer, but loses more than 40 percent of the energy it generates, which, over a year, is equivalent of the annual energy consumption of France. Russia is looking to boost its energy efficiency and has committed to decrease its energy intensity level per unit of GDP by 40 percent by 2020. Several Balkan governments, including Serbia, Albania, and Bosnia and Herzegovina, have, with IFC’s help, instituted regulatory frameworks favourable to the development of renewable energy. Several East European countries have been influenced by the EU’s 2020 target of 20 percent renewable energy, and the government of Turkey is actively encouraging industrial water conservation. Smart investors are already seizing the opportunities. Supported by international financing (including from IFC), Turkey-based Zorlu Enerji recently completed Pakistan’s first wind farm. The $159 million, 56-MW project launched early this year, producing enough electricity for 350,000 people and cutting C02 emissions by 90,000 tons each year. Zorlu is now scouting sites for its second Pakistan wind project, a 200-MW farm. After a recent $14 million loan, KKS Group, an

Spring 2014 Issue

In Pictures: IFC financing is helping Turkey’s Zorlu Energy build a wind farm that will help alleviate Pakistan’s severe power shortages.

independent district heating utility in Russia, is cutting losses and reducing greenhouse gas emissions by nearly 38,000 tons of CO2 per year. Outside Cairo, an Egyptian-Spanish consortium recently completed a $150 million wastewater facility capable of processing 250 million litres of water per day. The consortium, Orasqualia, expects to make 360 million euros over two decades before handing the facility over to the government. As the most energy inefficient region, EMENA has much to contribute in terms of mitigating the risks of climate change. Dozens of legitimate opportunities across the region can be expected to generate environmental benefits while providing meaningful returns. Given the vast potential and favourable political winds, now is a good time for businesses and investors to seek out the region’s many climate smart investments. i

ABOUT THE AUTHOR Dimitris Tsitsiragos, a Greek national, is IFC’s Vice President for Europe, Central Asia, Middle East and North Africa and a member of its Management Team. He is based in Istanbul. Mr. Tsitsiragos has been a Vice President since September 2011. As VP, he has led IFC’s integrated strategy that aims to create jobs, plug infrastructure gaps, increase access to finance, and tackle climate change. Under his leadership, the Europe, Central Asia, Middle East and North Africa region delivered a record $7.03 billion of investments in 170 projects in fiscal year 2012 (which ended June 30, 2012). Previously, Mr. Tsitsiragos served in various capacities in IFC, including Regional Director for Middle East, North Africa and Southern Europe

based in Cairo where he developed a strategy to support the region’s private sector in the wake of the Arab Spring and Director for Global Manufacturing and Services (GMS) department of IFC which was responsible for IFC’s activities in the areas of tourism; retail and property development; construction materials; the forest products chain; life sciences; and energyefficient machinery. He also served as IFC’s Director of the South Asia department and as Manager of New Investments for IFC’s Eastern/ Central Europe region and Manager of IFC’s Oil & Gas division. Mr. Tsitsiragos holds an MBA from George Washington University. ABOUT IFC IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries. Established in 1956, IFC is owned by 184 member countries, a group that collectively determines their policies. IFC’s work in more than a 100 developing countries allows companies and financial institutions in emerging markets to create jobs, generate tax revenues, improve corporate governance and environmental performance, and contribute to their local communities. IFC’s vision is that people should have the opportunity to escape poverty and improve their lives. | Capital Finance International

References [1] UNDP, Catalysing Climate Finance, 2011. [2] Based on current policies. [3] The figures are based on market research commissioned by IFC, a member of the World Bank Group, to AT Kearney and Eco Ltd. In gauging the opportunity, ATK and Eco based their analysis on a large body of existing research (including World Bank Group and other leading databases, market reports, and research by various associations and international organizations) and many expert interviews. Consolidating this information, they chose a conservative approach to quantify investment potentials across technologies and regions. As such, only investment potentials expected to materialize as commercially viable by 2020 have been included. Hence this number can be interpreted as a lower bound, with substantially higher potential of around $1 trillion possible with the implementation of several government initiatives under discussion in many EMENA countries. Finally, climate-smart business opportunities are economically viable investments that contribute to climate change mitigation and adaption. The criteria for financial viability of these investments differ across technologies and regions, depending on factors such as asset life times and country risk characteristics. [4] By their nature, many energy efficiency opportunities are more distributed and less prone to direct project investments. Therefore, the potential business models and investment structures in this market differ substantially, ranging from credit lines by commercial banks to finance small business investments such as solar hot water heaters to a public-private partnership for waste management and street lighting projects.


> Q&A Bentley Motors’ Stephen Reynolds:

Unchanged Core Values Drive Bentley’s Global Expansion HOW DOES BENTLEY SECURE CONTINUOUS INNOVATION AND TECHNOLOGICAL IMPROVEMENT? With the launch of new models in the coming years, the levels of technologies available will also increase. Our new Flying Spur for example, incorporates incredible technology with touchscreen infotainment, mobile connectivity including Wi-Fi, a rear seat entertainment suite and a new hand-held touch screen remote which allows rear-cabin occupants to control an extensive range of features from the comfort of their seat. An eight-channel, eight-speaker audio system with balanced mode radiators also provides high quality sound of exceptional clarity. We also pride ourselves in being the first luxury brand to present a plug-in hybrid and we are leading the way in bringing new powertrain choice to the luxury automotive sector. By the end of the decade, at least 90% of our production will be available as a plug-in hybrid. WHAT EFFORTS HAVE BEEN MADE TO IMPROVE THE AFTER-SALE SERVICE AND OVERALL CUSTOMER SATISFACTION? Given the nature and level of the products we provide, an exceptional customer experience is a must and a given. For nearly ninety years, Bentley Mulliner has been personalising Bentleys, and an even longer tradition exists of employing the finest craftsmen and -women who are able to turn their talents to creating extraordinary, personalised features for Bentley owners. Whatever the customer chooses, they can be sure of their cars exclusivity. In terms of after-sales services, all Bentley customers receive a call from Bentley Motors within ten days of taking delivery of their car and after any service or repair work. This is meant to ensure that they are entirely happy with their experience and allows us to take recommendations for any possible improvements. These responses are then passed to our dealers and shared within the Bentley organisation to ensure a consistently high performance of the service we offer our customers. WHAT GEOGRAPHICAL MARKETS SEEM THE MOST PROMISING FOR THE FUTURE? Our main markets – Americas, China, and Europe – will continue to be strong but increasingly we will grow our presence in areas such as Russia and Brazil. In 2013, sales were fairly evenly split between 138

Stephen Reynolds: Bentley’s Regional Director for Middle East & Asia Pacific.

our three key regions, the Americas, China, and Europe, including the UK. The Middle East is also becoming an increasingly key region for us and sales already account for 12% of total volume. We know that in the high-end luxury sector, new models drive sales and this is why we invest heavily and continued to do so throughout challenging economic conditions. WHAT ARE YOUR CORE CORPORATE VALUES? Our Brand Vision is to be the most successful luxury brand in the world. Our aim is to deliver cars with a unique combination of luxury and performance as well as to have continuous improvement through our organisation with expertise, passion and pride. We are already the most successful Company in our sector in terms of sales but we aspire to excel in every area of our business. Our Brand Essence is Luxury Performance in everything we do and the way communicate, be it through our cars or our organisation. We continually measure how our brand is perceived and work to broaden our business appeal beyond cars and through strategic external brand partnerships such as Breitling, Pankhurst, | Capital Finance International

The Bentley Home collection of furniture, the Bentley Fragrance collection and also though our Mulsanne Visionaries. HOW DOES THE NEW FLYING SPUR DIFFERENTIATE ITSELF? The original Continental Flying Spur was very much a four-door GT with a very high degree of commonality with its coupe stable mate. The new Flying Spur has a much more distinct identity, standing as a model line in its own right and establishing a new benchmark for luxury performance saloons. This is reinforced by its unique, sleek and elegant design language and the clear emphasis on hand-crafted luxury, comfort and refinement. WHAT ARE THE BUSINESS LESSONS GAINED FROM INTERNATIONAL EXPANSION? It is important to continually monitor world economies and to be flexible in providing the right volumes of the right cars in the right markets. The upper luxury sector is constantly growing and we are always looking to ensure that we provide our customers with the right distribution network for our cars and services. BENTLEY HAS BEEN WORKING TO LOCALISE ITS WORK FORCE IN THE MIDDLE EAST WHAT, KIND OF SKILLS HAVE YOU BEEN TRANSFERRING?

Spring 2014 Issue

In Pictures: Janice Hinson, Marketing Manager for Bentley – Middle East, receiving an award from for Best Customer Satisfaction in front of the new Flying Spur.

“Our aim is to deliver cars with a unique combination of luxury and performance as well as to have continuous improvement through our organisation with expertise, passion and pride.” Our dealers must adhere to the labour relations rules of the country in which they operate and employ a mix of local and international employees as appropriate to the requirements of the job. WE UNDERSTAND THAT MANY COMPANIES HAVE FACED AN UPHILL BATTLE TO LOCALISE THEIR WORK FORCES IS THERE ANYTHING YOU FEEL OTHER COMPANIES COULD LEARN FROM YOUR EXPERIENCES IN THE MIDDLE EAST? While localising the work force is an important part of our commitment to this region, it is also important that all job requirements are met. While like other brands we have faced some challenges, it is an area we see great potential in. It is important that companies think about what they can offer their employees and as much as what the local work force can offer them.

DO YOU FORESEE A TIME WHEN ALMOST ALL YOUR WORK FORCE IN THE MIDDLE EAST IS MADE UP OF LOCAL EMPLOYEES? Our dealers will always recruit according to the labour policy in place at the time. However, with

the mix of both local and international employees, it is important to ensure that we service our international customers, many of whom have homes and businesses in other countries, and expect us to be able to service their requirements world-wide as well as locally.

vehicles are taken in to account so that we can then refine the concept further.

AS A PRODUCER OF LARGE CARS, WHAT STEPS IS BENTLEY TAKING TO LESSEN ENVIRONMENTAL IMPACT? Bentley is envisioning a powerful and even more efficient future. Our commitment to this is highlighted with the Bentley Hybrid Concept – a technology showcase that previews Bentley’s first plug-in hybrid model, which is set to be a dedicated version of the all-new SUV available in 2017. As I mentioned earlier, Bentley will be leading the way as the first luxury brand to present a plug-in hybrid to the luxury automotive sector.

WITH THE EXCITING NEWS OF A NEW BENTLEY SUV IN 2016 DO YOU HAVE PLANS TO FURTHER BROADEN YOUR PRODUCT RANGE? The response from customers shows us that the demand for Bentley to offer this type of model remains very strong and continues to grow. A Bentley SUV will leverage the success of the global SUV market and is a key element of our strategy to sell 15,000 cars per year. This will balance profit and investment in the years ahead and deliver sustainable business growth. This car will appeal to all our existing markets – and has the potential to increase Bentley’s presence in new markets too. It offers a further interpretation of the all-wheel drive Grand Touring luxury Bentley – and is a natural progression for the brand.

HOW DO YOU INCORPORATE FEEDBACK FROM CUSTOMERS INTO FUTURE DESIGN? Bentley continues to listen carefully to our customers across the globe. Their opinions are important to us and their reaction to concept

There is always the possibility we may develop other types of vehicles or derivatives but they would have to be true to the Bentley brand values of luxury and performance. It’s in that spirit that we are entering the SUV market. i | Capital Finance International




Reflections on People Making a Difference in Our World


he heroes featured in this issue are joined by one of their opposites. President José Mujica of Uruguay is actually an antihero – and a most endearing one too. A knight in shining armour though, he is not. For all his transcendent heroic qualities, President Mujica dwells quite unapologetically in the human dimension. He seems genuinely surprised that his unassuming lifestyle – marked by altruism, decency and honesty – is deemed both inspiring and admirable. Mr Mujica is that all too rare gem in politics: A leader aware of his own failings and limitations, and one who refuses to deal in absolute truths or impose upon his nation any dogmatic beliefs. By now the life of the world’s “poorest president” has been well documented: His three-legged dog, the rather dishevelled appearance, a rust bucket for a car and the shack-like home that realtors might describe, with a stretch, as a handyman’s dream – the stuff of legend. These are not merely for show either: Mr Mujica just doesn’t care for the trappings of power. Instead, the Uruguayan president only wishes to do that for which he was elected: Managing the country’s affairs to the best of his ability, ensuring that the fruits of progress reach all its inhabitants. In a way it is sad that we should bestow hero-status on Mr Mujica for what he does is supposed to be the norm rather than the exception. However, the norm for presidents seems to be the monetisation of power as recently embodied by the ousted Ukrainian strongman Viktor Yanukovich who lined his pockets while his nation suffered.


Heroes, of course, come in many forms and sizes. Our current crop features Ai Weiwei, the multifaceted artist from China who refuses to bow to state power or to toe the approved line. Here we have a classical hero of courage and idealism; one who daily dons his armour to question those that ruthlessly wield raw power over life and death. On the opposite end of the hero scale, we present Cristiano Ronaldo from Portugal, a gifted football player who did not allow fame and fortune to cloud his judgment. Mr Ronaldo keeps both his goal-scoring feet firmly on the ground and inspires an entire generation by just adhering to common sense moral goodness. Heroine Fatema Mernissi from Morocco tirelessly battles for women’s rights in the Islamic world by pointing out that Middle Eastern history is filled with female protagonists. Her books on women in the Arab world have lifted the veil to show an otherwise mostly hidden world both fascinating and rich in diversity. In Egypt, Bassem Youssef, a cardiac surgeon turned satirist and television personality, takes the absolutist powersthat-be to task with a laugh and a wink. Needless to say, those in power are generally not amused. Any aspiring sociologist or anthropologist looking for a dissertation topic could do worse than to study the causes of the apparent absence of a sense of humour in those that occupy seats of power. Without further ado, here they are: Our esteemed heroes for the spring issue of i | Capital Finance International

Spring 2014 Issue | Capital Finance International


> MEHRIBAN ALIYEVA With Azerbaijan at Heart - the First Lady Reaches Out For a Better World When Azerbaijan first lady Mehriban Aliyeva travels internationally, minds, people and hearts come together – East and West meet – and good deeds spring out. Mehriban Aliyeva symbolises tireless outreach to women and children. She aims to change the world for the better as she travels her country and further afield as a UNESCO goodwill ambassador and president of the Heydar Aliyev Foundation that is engaged in countless projects aimed at furthering education and healthcare and promoting and protecting the country’s cultural heritage. According to Mrs Aliyeva, the well-endowed foundation pursues “broad and multi-sided” goals that also include environmental care. In Baku, the foundation seeks to bring nature and culture together with a new museum of modern art at the centre of a sprawling development that also includes white sandy beaches, a walkway over the Caspian Sea and a skyscraper designed by US architect Frank Gehry who masterminded such iconic buildings as the Bilbao Guggenheim and the Cinémathèque Française in Paris. Recently, the Heydar Aliyev Foundation unveiled ambitious plans for the funding of social projects aimed at disadvantaged children in Hungary, Romania and other countries of Eastern Europe. In France, the Azerbaijani first lady was awarded the Légion d’Honneur in 2010 by then president Nicolas Sarkozy in recognition of her “outstanding service and loyalty”. Mrs Aliyeva was instrumental in arranging her foundation’s support for renovation projects at the Louvre, Versailles Palace and Strasbourg Cathedral. Mrs Aliyeva is particularly active in support of educational programmes. In Azerbaijan, her foundation now builds and maintains more schools than the government. The foundation has also financed the construction of new hospitals, clinics and retirement homes. Mrs Aliyeva works tirelessly at promoting social inclusion and interfaith dialogue. By focusing on core Azerbaijani values and encouraging the preservation of the country’s rich and colourful heritage, Mrs Aliyeva seeks to strengthen her nation as a regional power for good. Stunning and glamorous yet humble and media-shy, she prefers to let her good deeds do the talking.

“She has placed Azerbaijan as a beacon of dialogue between civilizations and a focus for religious tolerance.” 142 | Capital Finance International

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> AI WEIWEI Free Expression in Art and Politics Curiosity may have killed the cat, but that doesn’t deter Ai Weiwei from asking questions, ruffling feathers and expressing opinions through his peerless art. Apparently, this makes Mr Weiwei a most dangerous man. Chinese authorities seem to consider Mr Weiwei an enemy of the state. They leave no stone unturned in their pursuit of a peccadillo with which to silence the artist. In 2011, a charge of tax evasion failed to stick but did land Mr Weiwei in jail for close to three months. He may still not leave the country because of vague official suspicions. Beijing police obligingly informed that Mr Weiwei may be involved with pornography, bigamy and unlawful foreign exchange dealings. However, no charges have been filed.

The curtailment of his mobility has forced the artist to find other ways of keeping in touch with the wider world. Technology came to the rescue. The Internet has enabled Mr Weiwei to link up with museums, art galleries and patrons who clamour for his work. From his Beijing studio, employees are regularly dispatched to the four corners of the globe to install the works Mr Weiwei has designed. Back home, the artist is being kept under constant watch. His studio, also his home, is surrounded by a small forest of surveillance cameras. Irreverent and not devoid of courage, Mr Weiwei has installed his own impressive network of cameras to snoop on the snoopers. Inside the building, a group of computer-savvy youngsters help the artist transform analogue

thought into digits merging art and politics. Hope for a future free of constraints remains high. “Today’s technology and its ease of access offer people new ideas that bring light to the darkness. We cannot stay dark forever. It’s not possible.” Mr Weiwei doesn’t necessarily blame the Chinese authorities for their reluctance to embrace change. Power is conservative by its very nature and perceives change as threatening. That’s also how the Internet came to play such an important role in Mr Weiwei’s life: “I wish to help people connect through free expression. No matter how unknown or fragile you are, you still need expression. It’s a sign of life and a very powerful one too.”

“Today’s technology and its ease of access offer people new ideas that bring light to the darkness. We cannot stay dark forever. It’s not possible.” | Capital Finance International


> BASSEM YOUSSEF Confronting Power with Laughter and Ridicule “You can’t laugh and be afraid at the same time – of anything. If you’re laughing, I defy you to be afraid.” An elegant an explanation as any of the power of satire, coined by US comedian and television host Stephen Colbert. In March 2011, Bassem Youssef, an Egyptian cardiac surgeon who had assisted wounded protesters at Tahrir Square, started posting a show on YouTube in order to vent both frustration and anger. In The B+ Show, Mr Youssef exposed the hypocrisy and misinformation prevalent in mainstream Egyptian media and poked fun at politicians and other public figures. Episodes were filmed with a handheld camera; a table in his laundry room served as the set. A mural with Tahrir Square battle pictures served as the backdrop. In the first three months alone, Mr Youssef’s YouTube channel attracted over five million views. Three years on, Bassem Youssef hosts the political talk show El Bernameg (The Programme) on regular television. The show handles news stories, political figures, media organizations, and all it touches with the same irreverence and humour as The B+ Show did. Mr Youssef is busy schooling post-Mubarak Egypt in the fine art of irreverence and ridicule toward those in power. He has at his disposal a most impressive arsenal: A viewership regularly numbered in the tens of millions, various newspaper collumns, a twitter feed followed by over two million and a Facebook account boasting some 4.5 million friends. Stylistically the progamme is very similar to its US counterpart The Daily Show. Even some of Mr Youssef’s mannerisms seem based on Jon Stewart. Last October, El Bernameg returned to air its third season. In the meantime, an elected president had been deposed. The country was now controlled by the military. The crackdown they orchestrated against the Muslim Brotherhood saw hundreds of people killed. During the first two seasons of his show, Mr Youssef had been an outspoken critic of the Morsi Administration, and he wasn’t particularly keen on holding back against the new powers that be. The first episode of season three had Mr Youssef mocking the widespread idolization of Egyptian defense minister Abdul Fatah al-Sisi. The very next day, CBC, the network that aired El Bernameg, hurriedly released an exculpatory statement. A bit later, CBC cancelled the show alleging a break of contract. However, in February El Bernameg did return for a second

crack at its third season, this time on the MBC MASR network. Satire is the celebration of irreverence. It is irreverence that ultimately keeps democratic leaders in check and topples despots. Comedians like Jon Stewart, and his Comedy Central colleague Stephen Colbert, may be proud of their country’s satirical tradition which they personify and helped export to the troubled Middle East. Bassem Youssef and Jon Stewart are now close friends and have appeared several times on each other’s shows. Mr Youssef is at the very frontier of funny – an at times dangerous place to be. Since his show first aired, he has been taken to court countless

times, mainly for “insult and defamation”. In January 2013 it was widely reported that a public prosecutor was investigating Mr Youssef on charges of maligning then-president Morsi, whose office claimed that the show was “circulating false news likely to undermine public peace and security.” Later that same year, Mr Youssef was arrested on charges of insulting both Islam and President Morsi. After questioning, he was released on bail. In 2013, Time Magazine named Bassem Youssef as one of its “100 most influential people in the world”. He had been nominated by Jon Stewart.

“You can’t laugh and be afraid at the same time – of anything. If you’re laughing, I defy you to be afraid.” 144 | Capital Finance International

Spring 2014 Issue

> ANDY GREEN Inspiring a New Generation of Engineers

“Riding this beast requires a special breed of speed demon. Royal Air Force wing commander Andy Green not only belongs to that cast; he leads it.” This is not your dad’s sports car. It bundles the power of about 180 Formula 1 racing cars and aims to shatter the speed record on land. The Bloodhound SSC (SuperSonic Car) is being designed to attain a speed of no less than 1,000 mph (1,609 km/h). The vehicle will be equipped with an EJ200 jet engine; a power plant more usually found in the Eurofighter Typhoon plane. Delivering up to 20,250 lbf thrust, this piece of kit is merely fitted to propel the Bloodhound SSC to a speed of about 300 mph (480 km/h). At this point a custom-designed hybrid rocket kicks in, taking the vehicle up to its target speed. A conventional 2.4L V8 Cosworth F1 petrol engine rated at 750 hp provides auxiliary power to the rocket and other on-board systems. Riding this beast requires a special breed of speed demon. Royal Air Force wing commander Andy Green (1962) not only belongs to that cast; he leads it. On October 15, 1997, Andy Green became the first person to break the sound barrier on land. Sitting astride Thrust SSC – a British designed jet-propelled car – Commander Green reached a speed of 763 mph (1,228 km/h, Mach

1.016) thundering across Black Rock Desert in Nevada. Thrust SSC was powered by twin Rolls Royce Spey turbofan jet engines delivering a combined power output in excess of 110,000 hp. The current Bloodhound SSC project entails more than just a lust for speed. It aims to inspire a new generation of students to pursue a career in science, technology, engineering or mathematics. The initiative was the brainchild of Lord Drayson, then minister of state for science and innovation, who in 2008 proposed innovative ways to encourage students to take a second look at the exact sciences, often wrongly perceived as rather boring and the realm of geeks and nerds. An avid amateur racing driver, avowed “car nut”, and currently president of the UK Motorsport Industry Association, Lord Drayson approached Andy Green and Richard Noble, a previous land speed record holder, to enlist their support. While Commander Green is slated to drive the Bloodhound, Mr Noble has taken on overall coordination of the project. Some 5,500 schools in the UK and South Africa receive regular updates on the progress of | Capital Finance International

the Bloodhound SSC project. A vast volume of curriculum material is also made available free of charge allowing students to gain an appreciation for the engineering skills and processes required for a project of this scope. Commander Green regularly visits schools to share his insights and excitement with students. He also receives students at the Maritime Heritage Centre in Bristol where the Bloodhound is assembled. Fittingly enough, this project’s site sits in the shadow of SS Great Britain – the first iron steamer to cross the Atlantic (1845) and one of the many great feats of engineering of legendary Isambard Kingdom Brunel whose pioneering spirit and bold vision are alive and well in contemporary Britain. Andy Green is slated to take Bloodhound SSC for a spin later this year on the Hakskeen Pan in the Northern Cape, South Africa, on a specially cleared, 19 km long track. Here, the vehicle is expected to reach a speed of around 200 mph (320 km/h) which will allow all systems to be thoroughly tested. A date for the speed record breaking attempt has not yet been set.


> CRISTIANO RONALDO Football Virtuoso Equipped with Class and Modesty

“Last year, Cristiano Ronaldo became an ambassador for both Save the Children and the Mangrove Care Forum in Indonesia which aims to preserve that country’s biodiversity.” The embodiment of the superlative, striker Cristiano Ronaldo gathers titles by the dozen: Most Expensive Football Player in History; Most Goals in a Single Season; Fastest Player to Reach 50, 100, 150 and 200 Goals, etc. He’s also a most likeable guy with an ego largely unaffected by his remarkable success on the pitch. That alone is surely enough to make Cristiano Ronaldo a hero in anyone’s book. Currently on the squad of Real Madrid and captain of Portugal’s national team, Cristiano Ronaldo in January 2014 scored the 400th goal of his professional career. Of course, racking up goals is what he does best: Ronaldo is the first player to move the scoreboard forty times in two consecutive seasons. In Spain, he became the first player of La Liga to score against every single opponent in a single season. Cristiano Ronaldo doesn’t merely play well when in possession of the ball; he is a gifted tactician with a sharp mind, excellent vision and, most of all, an expert sense of game development. His anticipatory powers get him at the right spot at the right time. These gifts make the difference between a good player and an excellent one. Contrary to most football players of note, Cristiano Ronaldo keeps a rather off-pitch low profile. His is not a life of wild excess or glitter and glamour. He keeps well clear of controversy and minds his manners. Cristiano Ronaldo is no stranger to philanthropy. He regularly, and quietly, contributes to good causes ranging from a £100,000 (EUR120,000) donation to a hospital on his native Madeira to £830,000 (EUR1m) for schools in Gaza. The latter sum was raised when Cristiano Ronaldo sold the Golden Bot he had won in 2009. Last year, Cristiano Ronaldo became an ambassador for both Save the Children and the Mangrove Care Forum in Indonesia which aims to preserve that country’s biodiversity. SportsPro, a publication dedicated to reporting on the financial side of professional sports, named Cristiano Ronaldo one of the world’s most marketable athletes alongside star striker Leonel Messi of Argentina. Product endorsements earn the Portuguese striker an estimated £12m (EUR14.5m) annually. A professional athlete doing well for himself, his fans and for the wider world may not appear to be that exceptional but when delivered with a smile and in an unpretentious manner, such an athlete becomes a hero.

146 | Capital Finance International

Spring 2014 Issue

> JOSÉ MUJICA At Long Last: A Politician to Admire The South American country of Uruguay does not often make for headline news. It’s a relatively well-developed and prosperous place that quietly goes about its business without making any fuss. Uruguay enjoys a moderate, but sustainable, rate of economic growth. In early 2013, Uruguay became one of only eleven countries worldwide to legalise same-sex marriage. Last December it became the first country in the world to fully legalise the sale, cultivation, and trade of cannabis. José “Pepe” Mujica, the country’s president, did make the headlines as the first Latin American leader to openly speak out against the US-led war on drugs. Taking cannabis out of the legal equation was Mr Mujica’s way of promoting societal peace. Having won the election of 2009 as candidate for the Broad Front, a coalition of leftwing political parties, Mr Mujica has led Uruguay according to the principals of social democracy. He has also brought a rather unique and endearing style to his country’s highest office. Mr Mujica has chosen the path-less-travelled to power and has the bullet wounds to prove it. In the early 1960s he joined the Tupamaros urban guerrilla movement which drew its inspiration from the Cuban Revolution. The Tupamaros were famous for their “Robin Hood” tactics, staging bank robberies as well as targeting businesses only to distribute the loot among the poor of Montevideo. In 1970, Mr Mujica was arrested and sent to Punta Carretas Prison from where he escaped a year later with 110 other inmates, most of whom fellow Tupamaros members. In 1972, Mr Mujica was again detained after a shootout with the police. He was shot no less than six times, but survived to tell the tale. After twelve year of brutal military rule, democracy was restored in 1985. Mr Mujica was released from prison under an amnesty law. In all, he spent 14 years of his life behind bars – two of which in solitary confinement. In 1989, Mujica entered the political fray as the Tupamaros joined other progressive groups in the Movement of Popular Participation, a party which subsequently participated in the Broad Front coalition. Mr Mujica was elected senator in 1999 and became Minister of Agriculture in 2005. Four years after that, he received his party’s nomination as its presidential candidate. He went on to win the election. While many governments around the world speak of austerity, the Mujica Administration is one of the few that actually lives according to the austerity gospel. Indeed, President Mujica truly leads by example: He donates 90% of his $12,000 monthly salary to charity. The remainder pays for the presidential residence: A somewhat dilapidated

“While many governments around the world speak of austerity, the Mujica Administration is one of the few that actually lives according to the austerity gospel.” chrysanthemum farmstead just outside Montevideo. Mr Mujica is now trying to convince his staff that the downtown presidential palace may be better employed as a shelter for the homeless. Mr Mujica’s primary mode of transportation is a beat-up Volkswagen Beetle. Decorum precludes this vehicle to be escorted by a motorcade. Though dubbed the world’s poorest president, Mr Mujica begs, politely, to disagree. President Mujica is an odd combination of the idealistic old revolutionary and the pragmatic contemporary leader. He is quite content with his austere lifestyle. Posturing does not enter the equation: He is genuinely not concerned with material wealth. As a politician, Mr Mujica is weary of market economics and the power of global capital. Although he doesn’t impose his lifestyle on the rest of the country, Mr Mujica still finds | Capital Finance International

much wrong with the world’s fixation on over consumption and materialism. Global politics should offer alternatives to this predatory lifestyle. Yet this conviction is absent from his government’s policies. Mr Mujica is also a pragmatist and presides, progressively minded, over a liberal economy geared for steady growth. Though Mr Mujica probably wouldn’t read this publication cover-to-cover, he still deserves full credit as a CFI hero. Considering the often disappointing calibre of leaders his country and the wider region have produced as of late, this slightly cantankerous, idealistic, incorruptible old Marxist with his live-and-let-live approach isn’t all that bad. In fact, it is pure genius. Pity then that Mr Mujica has said that he won’t be seeking re-election later this year. He would rather open a school on his farm.


> FATEMA MERNISSI Beyond the Veil: A Seismic Shift in Islamic Society An Islamic feminist may seem a contradiction in terms, but Fatema Mernissi is anything but. This Moroccan author and sociologist has made it her life’s work to question the alleged sayings of Muhammad that for some still justify the subordination of women in the Muslim world. It is the discrepancy between these hadiths – sayings attributed to the prophet – and the texts of the Qur’an that fascinate Mrs Mernissi most. In fact, nothing in the Qur’an would seem to indicate that women should be confined to a subservient role in society. From this parting point, Mrs Mernissi attempts to reconcile traditional Islamic faith with progressive feminism. In fact, she argues that faith and female empowerment are not at all incompatible. In her historical research on the role of women in Islamic societies, Mrs Mernissi found that in early Muslim culture women enjoyed equality with their male counterparts in areas such as property rights and spiritual exercise. In The Veil and the Male Elite: A Feminist Interpretation of Islam (1988), Mrs Mernissi profiles the religion’s influential women who today mostly reside in near-oblivion. In Forgotten Queens of Islam (1990), she portrays the life of no less than 15 female Islamic rulers who preceded Benazir Bhutto as heads of government. According to Mrs Mernissi, the distorted gender dynamics prevalent in most of today’s Islamic societies are caused by a refusal to adapt traditional Muslim structures to modern times. However, she sees much reason for optimism as women across the Muslim world slowly reassert their role, using technology to do so. Women are dominant on the 200 or so satellite television channels that have sprung up in Islamic countries and beam views to global audiences. The Internet has opened windows on the wider world as well, facilitating the free exchange of ideas, experiences and initiatives. Mrs Mernissi regrets the emphasis Western societies place on the veil and other traditional garments often considered to be depriving women of their freedom. This fixation, she argues, stops Western societies from fully appreciating the revolution taking place in the Islamic world. Mrs Mernissi sees a “mind-blowing civilizational shift” unfolding that brings the sexes closer together in a meaningful dialogue. A case in point is personified by Mai Al-Khalifa, an anchor lady at the Al Jazeera television network who commands near universal respect. Whenever Mrs Al-Khalifa comes on the screen, people gathered at cafes, eateries and shops grow quiet to listen attentively to what she has to say. “Coming from a society in which belly dancers were the only women to be seen on screen, this is a monumental change,” says Mrs Mernissi, emphasising that Mrs Al-Khalifa is by no means an exception: “Arab audiences are


“Arab audiences are almost universally enthralled by strong, eloquent women showing off their professional prowess on television.” almost universally enthralled by strong, eloquent women showing off their professional prowess on television.” Mrs Mernissi boldly takes this reasoning to a level beyond. She argues that the increasing space women have carved out for themselves in Islamic society actually encourages men to engage in a struggle for liberation against oppressive, authoritarian censorship. As such, | Capital Finance International

power becomes disconnected from sex and a new world – full of possibilities – opens up. The much-maligned veil is today but an outward expression of a faith in search of a new course: It is largely unimportant. Mrs Mernissi now draws attention to more relevant developments in Islamic society that are mostly hidden from view because of our collective obsession with an outmoded garment.

Spring 2014 Issue

> JOSEPH STIGLITZ Defying the Economic Classicists with Logic and Fact Plain reason and simple truth are often easiest to ignore. Why opt for a burst of common sense when a much more elaborate and complex explanation – wrapped in fancy words of learning – may be available? Most politicians, and the pundits who travel in their wake, study the art of evasion long and hard in order to offer meaningless sound bites that use the greatest number of words to say the least. Both reason and truth are often lost in the process. It is therefore quite refreshing when somebody finds the courage – and the words – to state the obvious: Over the last quarter century, people in Europe and North America have experienced a decrease in average personal wealth. In the US, the median income of male workers is now lower than it was forty years ago. European workers are not faring much better. Former World Bank chief economist Joseph Stiglitz, recipient of the 2001 Nobel Memorial Prize in Economic Sciences, is a plain talker and delivers his message in a straightforward, almost punch-like, way. Mr Stiglitz argues that the policies imposed after the 2008 financial meltdown have mostly benefitted banks and their stockholders while society at large is expected to foot the bill, presented in the form of strict austerity. Mr Stiglitz is also one of only a select few economists who steadfastly refuse to let the all-mighty rating agencies off the hook for their pivotal role in the run-up to the meltdown. Though these agencies were instrumental in enabling banks to sell massive loads of junk bonds as prime-quality investment vehicles, their monumental ineptitude – verging on criminal negligence – did not result in a revision of their procedures or, indeed, a reduction of their power. The global economy needs eminent thinkers like Mr Stiglitz to bluntly point out the inconsistencies of its error-prone, business-as-usual ways. As the stock portfolios of the rather self-complacent elites are soaring, the rest of us are being told to adjust for permanently lower standards of living. Young people are waned off outdated notions regarding job availability and stability, living wages, housing affordability and upward mobility. You’re lucky to get a job and shouldn’t push your luck. Time and again, Mr Stiglitz has pointed out that there are plenty other ways to reinvigorate economic life, and by extension social development. For a start, it might be a sensible idea to formulate policy on the fact that

free markets do not exist and neither does the invisible hand Adam Smith conjured. Mr Stiglitz knows little fear when it comes to shattering economic myths. In 2000 that courage cost him his job at the World Bank after he had voiced dissent over the harmful policy guidelines

imposed on the countries of Eastern Europe as they transitioned to market economies. As an economist of both note and daring, and one who refuses to toe the neoliberal line, Mr Stiglitz is undoubtedly a hero in the classical sense of the word.

“Mr Stiglitz is also one of only a select few economists who steadfastly refuse to let the all-mighty rating agencies off the hook for their pivotal role in the run-up to the meltdown.” | Capital Finance International


> WALTER OWEN BENTLEY Refinement Delivered at Speed Born in 1888 in Hampstead, Walter Owen Bentley was the youngest in a family of nine children. Fascinated to near-obsession by mechanical precision and speed, W.O. – as the Benjamin of the Bentley family was known affectionately – burst forth from school at age 16 to become a Premium Apprentice at the Great Northern Railway works in Doncaster; the first rung of a steep ladder that would lead to the exalted position of engine driver. Training was conducted with Victorian thoroughness. It took all of 18 months before the apprentice was allowed anywhere near a steam engine. And then it was only to undertake the most menial of jobs. W.O. studied hard and learnt, hands on, each technical procedure; how to design, cast, make and assemble complex machinery. Much later in life, Mr Bentley commented that “the underside of a car after a few thousand miles is as hygienic as an operating theatre, compared to a locomotive engine in for overhaul”. It took W.O. until the final year of his five-year apprenticeship to realise his lifelong ambition of becoming an engine driver. The happiest time of his life had arrived. However, Mr Bentley’s passion for speed and endurance did not remain confined to the railways. It was his love of motorcycles that spurred him to make an epic drive from Doncaster to London one fateful Saturday. That journey took him through every town and village along the meandering A1. Attaining a top speed of barely 30 mph, W.O. arrived home at around 9 pm having duly demonstrated the true grit and determination he possessed. It wasn’t long before W.O. was entering major endurance races against professional riders and teams. He achieved gold medals in both the London – Plymouth – London and London – Land’s End – London trials. Always the engineer, W.O. was not impressed with the performance of his bikes, or himself for that matter. He spent countless hours tuning his machines and perfecting his riding techniques. Although he cherished great love and affinity for the railways, W.O. soon realised that a career as a locomotive driver would unlikely yield the lifestyle that could meet his growing ambitions. In 1913, W.O. joined his brother Horace Miller Bentley – H.M. – to create “Bentley and Bentley”; a company initially dedicated to selling French DFP (Doriot, Flandrin & Parant) cars. Drawing on his trials experience, W.O. set about using motorsport competitions as a means to market the French vehicles. It was the chance discovery of an aluminium paperweight in the DFP offices that proved key to the company’s success. At the time, aluminium was not considered a metal suitable for use in internal combustion engines due to its low melting point. After


“The underside of a car after a few thousand miles is as hygienic as an operating theatre, compared to a locomotive engine in for overhaul.” much tinkering, W.O. was able to come up with an aluminium alloy able to withstand high temperatures. Pistons made from this alloy were much lighter, and also ran cooler, than cast-iron or steel ones. This allows for significantly higher compression ratios which in turn increases engine power. Installing these pistons in a competition car, W.O. was able to beat off even the strongest competitors, claiming the record in the 2-litre class at the Aston Clinton Hill Climb. The aluminium alloy Mr Bentley discovered took on even greater significance after the outbreak of the Great War when he passed his trade secrets on to the Royal Navy. He was promptly handed a commission in the Royal Naval Air Service and told to give aero engine manufacturers the scoop on his work. Rolls Royce and Sunbeam immediately incorporated aluminium pistons into their designs. However, the French Clerget aero engine plant in Chiswick refused to adapt its designs. Slightly annoyed, the Royal Navy assigned a team of engineers to Mr Bentley who was then instructed to go ahead | Capital Finance International

and design his own engine. In 1916, W.O. unveiled the Bentley Rotary 1 (BR1), followed two years later by the BR2. The first Bentley aero engine proved a resounding success. It replaced the Clerget engine in the Sopwith Camel fighter plane, boosting power to 150 hp while increasing reliability. The BR1 also cost 30% less than its French-designed competitor. The 24.9-litre, nine-cylinder BR2 upped power output to 245 hp and went on to equip both the Sopwith Snipe and Salamander. To this day, the BR2 stands at the very apex of rotary engine development. For his invaluable work, Mr Bentley was awarded an MBE (Member of the Most Excellent Order of the British Empire) in 1920. He also received £8,000 from the Royal Commission on Awards to Inventors. O.W. Bentley and his brother went on to found Bentley Motors Limited. To this day that company closely adheres to the passion that drove its founding father: To deliver speed in ulterior comfort and style.

Spring 2014 Issue

> SHAMI CHAKRABARTI The Need for Loyal Dissent

She was described as “the most effective public affairs lobbyist of the past twenty years” by The Times. In a free society, dissent is a civic duty. The presumed fallibility of those in power leads to a system governed not by men, but by laws – a system of rights and due process. Fear can undermine this system. A scared population might be willing to give up certain rights and freedoms in favour of security. One measure of a democracy in any given society is how it treats its most reviled members. For the UK, prior to July of last year, that member was Abu Qatada. Mr Qatada came to the UK in 1993 and was granted asylum on grounds of the religious persecution he allegedly suffered in his native Jordan. In Britain, he quickly gained notoriety as a “hate cleric”, publicly preaching violence against non-Muslims. In October 2002, Mr Qatada was arrested in south London and taken to Belmarsh Prison, where he was detained indefinitely without charge under the AntiTerrorism, Crime and Security Act 2001. The UK government then wished to deport him to Jordan, where Mr Qatada had been convicted in absentia of conspiracy to carry out terror attacks in 1999 - a conviction based on evidence extracted through torture. In January 2012, after a decade of appeal and on and off detention, the European Court of Human Rights ruled that Mr Qatada could not be deported as that would be a violation of his right to a fair trial under Article 6 of the European Convention on Human Rights. Following this ruling, many Britons including PM Cameron expressed frustration. Public opinion ran strongly in favour of deportation. In the British media, one dissenting voice speaking in defence of Mr Qatada rights was that of Shami Chakrabarti. On the BBC’s This Week, Mrs Chakrabarti, director of the civil liberties pressure group Liberty, raised the question why, despite being detained on and off for ten years, no charges were ever brought against Mr Qatada; and why evidence used against him in the deportation case could not be used to try him in a British court. Mrs Chakrabarti worked as a barrister for the Home Office before joining Liberty in 2001 as an in-house counsel. Since being appointed director

in 2003, she has campaigned for human rights and the upholding of due process. Her frequent appearance on news and debate programmes, as well as in newspaper columns, has gained Mrs Chakrabarti much attention, though not always favourable. She was described as “the most effective public affairs lobbyist of the past twenty years” by The Times and as “the most dangerous woman in Britain” by The Sun. Though Mr Qatada was eventually deported to Jordan, his case brought Mrs Chakrabarti’s heroism to the fore. She bravely and eloquently | Capital Finance International

stated her case in the face of hostile public opinion: Mr Qatada may be a villain, but that does not deprive him of his rights and those rights are worth defending. When a fair trial at home becomes too much of a bother or when due process becomes too much of a hassle for both government and public, we all lose. The law is supposed to be tedious, inconvenient, and – at times - frustrating for those in power. A government that forgets this stands in need of loyal dissenters such as Shami Chakrabarti.


> Jáuregui y Del Valle:

Experts on All Matters Legal in Mexico Jáuregui y Del Valle, S.C. was founded in 1975 and today has become one of Mexico’s foremost multidisciplinary law firms specialised in international business transactions. The firm is a leading practitioner in the areas of mergers & acquisitions, tax and taxation, finance, banking, securities, insurance, antitrust, energy, oil and gas, telecommunications, project finance, infrastructure, equity investments, joint ventures, corporate governance, privatizations, real estate, corporate reorganizations, international trade (including AD/CVD investigations), intellectual property, labour matters, healthcare, restructurings and workouts, transportation, Public Private Partnerships, commercial arbitration, regulatory, commercial and civil litigation and environmental law.


he firm consists of nine partners, and over twenty-five associates, besides five pre-graduate associates which make it one of the leading law firms in Mexico. The firm represents domestic and foreign clients involved in a wide range of joint ventures, investments and economic activities, including industry, trade and services. The firm has consistently implemented innovative transactions and is a market leader in advising highly-regulated entities and in structuring foreign equity investments in those companies. The firm is also a major provider of legal services in all kinds of financings, privatisations of government-owned companies and public services of all types, and in advising and assisting clients in all steps of qualifications for public bid processes and negotiations of procurement, services, infrastructure and other kinds of agreements with government entities. The firm has also advised foreign governmental entities, including the US Department of Commerce, in connection with the negotiation of various chapters of NAFTA. In 1995, the US Department of the Treasury also asked for the firm’s advice in the $20 billion emergency financial package for Mexico. The firm also assisted the US Securities and Exchange

“The firm has consistently implemented innovative transactions and is a market leader in advising highly-regulated entities and in structuring foreign equity investments in those companies.” Commission and represented both the Ministry of Education and the Ministry of Health of Mexico in the design and launch of two of the initial three public private partnerships programmes in the country. Clients’ needs have required the firm to establish working relationships with a number of law firms in the most relevant markets around the world. Mergers & acquisitions constitute one of the firm’s pillars and main areas of legal practice. In this regard, the firm’s representation of Mexican and foreign clients has included legal advice in all aspects of M&As, joint ventures, strategic

alliances, associations, distribution, corporate and commercial law matters, takeovers, divestitures, stock and asset purchases, buyouts, reorganizations, negotiated acquisitions, spinoffs, ESOPs and regulatory matters, including the assessment of antitrust issues, tax, environmental, intellectual property and labour law matters and foreign investment regulation. The competitiveness of financial intermediaries in overseas markets, both in terms of pricing and stability, is greatly enhanced by their power to engage in business without any compromise as to safety standards, efficiency or key product features. One of the most important attributes that distinguishes the firm is the attention paid to the manner in which Mexican courts, that only exceptionally hear disputes concerning crossborder financial transactions, are likely to analyse and perceive those transactions. Our advice to clients, while completely mindful of business objectives and of legal concerns arising in their own jurisdictions, goes well beyond a simple ‘Mexicanisation’ of structures and remains true from the ground up to the Mexican legal framework in the Mexican-bred manner in which it is meant to be understood and applied.

“The firm represents domestic and foreign clients involved in a wide range of joint ventures, investments and economic activities, including industry, trade and services.” 152 | Capital Finance International

Spring 2014 Issue

“The firm has also advised foreign governmental entities, including the US Department of Commerce, in connection with the negotiation of various chapters of NAFTA.” The firm regularly advises some leading financial institutions in the world – including commercial banks, investment banks, finance companies, insurance companies, leasing companies, asset-based lenders, pension fund vehicles and other institutional investors – in connection with their Mexican business. Tax consulting, advice and litigation represent another of the firm’s pillars and main areas of practice (including in federal and local tax and administrative litigations regarding tax assessments, refunds and levies) and is composed of highly specialised professionals with international expertise in cross-border and domestic transactions. It has ample experience in the structuring of investment funds for relevant real estate funds and pension plans, both domestic and international, and provides tax advice to high net-worth individuals, international banks and insurance companies on the design of products for purposes of private client related work and estate planning. The firm has broad expertise in administrative reviews before tax authorities, as well as litigation on nullity petitions and amparo procedures before the Mexican Federal Court of Tax and Administrative Justice, District and Circuit Courts and the Supreme Court of Justice. Its services include the design and implementation of tax strategies, tax consequences of corporate reorganizations and restructurings, consolidations for tax purposes, tax reports, tax litigation, economic and transfer pricing analysis, labour, employment and social security tax strategies and local contributions and constitutional administrative litigation. The firm is a certified socially responsible business and is currently ranked, among others, in Chambers & Partners Global, Chambers & Partners Latin America, IFLR1000, Latin Lawyer 250, Who’s Who Legal, Legal 500 Latin America and Best Lawyers. Its recent distinctions include being named Law Firm of the Year - Mexico by the International Financial Law Review (IFLR) and by the International Legal Alliance Summit & Awards (ILASA). i | Capital Finance International


> Ernst & Young, Argentina:

Tax Reform Affects Stocks and Dividends By Sergio Caveggia and Leonardo Favaretto

On September 23 of last year a law (nr. 26,893) was introduced which significantly amend the Argentine income tax law. It was published in the Official Bulletin.


s an introduction, the main amendments are aimed at levying income tax over the sale of shares and membership interests by natural resident persons and parties domiciled abroad, as well as the distribution of dividends earned by those parties. Part of the amendments introduced by the new law were already known to tax advisors and businesspeople, who were well aware that the income tax exemption over the sale of shares by people and companies domiciled abroad would end soon in view of the continuously increasing tax pressure observed in Argentina in the last few years at federal, provincial and municipal levels. MAIN AMENDMENTS INTRODUCED Below is a brief analysis of the main amendments introduced by the law and a particular focus on the two most significant changes affecting mainly transactions arising from the sale of shares and membership interests, as well as dividend distributions:

Purchase and sale of shares - natural resident persons: • According to Income Tax Law, natural persons shall pay taxes over habitual income, while companies shall pay taxes over habitual and nonhabitual income. • In this sense, a significant amendment introduced by the law intends to levy taxes over capital gains in the case of natural persons, stating that they shall pay taxes over income from the sale of shares, membership or equity interests, securities and bonds, among others, and from the sale of depreciable personal property, even when those transactions were not habitual. • Income from the purchase and sale of shares, membership or equity interests, securities and bonds, among others, shall be subject to a 15% rate. • However, apart from the taxability of shares, the law established an income tax exemption over income from the purchase and sale or disposal of shares, securities and bonds, among others, listed on stock exchanges and securities markets and/or authorized for public offering. Purchase and sale of shares - foreign residents: • Until the law was enacted, natural persons and companies domiciled abroad (foreign residents) were exempted from income tax as to income from the purchase and sale of shares. The law 154

“The issue becomes more complex when both parties, i.e. the stock seller and buyer, are foreign residents.”

In the first case mentioned (presumed income), the withholding to be made shall arise from the following formula: Stock sale price x 15% x 90%.

has abrogated that exemption. • The law has taxed such income at 15%. Below we will make reference to the tax base on which that rate may be applied.

In other terms, the tax shall arise from applying the actual 13.50% rate (15% x 90%) to the sale price of shares and/or equity interests. If, while negotiating, the parties agreed that the stock seller should receive the price free of withholdings, the rate shall be accordingly grossed up to 15.61%.

Distribution of dividends: • According to the law, the distribution of dividends or earnings in cash or in kind (except for shares and membership interests) obtained by foreign residents and natural persons residing in Argentina shall be subject to a 10% withholding.

One significant aspect consists in documenting the withholding assessment and payment to tax authorities. In fact, the issue would not be controversial if the stock buyer was an Argentine tax resident as the new legal provisions could be reasonably implemented.

NEW TAX SCENARIO FOR FOREIGN RESIDENTS As previously stated, until the law was enacted, foreign residents were subject to an exemption on capital gains obtained upon the sale of shares. In fact, section 73 of, Presidential Decree No. 2284/1991, exempted from income tax income derived from the purchase, sale, exchange, barter, or divestiture of shares, bonds, or any other securities obtained by foreign beneficiary natural or artificial persons. Finally, the law abrogates one of the few appealing tax planning tools offered by Argentina to foreign investors.

The issue becomes more complex when both parties, i.e. the stock seller and buyer, are foreign residents.

As the law becomes effective, foreign residents intending to dispose of their equity interests in Argentina shall pay income tax at a 15% rate. Note that income tax shall be settled through a withholding at source to be paid on a single and final basis. Now, which is the applicable tax base?

According to the new legislation, any of the following methods may be chosen: a. Applying a 15% rate over the 90% presumed income, as established by section 93(h) income tax law, or b. Applying the rate at issue over the base arising from deducting from the price paid the expenses incurred in Argentina (including the cost of the shares acquired) by those foreign residents in order to obtain, maintain and keep equity interests, provided that those expenses have been expressly recognized by Argentine tax authorities (actual income). | Capital Finance International

In this regard, the law states that the buyer of shares or member interests shall assess and pay the tax to Argentine tax authorities. Currently, as this new provision has not been regulated yet, it would not be possible to pay the tax to these authorities. This situation clearly generates doubts and uncertainties because there are several cases in which the parties involved in the transaction are unable to comply with a legal provision, which gives rise to a potential risk upon tax authorities’ intention to impose penalties due to the failure to pay the tax levied on the transaction. Another aspect to be considered in this new scenario is whether the sale or disposal of indirect equity interests is taxable. Chart 1 will clarify the situation.

Foreign Holdco "A" Not subject to IT


Foreign Holdco "B"

Subject to IT Opco Argentina

Chart 1

Spring 2014 Issue

The new legislation does not clarify anything in this regard. Consequently, we interpret that, upon the lack of an express provision, income tax shall only be levied on the direct sale and/or disposal of shares and membership interests of Argentine artificial persons. In the particular case of the chart above, the sale of Opco Argentina’s shares by the Foreign Holdco “B” shall be subject to income tax, while Buyer shall pay the tax withheld from the Foreign Holdco “B”. On the contrary, the indirect sale would not be subject to tax. Note that the law does not expressly extend to foreign residents the exemption to natural persons residing in Argentina and selling listed shares. Consequently, it is not yet clear enough whether the sale of Argentine companies’ listed shares by foreign residents shall be subject to income tax. Finally, the potential application of double taxation treaties signed between Argentina and the countries in which the stock seller resides shall be analyzed in each particular case in order to evaluate whether: (i) lower rates set forth by the law are applicable, or (ii) those treaties reserve the tax power in the country where the stock seller resides. Tax on the Distribution of Dividends and Earnings The law introduced a significant amendment to income tax law with respect to dividend taxability. Until the law was enacted, the distribution of dividends was subject to an income tax withholding as a single and final payment known as equalization tax. The name was chosen because the withholding is applied over the distribution of book earnings exceeding accumulated tax earnings. In the event of Currency US$000

Book Income 1.2 1.5 1.7 4.4

Dividends distribution in FY14: Accumulated taxable income FY13: Dividends subject to withholding tax: Withholding tax 35%: Dividends payment:

4.4 3.185 1.215 -425 3.975

FY11 FY12 FY13 Total

surplus, it shall be subject to a 35% withholding or treaty rate. The intention of lawmakers upon implementing such taxation method was to prevent shareholders from availing themselves from exemptions set forth by income tax law for the benefit of the companies distributing dividends. The amount of income subject to the equalization tax to be considered at the time of the distribution of dividends will result from the following calculation: Amount of dividends - Sum of [Income assessed by income tax law - income tax + dividends and earnings received not computed when assessing such income (i.e. dividends from subsidiaries)]. The chart below shows an example of a calculation of the equalization tax on dividends: As previously mentioned, apart from the socalled equalization tax, Argentine companies (corporations, limited liability companies and, in general, all business companies) shall make a 10% withholding when distributing dividends or earnings to natural persons, whether or not residing in Argentina, and artificial persons residing abroad.

in kind, the 10% withholding shall be applied, unless the distribution was made in shares or membership interests (e.g. distribution of bonus shares). Each particular case should be analyzed as to the application of double taxation treaty provisions in order to understand whether the abovementioned withholding percentage limits are applicable. FINAL THOUGHTS The new tax provisions have been clearly enacted for collection purposes. There are still many unanswered questions as to the application of the new provisions under the tax reform that we have analyzed. We have become aware of a draft administrative order that would solve part of these questions. We expect the administrative order and other regulatory provisions to be published soon in order to solve these multiple situations. i ABOUT THE AUTHORS Sergio Caveggia (Partner) and Leonardo Favaretto (Senior Manager) are members of Ernst & Young’s Transaction Tax Department.

It is still pending to analyze whether the 10% withholding shall be applied to the net dividend amount of the potential equalization tax or the gross amount of dividends. We interpret that such percentage must be applied to the earning to be distributed after deducting the equalization tax amount. However, this conclusion must be ratified by the administrative order to be issued by the executive branch. The law states that if dividends are distributed

Taxable Income 2.2 1 1.7

Income Tax -770 -350 -595

Sergio Caveggia

Leonardo Favaretto

Accumulated Taxable Income 1.43 650 1.105 3.185

Table 1 | Capital Finance International


> Ronan Farrow Poised to Reassert Primacy of Reason:

Wit, Knowledge and Intellect Family connections, or at least bearing a name of near-universal acclaim, do seem to facilitate the breaking down of barriers guarding the entrance to the world of fame and its attendant fortune. To the scions of the famous, this is not necessarily a blessing.


NN journalist and anchor Anderson Cooper, grandson of railroad tycoon Reginald Vanderbilt, had to put in quite a bit more than his fair share of work in the trenches of ABC and CBS before gaining recognition for his talents and skills. Others were less fortunate. Chelsea Clinton broke into NBC – a network traditionally not adverse to hiring famous progeny – but went on to fail rather miserably at her job of special correspondent.

time to write a number of well-researched essays that appeared in the pages of Foreign Policy, The Atlantic Monthly, The Guardian, The Wall Street Journal and other publications of distinction. In the ongoing post-marital fight between Mia Farrow and Woody Allen, Ronan clearly stands at his mother’s side repeatedly calling his alleged father a child molester. “He married my sister. This makes me both his son and brother-in-law.” No DNA testing has been done to determine Ronan’s paternity. The issue came to the fore when Mia Farrow last year suggested in a Vanity Fair article that Frank Sinatra may be Ronan’s father.

Now it is Ronan Farrow’s turn. Son of Mia Farrow and Woody Allen, or Frank Sinatra as the case may be, Ronan now presides over his very own, hour-long, daily show on MSNBC. Predictably, the critics went into overdrive. Ronan Farrow was deemed over-excited and too informal. The set’s colour scheme was all wrong and the topics reviewed sleep-inducing. However, the host’s loud voice did keep the audience awake. To employ a colloquialism that Mr Farrow might appreciate: Give the guy a break. After all, Stephen Colbert was but a goofball in the first season of his show. Rachel Maddow, of the eponymous MSNBC show and the first openly gay anchor to host a primetime show on US television, also took some time finding her groove. The Ronan Farrow Daily just needs a moment or two to find its even keel. Ronan Farrow has a lot more going for him than just name recognition. He graduated from college at age 15 and from Yale Law School at barely 21 after which the boy genius became a member of the New York Bar. He’s not adverse to a bit of “humblebrag” either. As a guest of John Stewart on the Daily Show, Ronan Farrow described himself as both a nerd and a failed doctor: “I may be less awesome […than my mom…], but I still want to be of some use. I did have this engrained sense of, gotta go into some kind of public service, and in addition to watching a lot of Netflix also try to give back something.” During his studies, Ronan Farrow worked as an intern at the chief counsel’s office of the House Committee on Foreign Affairs. He inherited his mother’s penchant for international human rights and became a UNICEF spokesperson for youth affairs even before finishing his college education. Young Mr Farrow also gained a profile 156

Ronan Farrow

as a tireless advocate for youth and women caught up in the Darfur crisis. He actively assisted initiatives brokered by the United Nations to bring succour to the torn region. His mother Mia Farrow is of course a long-standing UNICEF Goodwill Ambassador.

“He is amply supplied with the wit, knowledge and intellect required to go against the dumbing-down grain of US television and carve out a haven of informed and open debate.” Upon graduating from Yale, Ronan Farrow joined the Obama Administration in 2009 as an advisor on humanitarian affairs attached to the Office of the Special US Representative for Afghanistan and Pakistan. From there he went on to become special advisor on youth issues to Secretary of State Hillary Clinton. He left this position in 2012 to accept a Rhodes Scholarship at Oxford University. In between, Ronan Farrow found the | Capital Finance International

As an up and coming intellectual of note, Ronan Farrow could do worse than steer away from the ugly and most unbecoming Farrow-Allen mud-slinging dispute. The law says Mr Allen is innocent of any and all charges levied against his person. Should Ronan and his mother happen to think otherwise – they know the way to the court. Not taking that way implies acceptance of the ruling. Now, as far as Ronan Farrow’s new show goes: He is amply supplied with the wit, knowledge and intellect required to go against the dumbingdown grain of US television and carve out a haven of informed and open debate. The United States stands in dire need of a mainstream, primetime forum that takes whacky talking heads to task, exposes ill-informed pundits for the frauds they are, dims the spotlight on extremists and moves the radical fringe out of the picture. Mr Farrow is now uniquely positioned to successfully steer a course of reason and moderation, and to reestablish the primacy of core humanitarian values. Hopefully, Mr Farrow will eventually conclude that folksiness is not a style that suits him particularly well. Addressing viewers as “you guys” and peppering the show with euphemistic f-bombs quickly becomes tiresome. Even in contemporary discourse, formality has a useful place and a like function. Unless he aims to become a joker, Ronan Farrow would be welladvised to adopt a slightly more serious style that better befits the topics his show means to broach. i

Spring 2014 Issue | Capital Finance International


> Solar Power in Brazil:

Waking Up to the Power of the Sun By Wim Romeijn


oosting Brazil’s deficient energy production with large-scale solar power would seem a no-brainer: Both the required vast tracts of land and ample sunshine are available for the taking. Still, with an installed generating capacity of an estimated 17MW, solar power barely satisfies 0.01% of the country’s energy consumption. 158

However infinitesimal at the moment, solar power is definitely on the rise and leading Chinese photovoltaic module maker Yingli Green has taken note. The company already ships some 30% of all solar panels used in Brazil and now aims to become a household name in that country by co-sponsoring the 2014 World Cup. | Capital Finance International

Yingling Green is also supplying the 3,650 mono-crystalline silicon panels used in the construction of Brazil’s largest photovoltaic plant to date: The net-metered 1.5MW solar power facility of Neoenergia in the north-eastern state of Pernambuco – one of the few places in Brazil where local authorities actively support alternative energy projects with fiscal incentives.

Spring 2014 Issue

Brazil has a lot going for it as a host to solar power initiatives. Boasting a well-developed power grid that is easily plugged into, the country also basks in sunshine. Fully half of the Brazil’s 8.5 million square kilometres landmass enjoys a notably high solar incidence (the optimum angle at which the sun’s rays hit photovoltaic panels) during four to six hours a day. This dry fact translates into a most enticing daily electricity generating potential of up to 6kWh / m2. At last year’s energy supply contract auction of the federal government, solar power was but a footnote. However, utility-scale projects were still awarded some 122MW in longterm energy purchase agreements, signalling the willingness of the energy regulator to give solar power a chance to prove itself in a country awash in hydroelectric energy potential. Potential is the key word here. Brazil has plenty of it, but has also lagged behind in the harnessing of its hydropower. The completion, in 1984, of the Itaipu Dam – spanning the Paraná River on the border with Paraguay and still the largest of its kind in the world – was followed by almost two decades of lacklustre, small-scale dam building. Only recently construction fever has returned with 25GW worth of hydropower projects in either the construction or planning phase. The 11.2GW Belo Monte Dam taming the mighty Xingu River in Pará is scheduled for completion later this year. Still, the Belo Monte Dam stands as a testament to the painfully slow pace at which Brazil edges forward with its electricitygenerating plans: The dam has been on the drawing board since as far back as 1975 and was delayed time and again by allegations of corruption and concerns for the environment that resulted in lengthy court battles.

“Brazil has a lot going for it as a host to solar power initiatives. Boasting a well-developed power grid that is easily plugged into, the country also basks in sunshine.”

It is precisely because of this molasses-like pace of progress, that solar power may have a fighting chance in Brazil as a quick fix in places that need a dependable supply of relatively cheap energy even as the economy as a whole is suffering from acute power shortages. Just as it happened thirteen years ago, prolonged drought conditions have now again seen | Capital Finance International

the reservoirs of large hydropower plants drop to critically low levels. The country’s national grid operator ONS (Operador Nacional do Sistema Elétrico) recently sounded the alarm as water levels of the main dams supplying Brazil’s industrial heartland in the south-east shrank to below 30% of capacity. The energy crisis of 2001, still fresh in most people’s memory, saw the introduction of a “volunteer” rationing scheme that recommended users to cut power consumption by at least 20%. People even stopped watching their beloved telenovelas. Those who did not manage to cut power usage by the required amount had their electricity cut off. The crisis eventually abated when the rains returned but not after causing an estimated $26bn of economic damages and impacting GDP growth. The current energy shortfall is being tackled by importing increasing volumes of liquefied natural gas (LNG) at a premium price. This already derailed President Dilma Rousseff’s plans to cut energy prices by 20% this year in a bid to help ease the burden on poorer Brazilians. In fact, the government now mulls energy price hikes instead. Solar power generators are also being helped by a new federal law that streamlines the previously cumbersome process by which smaller-scale energy suppliers can plug into the national grid. This law now enables energy suppliers with less than 1MW of installed capacity to transport and sell their power more easily to the end consumer. Moreover, further legislative improvements are in the offing with a proposed fast-track approval process for solar power generators and a revised fiscal regime for alternative energy producers. Photovoltaic energy is increasingly seen as a valid alternative to the subsidy-slurping thermal energy patches now being applied to stave off power shortages. It offers an exceptional value proposition insofar that solar power projects in Brazil can be quite competitive on the electricity spot market and photovoltaic plants can be erected in a fraction of the time it takes to obtain regulatory approval for more conventional modes of power generation. i


> IFC:

Indonesia Needs Good Corporate Governance By Sarvesh Suri


ndonesia’s economy is facing tough challenges: A slowdown of gross domestic product growth, a depreciation of the rupiah and a tightening of external financing. On the political side, the country is entering a period of uncertainty with upcoming legislative and presidential elections. Moreover, under current market conditions, companies are operating in ever tougher competitive environments.


These developments challenge the attractiveness of the country’s corporates to investors. In this climate, Indonesia needs to restore foreign investors’ trust and redirect their attention to its strong fundamentals: A politically stable country with the world’s fourth largest population, and a young and growing consumer base. One fundamental step to restoring this trust and raising Indonesia’s standing as an attractive | Capital Finance International

investment destination is to shore up the private sector’s corporate governance practices. Earlier this month, Indonesian finance minister M. Chatib Basri rightly pointed out that during the era of easy money foreign investors tend to place their portfolios with less scrutiny. Now that Indonesia is going through a period of economic instability, investors will be more careful. They’ll analyse the business environment with a critical

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eye and examine the level of protection of investors’ rights and other corporate governance practices closely. In this situation, Indonesian companies can build trust by protecting the rights of shareholders and honouring their obligations to staff, investors, suppliers and local communities. They should also institute a competent and independent board that can review management decisions effectively and make roles and responsibilities of board and management public. At home, such good corporate governance builds trust between companies, local investors and other stakeholders. Internationally, good corporate practices send a positive signal to foreign investors that their money will be safe in Indonesian companies. Let’s not forget that Indonesia competes with other emerging market nations for a slice of global capital. Studies confirm investors will pay a premium to own shares in well-governed companies as they tend to perform better. In Brazil, for example, a segment of companies on the stock market, which voluntarily commit to higher corporate governance standards (called Novo Mercado, or New Market), have consistently posted larger gains and experienced less volatility over the past decade. Similarly, the Hawkamah Institute in the United Arab Emirates launched a pan-Arab index of listed companies across the Middle East and North Africa in 2011. Its work shows that the top 10 rated companies in terms of good governance significantly outperformed the market average between 2011 and 2013.

Indonesia: Jakarta

“Studies confirm investors will pay a premium to own shares in well-governed companies as they tend to perform better.”

In short, companies that practice good corporate governance advance their long-term survival and prosperity. A wellperforming company with streamlined internal practices has a positive impact on private sector development. Good corporate governance builds healthy organizations and institutions and leads to sustainable economic growth. With a young population that needs jobs, it is crucial Indonesia adopts long-term ways of building and sharing prosperity among its more than 240 million people. To do just that and place corporate governance front and centre of Indonesia’s | Capital Finance International

economy, the Financial Services Authority (OJK) recently launched with support from the International Finance Corporation (IFC), a member of the World Bank Group focused on private sector development in emerging markets, the Indonesian Corporate Governance Roadmap and Manual. The roadmap defines key principles of governance which will shape the regulatory framework for listed companies. It emphasizes transparency and seeks to strengthen the role of company boards. There is evidence to show that investors gain great confidence in companies that are more transparent and have active boards that are capable of stewarding companies effectively. Complementing the roadmap is the Indonesia Corporate Governance Manual, a benchmark of existing laws and regulations within the context of globally recognized practices. The manual provides practical guidance to Indonesian companies – not just those that are traded on stock markets – on how to implement sound governance practices. Now, as Indonesia’s corporates navigate choppy economic waters, is the right time for companies to improve their practices and prepare for the future. Indonesia’s companies — and the country as a whole — will be all the stronger for it. i

ABOUT THE AUTHOR Sarvesh Suri is Indonesia Country Manager for IFC, a member of the World Bank Group and the largest global development institution focused exclusively on the private sector. ABOUT IFC IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries. Established in 1956, IFC is owned by 184 member countries, a group that collectively determines their policies. IFC’s work in more than a 100 developing countries allows companies and financial institutions in emerging markets to create jobs, generate tax revenues, improve corporate governance and environmental performance, and contribute to their local communities. IFC’s vision is that people should have the opportunity to escape poverty and improve their lives.


> Afghanistan International Bank (AIB):

Solid Growth and Best Practices Grounded in Confidence Afghanistan International Bank (AIB) was founded in 2004 and has since established itself as a pioneering leader in the country’s banking sector. AIB has now become Afghanistan’s most respected and trusted financial institution. At its founding, AIB was the only commercial bank to be set up in Afghanistan in 23 years. The bank is based in Kabul and has its head offices at AIB House.


ince its founding, the bank has built an enduring business that combines international expertise with local knowledge, giving it a deep-rooted understanding of customer needs. This understanding is grounded on the strict application of the highest industry standards and on global best practices.

“AIB is now Afghanistan’s best performing and most respected financial institution.”

Over the past several years the bank has undertaken a number of initiatives aimed at building and reinforcing its institutional edifice. These are focused on four areas: Corporate governance, operational excellence, customer satisfaction and financial stability. In aggregate, the objectives of these undertakings are twofold: (1) to build the leading financial institution in Afghanistan; and (2) to ensure that AIB possesses both the structure and competence to meet the challenges that Afghanistan and the bank might well face over the next several years.

objectives with the corresponding assignment of responsibilities to individual executives through a goal-setting mechanism, as well as preparation of financial budgets. Bonuses paid to executives are closely tied to the bank’s overall performance and each executive meeting his own goals. In 2013, management developed a three year strategic plan to guide the bank through a period of possible volatility. This plan calls for a relatively conservative outcome for 2014 with improved growth expected in 2015 and 2016.

The board has instituted a number of governance improvements that include the defining of clear responsibilities for shareholders, Board of Supervisors and management. The board has been expanded to nine members, five of whom are independent directors. The board also created four committees to address, in depth, issues concerning compensation and succession, strategy and planning, and investments and risk. The committees are headed by board members with vast experience in each of these fields. The bank has also strengthened its planning process, which now includes specific business

REMARKABLE ACCOMPLISHMENTS AIB is now Afghanistan’s best performing and most respected financial institution. The first private bank in the country promoted by a multilateral development finance institution, the bank has recorded substantial gains across all of the most important performance indicators with sound fundamentals in capital, liquidity, profit margins and returns. This is evident in AIB’s 2013 results which show that the bank increased its revenue by almost 20% to AFN 1,965 million (2012: AFN 1,636 m). This is largely due to a 35% rise in fee and foreign exchange earnings to AFN 761

million (AFN 564m) that contributes 39% of overall revenue. Deposits increased by 5% to AFN 45,120 million (2012: AFN 43,142 m) and show a compound annual growth of 55% between 2007 and 2013. Compound revenue growth over the same period reached 30%. The main ratings agencies continue to assign ‘investment grade’ status to the bank’s AFN 7,640 million bond portfolio, of which more than 81% matures in three years or less. Total capital increased from AFN 2,560 million to AFN 2,775 million. Our capital adequacy ratio of 14.0% and 89% liquidity are still very satisfactory, both by domestic and international standards. AIB believes it scores highest of all Afghan banks in its ‘CAMEL’ rating. Our performance in 2013 also achieved prominent international recognition with The Banker magazine ranking AIB Best Afghan Bank for the second year in succession during its annual awards ceremony in London. In 2013 the bank also received a Straight-Through Progressing Award 2012 for excellent quality in the delivery of commercial payments and financial institutional transfers. BROAD CLIENT BASE AIB is the only financial institution in Afghanistan to have two of the OECD countrybased international banking groups – Standard Chartered Bank New York and Commerzbank Frankfurt – as correspondents to provide our customers with speedy international transfers. Julius Baer Zurich and Emirates NBD manage AIB bond portfolios.

“The first private bank in the country promoted by a multilateral development finance institution, the bank has recorded substantial gains across all of the most important performance indicators with sound fundamentals in capital, liquidity, profit margins and returns.” 162 | Capital Finance International

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60000.00 50000.00

40000.00 30000.00

20000.00 10000.00 0.00









Total Assets

operates 35 branches that give it a presence in all main business areas and a comprehensive coverage across the country. AIB serves more than 100,000 customers through business units comprising corporate, retail, e-banking (POS, ATM, mobile banking, Internet banking), and treasury.

Graph 1: Deposits and Total Assets, 2007-2013.

6000.00 5000.00 4000.00 3000.00 2000.00

1000.00 0.00



“While the departure of foreign forces from Afghanistan may cause a period of readjustment, AIB looks ahead with confidence in the future of the country.”

2009 Revenue

2010 Advances





Graph 2: Revenue, Advances and Capital, 2007-2013.


Top-quality information technology is a prerequisite for sustained growth, and AIB operations are based on platforms and systems that are recognised as global best practice for banks. The software used by AIB meets the standards established by the Wolfsberg Group of eleven international banks for anti-money laundering (AML) monitoring. AIB is believed to be the only bank in Afghanistan to operate an automated filtering system that checks accounts and inward and outward transactions against the requirements of OFAC (Office of Foreign Assets Control of the US Department of the Treasury). The bank offers a range of retail banking products and services, such as current accounts, savings accounts, term deposits, payroll services, debit/credit cards, payment services, and online banking.

35.00 30.00 25.00

AIB’s array of corporate banking services is tailor-made to meet the needs of customers in Afghanistan. These services include cash management, trade finance, loans, foreign exchange, and treasury.

20.00 15.00 10.00 5.00 0.00 2007







Graph 3: Earnings per Share, 2007-2013. Ten million bonus shares were issued in each of 2009 and 2011.

AIB is the banker to most leading Afghan business houses and to many international institutions including the United Nations, American and NATO Forces, the embassies of the US, the UK, and Denmark, the Asian Development Bank, the World Bank, Nokia Siemens, Ericsson, United States Agency for International Development, the Deutsche Gesellschaft For Technische Zusammenarbeit, the Japan International Cooperation Agency, the Danish Committee

for Aid to Afghan Refugees, and the Korean International Cooperation Agency. In 2012, AIB acquired the Standard Chartered bank’s operations in Afghanistan and entered into a cooperation agreement with Standard Chartered through which the onshore banking requirements of international aid agencies and global corporate clients operating in the country are now serviced by AIB. The bank now | Capital Finance International

CONFIDENCE IN THE FUTURE While the departure of foreign forces from Afghanistan may cause a period of readjustment, AIB looks ahead with confidence in the future of the country. Following the elections and the signing of the Security Agreement, the bank sees business confidence and activity picking up and expects this to continue for the foreseeable future. AIB does not see the country reverting to pre 2004 days and believes that the considerable achievements in the areas of democracy, women’s rights, and economics will continue. Given the pivotal role of Afghanistan in the political and security stability of the region, the bank expects to see continued international aid to further improve the security and overall development of the country. i 163

> IMF’S Global Outlook for 2014:

Danger of Emerging Markets Capital Outflow Global activity strengthened during the second half of 2013. Activity is expected to improve further in 2014–5, largely on account of recovery in the advanced economies. Global growth is now projected to be slightly higher in 2014, at around 3.7 percent, rising to 3.9 percent in 2015. But downward revisions to growth forecasts in some economies highlight continued fragilities, and downside risks remain. In advanced economies, output gaps generally remain large and, given the risks, the monetary policy stance should stay accommodative while fiscal consolidation continues. In many emerging market and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern. Some economies may have room for monetary policy support. In many others, output is close to potential, suggesting that growth declines partly reflect structural factors or a cyclical cooling. IS THE TIDE RISING? Global activity and world trade picked up in the second half of 2013. Recent data even suggest that global growth during this period was somewhat stronger than anticipated in the October 2013 WEO. Final demand in advanced economies expanded broadly as expected—much of the upward surprise in growth is due to higher inventory demand. In emerging market economies, an export rebound was the main driver behind better activity, while domestic demand generally remained subdued, except in China. Financial conditions in advanced economies have eased since the release of the October 2013 WEO—with little change since the announcement by the U.S. Federal Reserve on December 18 that it will begin tapering its quantitative easing measures this month. This includes further declines in risk premiums on government debt of crisis-hit euro area economies. In emerging market economies, however, financial conditions have remained tighter following the surprise U.S. tapering announcements in May 2013, notwithstanding fairly resilient capital flows. Equity prices have not fully recovered, many sovereign bond yields have edged up, and some currencies have been under pressure. Turning to projections, growth in the United States is expected to be 2.8 percent in 2014, up from 1.9 percent in 2013. Following upward surprises to inventories in the second half of 2013, the pickup in 2014 will be carried by 164

“In emerging economies with domestic weaknesses, the result of tapering could be sharper capital outflows and exchange rate adjustments.” final domestic demand, supported in part by a reduction in the fiscal drag as a result of the recent budget agreement. But the latter also implies a tighter projected fiscal stance in 2015 (as the recent budget agreement implies that most of the sequester cuts will remain in place in FY2015, instead of being reversed as assumed in the October 2013 WEO), and growth is now projected at 3 percent for 2015 (3.4 percent in October 2013). The euro area is turning the corner from recession to recovery. Growth is projected to strengthen to 1 percent in 2014 and 1.4 percent in 2015, but the recovery will be uneven. The pickup will generally be more modest in economies under stress, despite some upward revisions including Spain. High debt, both public and private, and financial fragmentation will hold back domestic demand, while exports should further contribute to growth. Elsewhere in Europe, activity in the United Kingdom has been buoyed by easier credit conditions and increased confidence. Growth is expected to average 2¼ percent in 2014–15, but economic slack will remain high. | Capital Finance International

In Japan, growth is now expected to slow more gradually compared with October 2013 WEO projections. Temporary fiscal stimulus should partly offset the drag from the consumption tax increase in early 2014. As a result, annual growth is expected to remain broadly unchanged at 1.7 percent in 2014, given carryover effects, before moderating to 1 percent in 2015. Overall, growth in emerging market and developing economies is expected to increase to 5.1 percent in 2014 and to 5.4 percent in 2015. Growth in China rebounded strongly in the second half of 2013, due largely to an acceleration in investment. This surge is expected to be temporary, in part because of policy measures aimed at slowing credit growth and raising the cost of capital. Growth is thus expected to moderate slightly to around 7½ percent in 2014–15. Growth in India picked up after a favourable monsoon season and higher export growth and is expected to firm further on stronger structural policies supporting investment. Many other emerging market and developing economies have started to benefit from stronger external demand in advanced economies and China. In many, however, domestic demand has remained weaker than expected. This reflects to varying degrees, tighter financial conditions and policy stances since mid-2013, as well as policy or political uncertainty and bottlenecks, with the latter weighing on investment in particular. As a result, growth in 2013 or 2014 has been revised downward compared to the October 2013 WEO forecasts, including in Brazil and Russia. Downward revisions to growth in 2014 in the

Spring 2014 Issue

Middle East and North Africa region, and upward revisions in 2015, mainly reflect expectations that the rebound in oil output in Libya after outages in 2013 will proceed at a slower pace. In sum, global growth is projected to increase from 3 percent in 2013 to 3.7 percent in 2014 and 3.9 percent in 2015. NOT YET OUT OF THE WOODS Turning to risks to the forecast, downside risks— old ones discussed in the October 2013 WEO and new ones—remain. Among new ones, risks to activity associated with very low inflation in advanced economies, especially the euro area, have come to the fore. With inflation likely to remain below target for some time, longer-term inflation expectations might drift down. This raises the risks of lower-than-expected inflation, which increases real debt burdens, and of premature real interest rate increases, as monetary policy is constrained in lowering nominal interest rates. It also raises the likelihood of deflation in the event of adverse shocks to activity. In emerging economies with domestic weaknesses, the result of tapering could be sharper capital outflows and exchange rate adjustments. Downside risks to financial stability persist. Corporate leverage has risen, accompanied in many emerging market economies by increased exposures to foreign currency liabilities. In a number of markets, including several emerging markets, asset valuations could come under pressure if interest rates rose more than expected and adversely affected investor sentiment. In emerging market economies, increased financial market and capital flow volatility remain a concern given that the Fed will start tapering in early 2014. The responses to the related December announcement have been relatively muted in most economies, possibly helped by the Fed’s policy communication and re-calibration (including revisions to forward guidance). Nevertheless, portfolio shifts and some capital outflows are likely with Fed tapering. When combined with domestic weaknesses, the result could be sharper capital outflows and exchange rate adjustments. Turning to policies, ensuring robust growth and managing vulnerabilities remain global priorities despite the expected strengthening of activity.

Figure 1: Global GDP Growth. (Percent; quarter over quarter, annualised). Source: IMF staff estimates.

In advanced economies, policy priorities remain broadly those discussed in the October 2013 WEO. With prospects improving, however, it will be critical to avoid a premature withdrawal of monetary policy accommodation, including in the United States, as output gaps are still large while inflation is low and fiscal consolidation continues. Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks. In the euro area, the European Central Bank (ECB) will need to consider additional measures toward this end. Measures such as longer-term liquidity provision, including targeted lending, would strengthen demand and reduce financial market fragmentation. Repairing bank balance sheets through the Balance Sheet Assessment exercise and recapitalizing weak banks and completing the Banking Union by unifying both supervision and crisis resolution will be essential for confidence to improve, for credit to revive, and to sever the link between sovereigns and banks. More structural reforms are needed to lift investment and prospects. In emerging market and developing economies, recent developments highlight the need to | Capital Finance International

manage the risks of potential capital flow reversals. Economies with domestic weaknesses and partly related external current account deficits appear particularly exposed. Exchange rates should be allowed to depreciate in response to deteriorating external funding conditions. When there are constraints on exchange rate adjustment because of balance sheet mismatches and other financial fragilities, or large pass-through to inflation because of monetary policy frameworks that lack transparency or consistency in their implementation - policymakers might need to consider a combination of tightening macroeconomic policies and stronger regulatory and supervisory policy efforts. In China, the recent rebound highlights that investment remains the key driver in growth dynamics. More progress is required on rebalancing domestic demand from investment to consumption to effectively contain the risks to growth and financial stability from overinvestment. i

Source: World Economic and Financial Surveys. World Economic Outlook (WEO) Update: Is the Tide Rising? 165

> NordFX:

Looking for - and Finding - Safety in Numbers


n this day and age, the world is ever more interconnected in virtually every sphere of life – political, economic, social and spiritual. We don’t necessarily have to travel in order to meet new people, start a career, hold negotiations, sign a contract, or join a community. Naturally, this shrinking of the world into a virtual village has not eluded the sphere of forex (foreign


exchange). Beyond lending opportunities, that enable and boost the trade in various financial instruments online, forex is fast becoming a global network offering opportunities in the realm of finance and investment to everyone – from rookie to expert. NordFX ( is an international forex broker that, ever since its foundation in 2008, seeks to bring the best and most relevant | Capital Finance International

of opportunities and services to its customers in over a hundred countries. The company offers top-of-the-line tools that assure an impeccable trading experience. Both beginners and professional traders will find here what they need – nine account types with a choice of flexible and advantageous terms along with the most popular and advanced trading platforms. NordFX provides access to 37 currency pairs and precious metals, all traded at narrow spreads.

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One would be quite right to say that there is nothing extra special here. Many other brokers offer similar products and even more. That may be true, but while NordFX offers the “typical” set of high quality tools and services, it also seeks to expand forex beyond the customary and make it attractive even to those who have little knowledge of the business or very little time for learning the ropes. CONQUERING THE LEARNING CURVE It is no secret that many who are interested in forex may at first be overwhelmed and even put off by the steep learning curve that needs navigating in order to become a successful trader. There are an intimidating number of concepts to learn: Fundamental and technical analysis, market trends, waves, channels, Gann angles, Fibonacci levels and, thrown in for good measure, some sort of Andrew’s pitchfork. Besides, it is said the psychological factor plays a big role in trading. How does one wrap one’s mind around all this? As if all this learning is not enough, it turns out that afterwards a trader also needs to carefully watch his charts for these trends, resistance lines and reversal patterns. Luckily, forex is not as black as it is often painted. Once again, all the help can be found online and, unsurprisingly, on specialized social networks. These include tens of thousands of traders from all over the world. Instead of posting likes, epiphanies and vacation pictures, participants on these networks share trading recommendations and signals that trigger currency buys or sells. Sign up to such a network and you get to not only watch more experienced traders work on forex, but copy their transactions in the real-time mode as well. Trades are replicated in your account automatically – all you need to do is to select those traders whose strategies suit you best and then subscribe to their signals. Some forex brokers try to develop their proprietary social networks and focus only on those traders that hold accounts in their companies. With its significant international coverage, NordFX has chosen a different approach. Its customers gain access to the three largest social trading networks at once. If among regular networks we all recognize Facebook, Twitter and LinkedIn, then their forex counterparts will be Currensee, ZuluTrade and MQL5 Signals.

“The last, but not the least, of the perks these social trading networks provide, is that as trading experience and success are accumulated, the user, in turn, can offer trading signals to others and derive extra income from this.”

FOREX SOCIAL MEDIA Currensee, an American trading platform, was launched in 2008 and now connects traders from about 200 countries. Just like in regular social networks, Currensee users create profiles, add friends and communicate with each other. The main attraction here is the Strategies Section where you can view various trading strategies and decide which of them to use in your work.

deposit of a thousand dollars, connects his/her account to the Currensee platform and gets acquainted with its features. Eventually, the customer forms a portfolio by selecting those trade leaders whose performance is of interest and allocates funds to them. After that, these trade leaders’ trades will be copied in the customer’s trading account automatically. The customer preserves full control over the account nonetheless. The second social trading platform of note is ZuluTrade. It requires a smaller minimal deposit – one can start just with $50 and get access to the results of more than 20,000 traders from all over the globe. ZuluTrade works much like Currensee. However, ZuluTrade also offers a number of options for protecting accounts from undesirable major losses, such as the Margin Call-o-Meter, ZuluGuard offering protection from high risks, a limit on the number of open trades, and the scaling down of copied trades. Finally, there is the Signals service from MetaQuotes Software Corp – the developer of the most popular trading platform MetaTrader, now in its fifth version. This convenient and handy service is already integrated in the trading terminals and does not require any additional software. It is also easy to join the network – one registers a NordFX live account and downloads the corresponding trading platform from the company’s website. After logging in, the customer can select signal providers and subscribe to their feeds without ever leaving the trading terminal. One more aspect than can make a forex experience smoother and more successful – if one is ever in doubt over a choice of signal providers, it is always possible to check with the providers’ ranking lists which are compiled on-the-fly through the constant monitoring and updating of trades and thus ensure the availability of relevant performance information. The last, but not the least, of the perks these social trading networks provide, is that as trading experience and success are accumulated, the user, in turn, can offer trading signals to others and derive extra income from this. These innovative and exciting trading opportunities and prospects are made available on the NordFX website and via its trading terminals to all who are willing and eager to make the most of forex and stay connected to fellow traders for a mutually beneficial, and fun, relationship. i

To start, a NordFX customer opens a Currensee account on the NordFX website with a minimal | Capital Finance International


> United Nations Office for Project Services (UNOPS):

Infrastructure to Empower Women On the face of it, building a road is simply about connecting two points. In reality, a road is so much more. A well-placed road can improve access to schools, health facilities and justice services. It can mean a mother making it to a hospital in time to deliver her child. It can also give a woman a quicker, safer route to sell her goods at the local market, or a job as a construction worker.


rom rehabilitating roads in Afghanistan to building health clinics in Sierra Leone, UNOPS (United Nations Office for Project Services) supports infrastructure projects that achieve real progress for people in need, by engaging local communities and empowering the most vulnerable. These infrastructure projects, implemented on behalf of a range of UN, government and other partners, have the ability not just to grow economies but to make a tangible improvement in people’s lives women and girls in particular.

“In particular, UNOPS project managers work to improve gender equality and empower women at all stages of their projects.”

In Pictures: By implementing around 1,000 projects for its partners at any given time, UNOPS makes significant, sustainable contributions to results on the ground.

This improvement starts by constructing facilities for women and girls to access education, justice, and healthcare. But UNOPS realises that a successful road or school is more than just tarmac or bricks. Infrastructure can create livelihoods and empower communities. Working closely with governments and communities, the organization strives to create infrastructure that is truly ‘owned’ by the people it serves. In particular, UNOPS project managers work to improve gender equality and empower women at all stages of their projects. The results of this work are more girls in school, more job opportunities for women, more control over their health and more power over their own lives. This is the true power of infrastructure. HELPING GIRLS GO TO SCHOOL Getting more girls into schools is about more than just building school facilities. That is why high quality projects to build schools consider ‘soft’ inputs such as free school lunches and community engagement. Alongside such inputs, ‘hard’ outputs like the physical design of the building can also make a huge difference. 168

In Pictures: To have the biggest impact during project implementation, UNOPS attempts to source the goods and services needed from local communities. This helps to build skills, boost the economy and empower women, as in this infrastructure project in Haiti.

Photo: UNOPS/Claude-André Nadon | Capital Finance International

Spring 2014 Issue

In many cultures, girls are less likely to be allowed to go school if they have to share a toilet with boys, or if boys can see them entering a toilet. These barriers are easily overcome by speaking with the community and devising a solution, such as erecting permanent toilet screens at schools in South Sudan, which were built by UNOPS with funding from a range of donors. PROVIDING WORK AND BUSINESS OPPORTUNITIES Infrastructure projects can also provide considerable amounts of work for local communities. Labour-based road projects in particular can inject much-needed cash into post-conflict or post-disaster communities while increasing skills and developing capacity.

In Pictures: UNOPS works in some of the most challenging environments in the world, building local capacity and helping communities recover from crisis. Photo: UNOPS/Claude-André Nadon

With the right planning and community outreach, these projects can also attract women into the labour force and provide skills for future jobs. For example, when building roads and shelters in post-earthquake Haiti on behalf of multiple donors, UNOPS emphasised a labourbased approach in order to be able to employ as many Haitians as possible, with a particular focus on female heads of households. This approach empowered women while at the same time ensuring a minimum family income to help improve lives and promote economic recovery. BREAKING TRADITIONAL BOUNDARIES In some cases infrastructure projects can help break traditional boundaries for women. For example, a Swedish-funded road project in Afghanistan wanted to give the community’s women the chance to work on the roads like the men. As this is an area where women traditionally do not work outside the home, outreach officers were employed to persuade local community leaders to agree to let women work.

In Pictures: To have the biggest impact during project implementation, UNOPS attempts to source the goods and services needed from local communities. This helps to build skills and boost the economy. In this project, men from the village of Jabraeel, Afghanistan, learn marketable skills to limit annual flooding. Photo: UNOPS

In Pictures: To have the biggest impact during project implementation, UNOPS attempts to source the goods and services needed from local communities. This helps to build skills, boost the economy and empower women. In this project, Women from the village of Jabraeel, Afghanistan, learn marketable skills to limit annual flooding. Photo: UNOPS | Capital Finance International

This approach was a success and 105 women were trained to screen gravel and weave wire baskets for wall building. This enabled them to both learn a useful new skill and earn a valuable income for their families. The women reported that working as a group also led to the creation of an informal social forum where they could exchange ideas on ways to improve their lives. As well as training women labourers, infrastructure projects can help women create their own businesses. In that same road-building project, construction workers complained of a lack of places to buy food on site. In response, the project helped a group of local women to set up a bakery, which began supplying bread to local workers and bus passengers. This was such a success that five women’s groups were then trained to start similar ventures. One group was engaged to produce protective clothing for the project’s snow clearing crew. The quality of the products led other UN agencies to enquire about buying winter wear from the same group. The wages brought home from these businesses brought a new financial freedom for many of the women. 169

REDUCING DANGEROUS TRAVEL In developing countries, women are often the ones responsible for fetching water for their families, sometimes travelling a long way through insecure areas. In Lakes State in South Sudan, for instance, many women risk their safety by travelling up to four hours a day to fetch water during the dry season. Talking to women to find out their water needs allows project managers to build dams and water reservoirs in the right locations to increase women’s safety, such as in the case of the Lakes State Stabilization Programme in South Sudan. This was coordinated by the United Nations Development Programme in partnership with UNOPS and the World Food Programme, under the state government. Similarly, women in many communities are responsible for getting goods to market. In remote areas this can take many days. Well-planned and maintained roads can cut that time down immensely and give women more time for other uses. For example in the Democratic Republic of Congo, UNOPS rebuilt a road between Masisi and Goma, on behalf of the government of Belgium, reducing travel time from three days to half a day. IMPROVING MATERNAL HEALTH Women’s health is a major issue in development, with many women dying in childbirth or being denied access to contraception that could help them plan their families and better control their own lives.

In Pictures: A project rehabilitating Haitian neighbourhoods destroyed by the 2010 earthquake created more than 15,000 working days, with UNOPS hiring 95 percent of its workforce from the local community. Photo: UNOPS/Claude-André Nadon

As one of the UN Millennium Development Goals, maternal health has received considerable attention and the indicators are improving fast. This is partly thanks to an improvement in dedicated maternal health spaces, such as the integrated pregnancy and childhood centres built in Indonesia by UNOPS on behalf of UNICEF. EMPOWERING EXPRESSION All members of the community have to be engaged in order for development projects to successfully identify needs and provide the required jobs, training and access to services. This includes making a special effort to consult those whose voices are not always heard, such as women in traditional societies. In the Maldives, for example, UNOPS implemented a project to pipe drinking water into people’s houses, on behalf of the government through UNDP, with funding from the Adaptation Fund. To ensure that the outputs met the needs of all family members, the project board consulted members from the islands’ Women’s Development Committees. In countries where there is no such formal representation, female community liaison officers are often hired to seek out local women and meet them at home, to find out their needs and hear their opinions. Ensuring that women’s voices are heard is critical to making a project successful, sustainable and truly inclusive. i 170

In Pictures: Afghan nationals have been recruited and trained from within mine-affected communities under a community-based demining scheme, which has developed national capacity, stimulated economic growth and contributed to a more stable Afghanistan.. The programme is coordinated by the Mine Action Coordination Centre of Afghanistan (MACCA) which is funded by the United Nations Mine Action Service (UNMAS) and implemented by UNOPS. Photo: Jacob Simkin | Capital Finance International

Spring 2014 Issue

SUPPORTING LIFE-SAVING RELIEF OPERATIONS IN SOUTH SUDAN More than 110,000 stranded refugees in South Sudan were able to receive emergency relief after transport infrastructure in the area was greatly improved, with UNOPS support. The Sudanese refugees fled to Maban County in Upper Nile State during 2012, but poor roads made delivering humanitarian aid difficult, especially during the rainy season when roads became impassable. UNOPS was tasked by the United Nations logistics cluster to undertake emergency infrastructure works to create vital access to the refugees. As well as building better roads, UNOPS completely rehabilitated the surface at Maban airfield, creating a new all-weather 1,400 metre runway. The resurfacing was carried out in six weeks and used a labourbased approach that provided much needed income for the local community. These activities were funded by contributions from the European Commission, the United States

ABOUT UNOPS UNOPS mission is to serve people in need by expanding the ability of the United Nations, governments and other partners to manage projects, infrastructure and procurement in a sustainable and efficient manner. As central resource of the United Nations, UNOPS helps its partners deliver their aid and development programmes in over eighty countries. With over 6,000 personnel, UNOPS offers its partners the logistical, technical and management knowledge they need, where they need it. UNOPS partners are currently relying on its proven expertise to increase the speed, cost effectiveness and sustainability of over 1,000 projects. In 2012, 65 percent of UNOPS delivery was on behalf of the United Nations system. UNOPS charges a different rate for different types of projects, depending on a variety of factors including length, location, complexity and expected risk. In 2012, UNOPS | Capital Finance International

government and the Common Humanitarian Fund for South Sudan. With both roads and air routes open, organizations such as the World Food Programme were able to deliver crucial provisions and provide life-saving support in one of the world’s biggest humanitarian operations of 2012. Throughout the project, UNOPS consulted the local community and the government of South Sudan regularly and held weekly meetings with representatives from the relief organizations on the ground, to ensure their needs were met. In one example of the value of such consultation, when preparing to rehabilitate the airfield, UNOPS altered the specifications after talking with pilots from humanitarian organizations operating locally, making the airstrip more fit for purpose while saving the donors money. In another example, UNOPS installed road signs and speed bumps in villages and set up driver training after the new roads led to an increased incidence of unsafe driving.

delivered $977 million in project services and earned $58.8 million in project-related revenue, meaning that administration costs were on average around six percent. JAN MATTSSON – EXECUTIVE DIRECTOR, UNOPS Mr Jan Mattsson joined UNOPS as Executive Director in 2006 and has led the organization through a major transformation. During this period, UNOPS mandate and role in the UN system were clarified by the General Assembly, its core competencies firmly established in line with international best practice standards of performance and the organization was returned to financial sustainability. Mr Mattsson has enjoyed a distinguished career with the United Nations, spanning more than thirty years. Just prior to UNOPS, he served as Assistant Secretary-General and Director of the Bureau of Management of the United Nations Development Programme (UNDP), where he was a leader of change management and organizational reform.


> World Bank Group:

A Promising New Resource for Development The Potential of Sovereign Wealth Funds By Shanthi Divakaran and Christopher Colford

Mobilizing finance for long-term, large-scale direct investment in development is a daunting global challenge. However, a growing and potentially vast source of capital seems poised to transform the process of financing development, reducing poverty and building shared prosperity in some of the world’s lowest-income countries. The wealth controlled by Sovereign Wealth Funds (SWFs), which now command almost $5 trillion in assets, seems destined to become a vital new force in the global financial architecture.


lready deploying more than twice the sum controlled by the world’s private-equity industry, SWFs – if wisely managed and well governed – could emerge as a key driver of global development as their capital is put to work in farsighted investment opportunities. SWFs are government investment agencies, usually established with balance-of-payments or fiscal surpluses – which are frequently created by an influx of revenue from commodity exports. Since SWFs are often motivated by an implicit promise to serve the long-term welfare of their countries’ citizens, their ideals coincide with those of the global development community, which seeks to allow capital to be put to work in ways that will optimize human development, social welfare and sustainable growth. Given their potential for providing substantial South-toSouth flows of Foreign Direct Investment (FDI), SWFs could be a vehicle that delivers “win-win” outcomes – earning substantial returns for their countries, while channelling savings in surplusearning countries toward productive investments that benefit the poorest people. The long-established SWFs of resource-rich countries of the North Sea and Persian Gulf, and of fast-developing financial centres like Singapore, may be today’s best-known investment vehicles, but the SWF landscape goes far beyond the likes of the Government Pension Fund Global of Norway (with more than $700 billion in assets) or Temasek (with about $175 billion). A wave of new SWFs has been set up in recent years – with more than 20 founded since 2005 – thanks to booming prices for commodities exported by developing countries, largely due to new resource discoveries and increasing consuming-country demand for imports. As SWFs become ever more


“Many governments are encouraging their SWFs to increasingly invest in domestic industries and infrastructure projects.” influential, a new array of financial decisionmakers is assuming a prominent position on the global stage. NEW FUNDS Papua New Guinea, for instance, established a SWF in 2012 to invest funds from that island nation’s mineral, oil and gas exports. Nigeria, the largest producer of oil in Sub-Saharan Africa, in 2011 set up a sovereign wealth fund – managed by the Nigeria Sovereign Investment Authority – that has three priorities and thus deploys its assets in three separate compartments: a Stabilization Fund, a Future Generations Fund, and a Nigerian Infrastructure Fund. Nigeria is part of an SWF movement that is increasingly prominent throughout Africa: In the Sub-Saharan region, 31 countries are already dependent on hydrocarbons or mineral resources for more than 25 percent of their merchandise exports – and thus they, along with other countries that continue to discover resource riches, seem likely to deploy their funds through SWFs. The investment choices of SWFs can have farreaching impact. SWFs in developed countries optimize their portfolios based on their own objectives and risk/return and investmenthorizon profiles. These characteristics may lead to investments in long-term development | Capital Finance International

projects in Emerging Markets and Developing Economies (EMDEs). SWFs in resource-rich EMDEs also optimize their portfolios using similar criteria, which may lead to investments in long-term development projects in host countries themselves or in other EMDEs. For many resource-rich developing countries that do not yet have access to global capital markets or are only now emerging onto the global economic stage, revenues from natural resources can provide an important means to finance investments in such public goods as education and infrastructure. DOMESTIC INDUSTRY AND INFRASTRUCTURE Many governments are encouraging their SWFs to increasingly invest in domestic industries and infrastructure projects. Recent examples include the infrastructure fund compartment managed by the Nigeria Sovereign Investment Authority as well as the Angolan SWF, the Fundo Soberano de Angola. This is an understandable course, so long as the investments themselves are directed to projects with positive financial and economic returns and so long as the macro-fiscal and governance risks inherent in making domestic investments is adequately mitigated. However, SWFs in resource-rich low-income countries face challenges of governance and transparency that can inhibit their ability to contribute to and realize returns on investments in long-term development projects. Resourcerich developing countries that face high levels of poverty and privation will surely need to manage their wealth carefully, recognizing that their natural resources are likely to be exhaustible. Moreover, upholding strong standards of governance and designing responsible investment policies will be critical to maximizing

Spring 2014 Issue 12

10 Africa


Australia/Pacific Asia


Europe Middle East


North America South America



Prior to 1980




Through end of 2012

Chart 1: Sovereign Wealth Funds

their long-term investment opportunities and thus supporting sustained prosperity. Looking toward their long-term needs, stewards of SWFs would be wise to seek far-sighted counsel from a range of trusted sources that can provide strategic support beyond the advice available from investment banks, consulting and law firms, and asset-management firms. One such resource to which developing country SWFs can turn for support is the World Bank Group, whose long-term priorities for poverty reduction and sustainable development are in harmony with developing countries’ hopes to soundly manage their resource wealth. Taking a holistic view of each country’s development needs, and focusing on positive long-term outcomes, is essential to making the most of each SWF’s potential.

“In addition, the World Bank Group in 2012 established a secretariat and advisory group to assist SWF leaders worldwide, assembling experts and mobilizing knowledge resources from across the Bank.” Since the World Bank Group carries on a sustained policy dialogue with the government institutions that typically own, manage or oversee SWFs – usually a country’s Ministry of Finance or Central Bank – it is well-positioned to offer strategic counsel, providing expertise in the political-economy implications of SWF-related decisions and detailed knowledge of global best practices. MANAGEMENT AND OVERSIGHT At every stage of SWF management and oversight – from weighing whether an SWF is an appropriate vehicle within the context of each country’s local conditions, to drawing up governance rules and investment policies that uphold strong international standards – the World Bank Group can be a partner with governments in working

through the many challenges that accompany SWF decision-making. Such issues can include judging the macroeconomic context within which an SWF is formed; weighing an SWF’s strategic objectives and realistic goals; aligning the institutional and governance arrangements of the fund; and considering domestic investment strategies. Recognizing the growing potential of SWFs in influencing the contours of development, the World Bank Group has structured a series of mechanisms to help serve the needs of SWFs with assets available for development investing. Within the International Finance Corporation – the private-sector investment arm of the World Bank Group – the IFC’s Asset Management Company now controls about $6.5 billion in assets, with six funds that can co-invest with SWFs and pension funds. For example, the African, Latin American and Caribbean (ALAC) Fund, was set up in 2010 to provide SWFs and pension funds with an opportunity to co-invest with IFC in growth equity investments in developing countries. The portfolio of the $1-billion, 10-year ALAC Fund is now about 40-percent focused on sub-Saharan Africa, with investments in several countries, including Nigeria, Kenya and Uganda. In addition, the World Bank Group in 2012 established a secretariat and advisory group to assist SWF leaders worldwide, assembling experts and mobilizing knowledge resources from across the Bank. By coordinating its engagement with SWFs, the advisory group aims to provide an integrated value proposition for the World Bank Group’s clients and to encourage knowledgesharing. The group reviews draft SWF laws; helps design SWF-related engagements; and facilitates knowledge-exchange about SWFs. With a cross-sector perspective, the secretariat taps into a broad set of experts and considers cross-cutting issues related to SWF design and implementation.

be accessible to SWFs, academic hubs and external practitioners by June 2014. A series of workshops, led by experts who have set up or managed SWFs, has begun helping practitioners build their capacity. Those workshops are expected to be available to SWF leaders who will attend the World Bank and International Monetary Fund (IMF) spring meetings in April and annual meetings in October. In prioritizing the needs of SWFs, the World Bank Group joins other international organizations that have been stepping up their work on SWF-related issues in the context of global development. The IMF also has a longstanding advisory role with the SWF community, having spearheaded the development of the Santiago Principles – voluntary guidelines on SWF best practices – in 2008. An UNCTAD panel on SWFs at the Doha Roundtable in April 2012 sought to explore the potential for SWF investments to promote sustainable development. A Global Sovereign Funds Roundtable in May 2012 focused on development investing and Environment, Social and Governance (ESG) principles. With optimism running high about the prospects for global development, governments and international institutions are focused on the post-2015 agenda, beyond the fulfilment of the Millennium Development Goals process. As new actors and new investment vehicles seek to drive development forward, well-managed and wellgoverned sovereign wealth funds seem likely to be an ever-more-important resource in promoting transformational projects that will help fulfil the global goals of eliminating extreme poverty and promoting shared prosperity. i

Shanthi Divakaran

Christopher Colford

ABOUT THE AUTHORS Shanthi Divakaran is a senior financial sector specialist in the World Bank’s Financial and Private Sector Development Network. She currently manages the World Bank’s Sovereign Wealth Fund secretariat. Christopher Colford is a communications officer at the World Bank’s Financial and Private Sector Development Network. Mr Colford was previously a consultant at Hill & Knowlton Public Affairs Worldwide and a senior editor at McKinsey & Company.

KNOWLEDGE AND NEEDS Pursuing a vigorous knowledge programme, the group has generated case studies on SWFs and has set up an online platform that will | Capital Finance International


> Final Thoughts on Financial Innovation:

Bitcoin - Chronicle of a Failure Foretold By Wim Romeijn


ransaction malleability – a fraudulent, though most lucrative, way of receiving money without anyone actually sending it – is driving another nail into Bitcoin’s coffin. The digital money is by no means dead (yet), and could even perform a Phoenix trick, but its value tumbled all the same as the Tokyo-based Bitcoin exchange Mt Gox early February reported the software-related bug and halted Bitcoin transfers between the virtual wallets it manages and those of other exchanges. The financial geeks of Mt Gox are said to be working with the core Bitcoin software developers to solve the issue that involves hashes and other exciting crypto sciences. As these coders plugged away to plug the hole, the Bitcoin exchange rate slumped to barely $500 from an earlier high of $1,200. Digital currencies should be used only by the strong of heart or – at a pinch – by those who possess more money than they probably should. As Bitcoin jumped and leapfrogged to its all-time high, even some quite respectable pundits got caught up in the excitement, predicting that before long a single Bitcoin could be worth as much as $700,000.

Special Feature

Now that’s financial innovation at its very best: A currency you can’t actually touch or hold in in a wallet other than a virtual one being worth about half of Detroit’s housing stock. You just gotta love it.

“Bitcoin is deflationary money. Its growth is limited to 21 million coins ensuring continued appreciation in value.” geniuses can outsmart the collective intelligence and resourcefulness of the world’s hackers and fraudsters. Examples abound of powerful and cash-loaded companies that have tried – and utterly failed – to outwit this collective ingenuity. Ten or so years ago, Sony invested tens of millions of dollars to secure its music CDs against copying by home computer users. The system the company developed was hailed as a marvel of technology until – merely days after the first protected CDs hit the high streets – some guy in Germany discovered that marking the disc with a felt-tip pen at a spot near the inner rim could defeat the security system. Microsoft has also repeatedly tried and failed at securing its software against hackers. Within a day after its then-CEO Bill Gates pompously declared that Windows 7 could not be hacked because of some supremely nifty security feature, the operating system was cracked wide open for all to use.

You also have to be rather daft in supposing the hash-generating software that underlies Bitcoin to be resistant to hacking when the stakes are that high. When obtaining just ten measly Bitcoins can potentially land a hacker or fraudster seven million in real money, that software is going to be cracked.

This is the Bitcoin conundrum: As the digital currency appreciates in value, the likelihood of it being undermined by hackers-turnedcounterfeiters increases exponentially. The Bitcoin geeks can plug all the holes they want and unleash all might of cryptology, their efforts will prove to be in vain. The most interesting part of this equation is that the best crack will assuredly come in the form of some felt-tip pen, i.e. the simplest of solutions that produce a ‘duh’ moment.

It’s not a question of technical prowess; it’s a philosophical one. No group of crypto geeks and

Now, as such Bitcoin seems a swell idea, especially the part that has central banks and

174 | Capital Finance International

the governments they serve lose their power to manipulate the currency. This certainly appeals to anyone with even a single anarchic gene in their body. However, let’s be careful what we wish for. Yes, the system of fiat money that runs today’s world is bizarre in the extreme. Trillions of dollars and euros are called into existence at the stroke of a pen or the punching of a few keys. This cannot be a good thing for anyone, save for the select few holding that all-mighty pen or keyboard. Fiat money is also inflationary and some people in some countries go wild with that power and inflict serious economic and financial damage. Venezuela comes to mind. As does Mr Mugabe’s Zimbabwe. As Aristotle noted way back when, it is better to rise from life as from a banquet - neither thirsty nor drunken. Bitcoin is deflationary money. Its growth is limited to 21 million coins ensuring continued appreciation in value. That may seem like a good thing, but is actually a damaging feature. Deflation is understood to be a general decline in prices as a function of supply and demand. Why spend today, when your money may be worth more tomorrow? To see what deflation does, just look at the housing market in Spain. Nothing moves because everybody thinks that real estate prices are likely to drop further. Only a fool buys today when he expects a lower price tomorrow. As a result millions of construction workers are idle. One might even say that hackers would do Bitcoin a favour by minting counterfeit coins, by so doing upping inflationary pressure. But in fact, for all its appeal, Bitcoin is merely an interesting, albeit severely flawed, concept. It will be run through its paces, cause both awe and wonder as it moves from low to high and back again, and then ultimately be confined to the outer reaches of the financial world where it will reside in the company of other crackpot ideas such as universal income and unlimited growth. i

Spring 2014 Issue

TESTED BEYOND ENDURANCE The U-2 BLUE is the latest mechanical timepiece from Bremont. Engineered for, and tested by the military. For the rest of us.


Available at Bremont Authorised Dealers. | Capital Finance International

175 Spring 2014 Spring 2014

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