CFI.co Summer 2014

Capital Finance International

Summer 2014

GBP 4.95 // EUR 5.95 // USD 6.95

AS WORLD ECONOMIES CONVERGE

Matteo Renzi, Presidency of the Council of the EU:

VISION FOR JOBS

ALSO IN THIS ISSUE // WORLD BANK: CUSTOMER IS KING // UNCDF: FINANCIAL SERVICES IFC: SMEs IN MENA // WBG: COMMODITY SUPER CYCLE OECD: ECONOMIC RECOVERY // MIGA: ISLAMIC FINANCE

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There’s thinking ahead and there’s thinking beyond.

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For more information visit www.bentleymotors.com. #Mulsanne.

The name ‘Bentley’ and the ‘B’ in wings device are registered trademarks. © 2013 Bentley Motors Limited. Model shown: Mulsanne.

Editor’s Column On Re-establishing the Primacy of Politics The problem is that these traders are not really creating any lasting wealth. Theirs are fortunes that come at a rather significant social cost. The woes recently suffered by Spain, Portugal and Greece made a few smart people very rich but left tens of millions bereft of both property and prospects.

Ailing economies need consumers, not traders nor investors with an attention span measured in milliseconds. Consumers need incomes and thus work. No economy can reasonably be expected to bloom when one in every four available workers is condemned to stay unproductive.

The contemporary world is a fast moving one.

Thanks to the spread of fibre optics, information now travels close to the speed of light. Using powerful computers hooked up to fibre optic networks and some dicey algorithms, high frequency traders raid capital markets on all continents to reap untold billions in easy profits. Today’s agile investors do not much care what kind of securities to hold as long as there are margins to exploit and quick bucks to be made.

Nerds, mathematicians, econometrists and other previously harmless intellectuals at the fringe have teamed up with ruthless money-grabbers to relieve their slightly slower brethren of capital and income. Classicists claim that the dubious practices resulting from this unholy alliance of brain and brawn are a force of good, clearing the system of inefficiencies, weeding out species resistant to change or unwilling to adapt, and redirecting capital flows to sectors geared for future success.

Editor’s Column

The classicists of capitalism are dead wrong.

Fortunes made through mere speculation, corporate raiding, playing the markets and other nonproductive methods merely concentrate wealth into the hands of a select few “takers” while leaving the other 99.9% wondering what just happened.

It is a generally accepted fact that in any given economy, wealth is created not by the big boys, but by the millions of small and medium-sized businesses plugging away behind the scenes.

Nearly everywhere, SMEs provide the lion’s share of jobs and tax revenue. This is where the real money is being made; by the sweat of countless brows.

Yet, few are paying any attention to the importance of small business. As topics, big corporations and agile money tricksters are much sexier. We collectively revel in the exploits of traders who live hard and fast, making money effortlessly.

Who wouldn’t want to have a successful trader’s lifestyle? The wolves have it. The sheep are being eaten for lunch.

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The money to make things right is readily available, however is not being applied to where it’s needed.

Take the European Central Bank’s (ECB) stimulus package of 2012. The ECB disbursed hundreds of billions of basically free money to all banks in the Eurozone with the request they give credit to business. Without exception, the banks turned around and deposited the monies received at the ECB which then proceeded to pay them interest.

Without so much as lifting a finger, Eurozone banks made billions in a risk-free operation that benefitted no one but themselves.

One cannot blame the bankers. Why risk the ECB’s billions on possibly risky business ventures when a safe – and more profitable – alternative was readily made available to them? Bankers are as human as the rest of us.

The failure was systemic. Politicians with vision and determination, not bankers, were needed to push through measures that would see the right thing done. But today’s politicians seem not to care for anything beyond sound-clips, platitudes and soothing words. Only a select few dare stand up and tell the powers-that-be that the emperor has no clothes.

How different from the generation that half a century back decisively grabbed the national destinies of a largely destroyed continent to impose – often by sheer power of will – a vision of shared prosperity.

Then, there was no room or role to play for supremely short-sighted and egotistical traders.

Their petty interests were of no consequence and societies would not tolerate those who insisted on getting rich by playing on razor thin margins or other tomfoolery.

Take Tommy Douglas in Canada. The seventh premier of Saskatchewan (in office 1944-1961), at the time Canada’s most impoverished province, decided that all inhabitants should be entitled to free healthcare and free education. The sorry numbers of his province didn’t match up: The money to implement such a system was simply not there. Nonetheless, Tommy Douglas – named the greatest Canadian of all time in 2008 – went ahead considering that people’s health and education CFI.co | Capital Finance International

Summer 2014 Issue

should not be a monetary issues but a moral one.

It worked and eventually all of Canada adopted similar guarantees.

Around the same time, Prime Minister Willem Drees (in office 1948-1958) did the same thing in The Netherlands. He too considered that universal healthcare, old age pensions and free education were indispensable elements of any civilised society. Money, or the lack thereof, was never an issue.

The austerity imposed today by technocrats and the vision-deprived politicians who follow blindly in their wake harms entire societies, concentrates wealth, and diminishes prosperity. Today’s technocrats and bankers, who have only heard faint echoes of what most consider esoteric Keynesian philosophy, cling to the notion that money rules and is, as such, an end in itself. It does not and is not.

Money is merely a medium of exchange much like the unwieldy Rai stones once were on the Pacific island of Yap. Sovereign societies and their destinies are emphatically not ruled by money and those who seek to gather as much of it and possible and then some. Societies are ruled by their people for the common good. Politicians, duly elected to public office, carry out the mandate received from the people. Traders, bankers, investors and corporate bigwigs are not elected to any office and, thus, are subject to the rules set by the representatives of the people.

Forget, as we seem to have, this simple fact at your peril. Money and money matters should again be relegated to a lower plane. The primacy of politics must be re-established lest we wish to court disaster. Societies where up to 75% of the wealth is owned by less than 1% of the population are asking for trouble. Common people will put up with such distortions for some time, being fed on crumbs and morsels falling off the dining table, but they will not stand for this eternally. There is a breaking point out there somewhere and we should not wish to come anywhere near it.

Wim Romeijn Editor CFI.co CFI.co | Capital Finance International

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Editor’s Column

Policies are urgently required in Europe and elsewhere to return the money men to their rightful, and respectable, place – a few rungs down the food chain from their current lofty position. There is an urgency to this for the concentration of wealth into the hands of ever fewer people is picking up pace.

The logical conclusion is that the breaking point is coming ever closer. The world is moving very fast indeed.

> Letters to the Editor

“ “ “ “

Economic development is fuelled by energy, and plenty of it. It is one thing for Europe to switch to renewable energy sources, but Emerging Markets may not be able to generate the required energy by environmentally sound methods. These methods often need vast outlays of cash that are simply not available.

While it is worthwhile to investigate alternative energy sources and use them in more prosperous countries, emerging markets need cheap and reliable sources of energy now in order to lift people out of misery. Environmental expediency is not (yet) a universally applicable concept and nor should it be. Combatting hunger, disease, illiteracy and under development should be at the top of any global agenda.

SALVATORE CAPORALETTI Milan (Italy)

It is a welcome sign that not all British manufacturing has moved overseas.

Thank you for featuring Bentley Motors in your spring issue for it cannot be emphasised enough that British workers, when given the chance, are capable of competing against any and all comers. Their craftsmanship is unsurpassed. It is a shame that most British and indeed western industrialists have opted for the easy route and moved production to low-wage countries. While this may be a boon to China, Mexico and others, highly-qualified, dedicated and willing workers in the UK are left to flip burgers or live on the dole. I congratulate Bentley Motors for maintaining its unwavering trust in the British worker.

NIGEL DAVIS Bristol (UK)

Congratulations on an eye-catching and very readable issue of CFI! I immediately perused all 176 pages, and was impressed with the range of issues covered, and the depth of discussion. I paid also special attention to your profiles of heroes and heroines. Your publication supplies helpful information and perspective to us.

STEVAN M. HORNING Washington, D.C. (USA)

Thank you for naming Uruguayan President José Mujica one of your heroes. You couldn’t possibly have picked a better, and indeed more heroic, man. President Mujica is not just an able administrator; he is also respectful of others and has never avoided debate or imposed his will on the nation, arbitrarily or otherwise. José Mujica’s popularity derives from his love of liberty and his sense of modesty. This is a man who remains keenly aware of his own fallibility, high office notwithstanding.

NELSON CABRERAS Punta del Este (Uruguay)

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National Gallery, London

Summer 2014 Issue

“ “ “ “

The article on the future of the emerging markets, now that the developed world has recovered from the 2008 financial meltdown, was most timely indeed. The BRIC countries are no longer seen as tomorrow’s super powers. Some are suffering from lacklustre investment levels, net capital outflows and other ailments that point to a rather bleak future. Brazil remains tomorrow’s promise unfulfilled; Russia is but a bear running amok; and India seems to be falling asleep at the wheel. Only China keeps growing, but its days as an engine of global growth may be numbered due to dicey financial practices. Nothing has changed really.

ABE CHUKWU Lagos (Nigeria)

Bitcoin proved to be a one day wonder.

It is fast going the way of the dodo. Some may see in this a conspiracy of central bankers and governments eager to keep monetary control. I don’t. Bitcoin was a rather silly idea from the get-go.

Its built-in deflation was a recipe for disaster. As a global reserve currency, bitcoin would have plunged the world into a prolonged depression. The only way out would have been to reintroduce inflationary money. The hackers who got rid of bitcoin did us all a favour. They are the unsung heroes of our time – only you’d probably never know.

EVA MEHRA New Delhi (India)

You have reported extensively on plans to build huge solar power plants in the sun-drenched countries of North Africa that could provide cheap renewable energy to the countries of Europe. If I’m allowed to say: These plans are quite silly. Isn’t it bad enough that Europe depends to an alarming extent on natural gas supplies from Russia? Are we in Europe to switch from one unruly provider for another one? Most countries of North Africa have just experienced severe civic upheaval.

While Europe should do all in its power to promote democracy and good governance in North Africa, it would be unwise to mortgage the continent’s future to energy supplies from this region.

DIETER KLEIN Münster (Germany)

Your spring feature article on the little bourse that could offered a most inspiring reading experience. It is refreshing indeed to see that a cando attitude survives and thrives in a place such as Bahrain. The example of the Bahraini bourse, and the spirit in which it is run, deserves emulation elsewhere in the world for it shows how setbacks and lack of size may be easily compensated for by resourcefulness, decisive action and excellence in governance. Thus, the Bahraini Bourse offers a case study in how to overcome challenges considered quite unsurmountable elsewhere.

EDWARD MUNSI Kuala Lumpur (Malaysia)

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

Editorial William Adam Ivan Chapman Diana French David Gough-Price Hilary Hunt Ellen Langford John Marinus Sebastian M. Svensson

Distribution Manager Len Collingwood

Subscriptions Maggie Arts

Commercial Director Jon Gerben

Publisher Mark Harrison

> COVER STORIES World Bank Group: Commodity Super Cycle to Stick Around a Bit Longer (14 – 17)

OECD: Achieving a Resilient Economic Recovery (24 – 25)

Matteo Renzi: Vision for Jobs (38 – 44)

IFC: Overcoming Constraints to SME Development in MENA Countries and Enhancing Access to Finance (104 – 107)

Chairman Tor Svensson Capital Finance International Meridien House 69 - 71 Clarendon Road Watford Hertfordshire WD17 1DS United Kingdom T: +44 203 137 3679 F: +44 203 137 5872 E: info@cfi.co W: www.cfi.co

MIGA: Islamic Finance - A Growing Source of Capital for the Developing World (118 – 120)

World Bank: “Customer is King” – Toward More Effective Development?

(166 – 168)

UNCDF: Connecting Poor People to Formal Financial Services Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers www.magprint.co.uk

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(170 – 173)

CFI.co | Capital Finance International

Summer 2014 Issue

FULL CONTENTS 14 – 25

As World Economies Converge World Bank

Nouriel Roubini

Joseph E. Stiglitz

Chairman’s Column

Robert J. Shiller

OECD

26 – 37

Diaspora Ten

38 – 65

Europe Matteo Renzi to the Rescue?

European Policy Centre

European Commission

Norton Rose Fulbright

European Federalist Party

66 – 77

CFI.co 2014 Awards

Rewarding Global Excellence

78 – 97

Africa

PwC

FACRA

SSF Entrepreneur

Christopher Colford

Dunn Loren Merrifield Advisory Partners

98 – 129

Middle East

Mohammed Al Maktoum

QIIB

Path Solutions

IFC

Renaissance Services

Grant Thornton

Fortress Investments

Jordan Dubai Islamic Bank

MIGA

Farazad Investments

Strategy&

INVESTBANK

130 – 141

Editor’s Heroes Ten Men and Women Who are Making a Real Difference

142 – 149

Latin America

Ernst & Young

150 – 165

Asia

XacBank

The IT Scene in China

Makhtag

Chinese Film Industry

Green Delta Securities

Mongolian Mortgage Corporation

166 – 174

Emerging Economies Perspective

World Bank Group

Banco del País

UNCDF

CFI.co | Capital Finance International

The European Conundrum

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Chairman’s Column Welcoming a New Vision for Jobs unemployment). The inclusion of less internationally competitive euro-countries has depressed the euro’s exchange rate from the onset. Without the euro, the Dutch and Germans would have seen their guilder and marks appreciate in value to the detriment of their exportled industries. The Dutch, the Germans and a select few others have benefitted massively from the euro.

In the EU as a whole, unemployment is “only” 10.6%. In the euro area 11.9% of the workforce cannot find gainful employment. The euro is a straightjacket (individual countries can no longer devalue their currency at will) on the less competitive economies whose manufacturing ability and innovation are negatively affected. Economies with a historic bias towards services such as tourism, real estate, and agriculture are saddled with high price levels and cost from euro-caused inflation, while suffering low productivity and decreased competitiveness.

How refreshing the new mandate for change in Europe that voters awarded Italy’s young Prime Minister, Matteo Renzi. Much the new kid on the block, Mr Renzi calls Merkel an “old boring aunt” and is not in the least afraid to oppose austerity. Instead, he favours “fiscal flexibility” and proposes policies that stimulate growth and create employment.

Chairman’s Column

Renzi wants to reduce payroll taxes – including for low paid workers – and a reduction in corporate rates. Both are sensible proposals which have proven successful in the UK in terms of job creation. Also, Mr Renzi favours boosting public investment in such areas as education.

We know from experience that public investments really do have a positive impact on the overall economy with significant spill-over and multiplication effects. Scholars, such as Mr Thomas Piketty, have proven beyond any reasonable doubt that the reigning faith bias of the fiscal neo-conservatives brings more harm than good.

Germany’s businesses enjoy a healthy growth of profitability as expressed by the ever rising DAX stock index. Italy, meanwhile, has suffered from sclerosis for quite some time now. For over half a century, Italy’s growth rate has amounted to less than 1% annually.

Youth unemployment stands at 42%. Such horrific statistics mask the even harsher realities in the southern part of Italy.

Italy is a microcosm that mirrors Europe’s North-South wealth divide. In Italy, as in Europe, the competitive and industrial north resents having to pay for the “lazy” south.

In Europe, wealthy northern countries such as Germany and the Netherlands increasingly resist the redistribution of their tax revenue to make up for deficiencies in the poorer southern PIGS (Portugal, Italy, Greece and Spain).

That said, the euro has so far been a boon for Germany (6.7% unemployment), but not for Italy (almost 13% 12

Prior to the introduction of the euro, the Spanish peseta would be regularly devalued so that, say, waiters could keep their jobs serving cheap beer to parched visitors.

Now that beer is no longer a bargain while the waiters have to compete for the remaining jobs with less expensive and possibly harder working staff from Eastern Europe. The Spanish waiter may not relocate to Germany – but that’s where the jobs are.

Both the UK and the US have in the past effectively used currency depreciation and government budget deficits (fiscal flexibility) to boost their growth in times of trouble.

Those options are not available to the PIGS. They have no other option than to devalue internally - cut both salaries and costs - while simultaneously implementing austerity measures imposed by foreign creditors. Where is the hope for employment? If the Greeks really dislike Germans these days, it is but a small wonder.

There are other important elements besides currency valuation that contribute to increased competitiveness.

Critical factors include access to finance, innovation, education, SME growth and good governance. These tend to be more pronounced in Europe’s north.

With a banking system quite unfit for the purpose, and banks shrinking their balance sheets, new non-bank business finance is required to stimulate job growth and SMEs. Venture capital, syndication, private placement, shadow banking, and mini-bonds used by SMEs to raise funds.

The current austerity policies perpetuate and sustain the gap in competitiveness between Europe’s north and south. Derailed real estate markets that detract wealth rather than create it, and lacking investments in education and infrastructure, remain impediments to progress of any sort.

Meanwhile in Germany, business is booming. German companies - the larger ones in particular - enjoy easy access to low cost capital with the ECB conveniently located in Frankfurt. But the periphery and smaller CFI.co | Capital Finance International

Summer 2014 Issue

businesses do not enjoy such easy terms of credit with which to finance growth. The banking system is not geared to providing SMEs with the capital needed as a result of which these businesses miss out on a great many opportunities and fail to create jobs.

In prior CFI.co editions (Spring 2014 issue), Professor Michael Pettis explained how the reluctance of private Germans to consume per definition exports unemployment to other countries. The German excess savings creates a current account surplus which in turn leads to capital export (such as foreign lending). The recipient countries (Greece, etc.) of this capital surplus must per Economics 101 definition run a current account deficit for the balance of payments…well, to balance. An importer of surplus capital pays the bills in jobs. Spain’s 26% unemployment is a fitting example of money flowing south while jobs move north.

The introduction of the euro allowed the PIGS countries to finance sustained large current account deficits – fuelled by public deficits – by dipping into German savings. The dialectic causality means that the story is not just that some countries were living beyond their means while Germany was being thrifty. It takes two to tango. The Germans enjoyed profits and job growth and were willing to finance these by sending savings southwards. So, Germany is enjoying the benefits of the euro, and must now be made to understand that the jobs should be more evenly spread around. It is tempting – but not charming - to be smug and self-righteous when winning.

Austerity and maintaining the status quo do not harm German prosperity. However, elsewhere in Europe austerity actually does great harm to both economies and societal cohesion.

Clearly, countries have their own internal issues to deal with in order to attain sustained economic growth. Italy and Spain, for instance, face major challenges such as excessive bureaucracy and tax systems that urgently need an overhaul.

Meanwhile, EU institutions need more transparency, accountability and democracy. A major priority should be to prioritise job creation in southern Europe to the detriment of German creditor favouritism. Excessive inequality between rich and poor, north and south, hope and despair simply does not suit Europe – and is not even in Germany’s best interest.

A new vision of common purpose and solidarity is required.

Tor Svensson Chairman Capital Finance International

CAPITALFINANCE I N T E R N AT I O N A L 13

Chairman’s Column

Italy’s Prime Minister is now tabling a new discussion concerning the kind of Europe we collectively want and the ways that could shape this future. That is new and constitutes a welcome change. Europe stands in need of some positive forward thinking. Currently, most European politicians pay only lip service to combatting unemployment and refuse to come wwith concrete solutions to tackle the issue. Prime Minister Renzi advocates that Southern Europe “take its future back”. He wishes to shake things up a bit. Mr Renzi is now up against an old boring aunt fiercely resisting any change who claims to be doing just fine. That’s the real trouble, that is.

> Otaviano Canuto, World Bank Group:

Commodity Super Cycle to Stick Around a Bit Longer Some analysts have predicted that the commodity price boom has played itself out. However, natural resource-based commodity prices (with the exception of shale gas and its downward pressure on US natural gas prices) have remained relatively high over the last few years, despite the feeble global economic recovery.

The commodity price spike that started at the end of the 1990s has not been significantly affected by the global downturn, with average prices similar to 2008 levels (Chart 1).

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Indeed, commodity prices have occasionally exhibited signs of bouncing back more quickly than the level of global economic output (Chart 2). So the question is: Have we entered a phase of descending commodity prices? Here we argue that it may be too soon to say that we have moved past the commodity super-cycle phenomenon.

CFI.co Columnist

CAN HISTORY SHED SOME LIGHT? Several authors have recently revisited long, historic series of commodity prices. Their focus has been either on the old PrebischSinger hypothesis - according to which the “terms of trade” between primary products and manufactured goods tends to fall in the very long run - and/or on the frequency and shapes of past price cycles.

“Since the late nineteenth century, commodity prices have moved along three long-term general cycles, though a fourth has been recently identified.”

Reports on previous cycles and price volatility have been more convergent. These works tend to agree on the localization of at least three supercycles of commodities since the 19th century,

Since the late nineteenth century, commodity prices have moved along three long-term general cycles, though a fourth has been recently identified. The first two cycles spanned roughly four decades, and the third one lasted 28 years.

All four upward phases were primarily driven by rising global demand, though the main sources of that demand differed for each. This time, China’s fast economic growth since the beginning of the new millennium has boosted demand, as illustrated by the country’s rising proportion of global natural resource-based commodities use (Canuto, 2008a).

Directions - upward or downward - of longterm price trends vary among different types of commodities and depend on the starting points used as reference. The picture gets blurred in cases where commodities have evolved and are hard to compare over time (e.g., poultry or soybean production today is highly different from what it was several decades ago).

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Chart 1: Commodity Prices. Source: World Bank.

CFI.co | Capital Finance International

as well as one initiated at the end of the 1990s.

Typically 20-year boom periods have reflected strong demand associated with moments of rapid industrialisation and urbanisation - as in the case of the US in the 1890s, or China in the 2000s - in which supply takes a long while before matching that demand. When this happens, periods of much lower commodity prices follow.

Spotting trends or previous cycles is a highly useful exercise. It calls attention to the interplay between demand and supply over time. However, we are unable to use past trends to forecast future paths of specific or general commodity prices at a certain point in time - as illustrated by the non-homogeneity of shapes of previous cycles.

Summer 2014 Issue

As is clear from Chart 3, commodity prices relative to manufactured goods may move and stay significantly lower or higher for substantial periods regardless of the presence of a longrun trend or drift. It all hinges on the relative strength of forces behind the demand for primary commodities relative to the demand for manufactures, and the supply of commodities relative to the supply of manufactures (Brahmbhatt and Canuto, 2010).

When looking ahead at a certain point in time, it is fundamental to approach the nature, intensity and time length of factors on each side of the equation at that specific moment: One cannot look for any predetermined historic shape of commodity super-cycles.

WHITHER THE PREBISCH-SINGER DYNAMICS? When independently raising their very longterm gloomy prospects regarding commodity prices, Hans Singer and Raul Prebisch in 1949 emphasized the two different sides of the equation. Singer’s price pessimism was based on strong beliefs about the relatively unfavourable price- and income-elasticity of demand for commodities. Prebisch suggested an asymmetry in the appropriation of productivity gains between commodity-dependent and industrialized countries. While eventual productivity gains on the former’s side were automatically transmitted into lower prices, in the latter case they were captured in the form of stable prices and rising wages and profit volumes, given the prevalence of cost-plus pricing and labour unionisation in industry.

This fit well with Prebisch’ critical views about social and political structures inherited by Latin America from its past as a leading commodity producer, as compared with the evolution toward a welfare state in advanced, industrialized US and Europe. From this came his belief that Latin America should diversify towards a manufacturing industry-based society, like other natural resource-rich advanced economies such as Canada, Australia had done.

HAS THE DESCENDING PHASE OF THE SUPER CYCLE BEGUN? It is worth highlighting two distinctive features of the current commodity super-cycle, the peak of which has supposedly been reached: First, the correlation between resource prices over the past thirty years has substantially increased (McKinsey, 2013). Beyond the strong demand-

CFI.co | Capital Finance International

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CFI.co Columnist

This is not the time or the place for any evaluation of how dated or incomplete those “structuralist” views are, much less of the policy proposals that came to be associated with them over time. However, in our view, it remains useful to think of the evolution of commodity prices relative to manufactured goods as reflecting the relative paths of demand elasticity, productivity and supply bottlenecks.

Beyond short-term supply and price fluctuations, more structural factors seem to be at play behind the persistent volatility:

CFI.co Columnist

Chart 2: Since 2009, resource prices have rebounded quicker than global economic output (Indexes). Source: McKinsey (2013).

pull on all commodities wrought by China’s industrialisation-cum-urbanisation, there is a higher correlation induced by the technological evolution. Natural resource-based products have risen as input and, therefore, as costs to other commodities (e.g., fertilizers in agriculture).

Furthermore, substitutability between uses (e.g., sugarcane can either turn into ethanol or sugar) and sources (e.g., alternative fuels and forms of power generation) has increased, making price shock transmission more widespread.

Second, volatility has increased and continues to

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rise in comparison to the past (Arezki et al, 2013).

This is often associated with the increased size of commodities as a class of financial assets, even if supply and demand fundamentals ultimately operate as gravity centres (Canuto, 2008). There is also some discussion of the role played by an increasing incidence of natural phenomena (floods and droughts, variable temperatures) on agriculture production, as well as the social and political factors that accompany oil, metal and mineral extraction (conflicts, labour strikes).

Nevertheless, these factors are largely associated with short-term volatility.

CFI.co | Capital Finance International

“Supply appears to be progressively less able to adjust rapidly to changes in demand because new reserves are more challenging and expensive to access. For example, offshore oil requires more sophisticated production techniques. Available arable land is not connected to markets through infrastructure. Mineral resources increasingly need to be developed in regions that have high political risks. Such factors not only increase the risk of disruptions to supply but also make supply even less elastic. As supply becomes increasingly unresponsive to demand, even small changes in that demand can result in significant changes in prices. Investors may be deterred by the volatility in resource prices and become less inclined to invest in new supply or resource productivity initiatives.� (McKinsey, 2013) At the margin, supply-side costs are still pointing upwards almost everywhere in the commodities universe, with the exception of shale gas.

However, the pace of innovation and physical investment are not enough to grant the supply elasticity necessary for the price-descending phase of the super-cycle to unfold. And, as promising as the shale-gas revolution may look to the US economy in the years ahead, it seems a stretch to expect it - through substitution and correlation - to be a fully countervailing factor to rising marginal costs of other natural resourcebased products.

Summer 2014 Issue

Chart 3: Commodity Prices in Real Terms (1900-2020). Source: Brahmbhatt and Canuto (2010).

There may be different intensities of demand changes per types of commodities. For instance, China’s changing growth pattern - Canuto

(2013b) - may lead to a less metal-intensive growth, but this is not necessarily the case for foodstuffs. As depicted in Chart 1, trajectories of commodity prices do not necessarily follow similar paths.

Back in Canuto (2008b), I argued that: “If one may paraphrase Mark Twain, recent news about the death of the commodity supercycle and of a ‘commodity bust’ were somewhat exaggerated.”

Six years later, I think this still applies. i

CFI.co | Capital Finance International

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CFI.co Columnist

On the other side of the equation, the current growth soft patch faced by many emerging markets does not point to any drastic future reversal of the propensity to create demand for commodities. Urbanisation and poverty reduction have remained steady in the developing world, and there is no sign of a major macroeconomic downturn beyond the recent accommodation to lower growth rates. (Canuto, 2013a)

References Arezki, R. et al. (2013). “Testing the PrebischSinger Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks”, IMF Working Paper n. 13/180, August Brahmbhatt, M. and O. Canuto (2010). “Natural Resources and Development Strategy after the Crisis”, World Bank, Economic Premise n. 1, February.

Canuto, O. (2008a). “China as a Bulwark and a Raging Bull”, Economonitor (Roubini Global Economics), February 4th.

Canuto, O. (2008b). “Three tiers of commodity price drivers”, Economonitor (Roubini Global Economics), April 21st.

Canuto, O. (2013a). “Lost in transition”, Project Syndicate, December 2.

Canuto, O. (2014). “Macroeconomics and stagnation: Keynesian-Schumpeterian wars”, Capital Finance International, spring.

Canuto, O. (2013b). “China, Brazil: Two tales of a growth slowdown”, Capital Finance International, summer.

Jacks, D.S. (2013). “From boom to bust: A typology of real commodity prices in the long run”, NBER Working Paper 18874, March.

McKinsey (2013). “Resource revolution: Tracking global commodity markets”, September.

Ocampo, J.A. and B. Erten (2013). “The Global Implications of Falling Commodity Prices”, Project Syndicate, August.

> Nouriel Roubini:

The Great Backlash

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EW YORK – In the immediate aftermath of the 2008 global financial crisis, policymakers’ success in preventing the Great Recession from turning into Great Depression II held in check demands for protectionist and inwardlooking measures. But now the backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that came with it – has arrived.

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This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favoring domestic workers and firms, antiimmigration measures, state capitalism, and resource nationalism. In the political realm, populist, anti-globalization, anti-immigration, and in some cases outright racist and antiSemitic parties are on the rise.

CFI.co | Capital Finance International

These forces loathe the alphabet soup of supranational governance institutions – the EU, the UN, the WTO, and the IMF, among others – that globalization requires. Even the Internet, the epitome of globalization for the past two decades, is at risk of being balkanized as more authoritarian countries – including China, Iran, Turkey, and Russia – seek to restrict access to social media and crack down on free expression.

Summer 2014 Issue

The main causes of these trends are clear.

Anemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise. Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system has become widespread. Nowadays, both advanced economies (like the United States, where unlimited financing of elected officials by financially powerful business interests is simply legalized corruption) and emerging markets (where oligarchs often dominate the economy and the political system) seem to be run for the few.

be separated from his dream of leading a “Eurasian Union” – a thinly disguised effort to recreate the former Soviet Union.

For the many, by contrast, there has been only secular stagnation, with depressed employment and stagnating wages. The resulting economic insecurity for the working and middle classes is most acute in Europe and the eurozone, where in many countries populist parties – mainly on the far right – outperformed mainstream forces in last weekend’s European Parliament election. As in the 1930’s, when the Great Depression gave rise to authoritarian governments in Italy, Germany, and Spain, a similar trend now may be underway.

Meanwhile, the Middle East remains a region mired in backwardness. The Arab Spring – triggered by slow growth, high youth unemployment, and widespread economic desperation – has given way to a long winter in Egypt and Libya, where the alternatives are a return to authoritarian strongmen and political chaos. In Syria and Yemen, there is civil war; Lebanon and Iraq could face a similar fate; Iran is both unstable and dangerous to others; and Afghanistan and Pakistan look increasingly like failed states.

If income and job growth do not pick up soon, populist parties may come closer to power at the national level in Europe, with anti-EU sentiments stalling the process of European economic and political integration. Worse, the eurozone may again be at risk: some countries (the United Kingdom) may exit the EU; others (the UK, Spain, and Belgium) eventually may break up.

In all of these cases, economic failure and a lack of opportunities and hope for the poor and young are fueling political and religious extremism, resentment of the West and, in some cases, outright terrorism.

Even in the US, the economic insecurity of a vast white underclass that feels threatened by immigration and global trade can be seen in the rising influence of the extreme right and Tea Party factions of the Republican Party. These groups are characterized by economic nativism, antiimmigration and protectionist leanings, religious fanaticism, and geopolitical isolationism.

Washington, D.C.: Franklin D. Roosevelt Presidential Memorial

“This time, the damage caused by the Great Recession is subjecting most advanced economies to secular stagnation and creating major structural growth challenges for emerging markets.”

A variant of this dynamic can be seen in Russia and many parts of Eastern Europe and Central Asia, where the fall of the Berlin Wall did not usher in democracy, economic liberalization, and rapid output growth.

Instead, nationalist and authoritarian regimes have been in power for most of the past quarter-century, pursuing statecapitalist growth models that ensure only mediocre economic performance. In this context, Russian President Vladimir Putin’s destabilization of Ukraine cannot

CFI.co | Capital Finance International

In Asia, too, nationalism is resurgent. New leaders in China, Japan, South Korea, and now India are political nationalists in regions where territorial disputes remain serious and long-held historical grievances fester. These leaders – as well as those in Thailand, Malaysia, and Indonesia, who are moving in a similar nationalist direction – must address major structuralreform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap. Economic failure could fuel further nationalist, xenophobic tendencies – and even trigger military conflict.

In the 1930’s, the failure to prevent the Great Depression empowered authoritarian regimes in Europe and Asia, eventually leading to World War II. This time, the damage caused by the Great Recession is subjecting most advanced economies to secular stagnation and creating major structural growth challenges for emerging markets.

This is ideal terrain for economic and political nationalism to take root and flourish. Today’s backlash against trade and globalization should be viewed in the context of what, as we know from experience, could come next. i

ABOUT THE AUTHOR Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at the Stern School of Business, New York University.

Copyright: Project Syndicate, 2014. www.project-syndicate.org

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> Joseph E. Stiglitz:

Creating a Learning Society

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EW YORK – Citizens in the world’s richest countries have come to think of their economies as being based on innovation. But innovation has been part of the developed world’s economy for more than two centuries. Indeed, for thousands of years, until the Industrial Revolution, incomes stagnated. Then per capita income soared, increasing year after year, interrupted only by the occasional effects of cyclical fluctuations.

noted some 60 years ago that rising incomes should largely be attributed not to capital accumulation, but to technological progress – to learning how to do things better. While some of the productivity increase reflects the impact of dramatic discoveries, much of it has been due to small, incremental changes. And, if that is the case, it makes sense to focus attention on how societies learn, and what can be done to promote learning – including learning how to learn.

scientist Joseph Schumpeter argued that the central virtue of a market economy was its capacity to innovate. He contended that economists’ traditional focus on competitive markets was misplaced; what mattered was competition for the market, not competition in the market. Competition for the market drove innovation. A succession of monopolists would lead, in this view, to higher standards of living in the long run.

The Nobel laureate economist Robert Solow

A century ago, the economist and political

Schumpeter’s

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conclusions

have

not

gone

Summer 2014 Issue

unchallenged. Monopolists and dominant firms, like Microsoft, can actually suppress innovation. Unless checked by anti-trust authorities, they can engage in anticompetitive behavior that reinforces their monopoly power.

Moreover, markets may not be efficient in either the level or direction of investments in research and learning. Private incentives are not well aligned with social returns: firms can gain from innovations that increase their market power, enable them to circumvent regulations, or channel rents that would otherwise accrue to others.

But one of Schumpeter’s fundamental insights has held up well: Conventional policies focusing on short-run efficiency may not be desirable, once one takes a long-run innovation/learning perspective.

This is especially true for developing countries and emerging markets.

Industrial policies – in which governments intervene in the allocation of resources among sectors or favor some technologies over others – can help “infant economies” learn. Learning may be more marked in some sectors (such as industrial manufacturing) than in others, and the benefits of that learning, including the institutional development required for success, may spill over to other economic activities.

Such policies, when adopted, have been frequent targets of criticism. Government, it is often said, should not be engaged in picking winners. The market is far better in making such judgments.

New York: Columbia University

“One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA.”

But the evidence on that is not as compelling as free-market advocates claim.

America’s private sector was notoriously bad in allocating capital and managing risk in the years before the global financial crisis, while studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects – especially because the government invests more heavily in important basic research. One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA.

on many issues. The great economist Kenneth Arrow emphasized the importance of learning by doing. The only way to learn what is required for industrial growth, for example, is to have industry. And that may require either ensuring that one’s exchange rate is competitive or that certain industries have privileged access to credit – as a number of East Asian countries did as part of their remarkably successful development strategies.

There is a compelling infant economy argument for industrial protection.

Moreover, financial-market liberalization may undermine countries’ ability to learn another set of skills that are essential for development: how to allocate resources and manage risk.

Likewise, intellectual property, if not designed properly, can be a two-edged sword when viewed from a learning perspective. While it may enhance incentives to invest in research, it may also enhance incentives for secrecy – impeding the flow of knowledge that is essential to learning while encouraging firms to maximize what they draw from the pool of collective knowledge and to minimize what they contribute. In this scenario, the pace of innovation is actually reduced.

More broadly, many of the policies (especially those associated with the neoliberal “Washington Consensus”) foisted on developing countries with the noble objective of promoting the efficiency of resource allocation today actually impede learning, and thus lead to lower standards of living in the long run.

Virtually every government policy, intentionally or not, for better or for worse, has direct and indirect effects on learning.

Developing countries where policymakers are cognizant of these effects are more likely to close the knowledge gap that separates them from the more developed countries.

Developed countries, meanwhile, have an opportunity to narrow the gap between average and best practices, and to avoid the danger of secular stagnation. i

But, putting such successes aside, the point of industrial policy is not to pick winners at all. Rather, successful industrial policies identify sources of positive externalities – sectors where learning might generate benefits elsewhere in the economy.

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

Viewing economic policies through the lens of learning provides a different perspective

Copyright: Project Syndicate, 2014. www.project-syndicate.org

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> Robert J. Shiller:

Inequality Disaster Prevention

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EW HAVEN – Thomas Piketty’s impressive and much-discussed book Capital in the Twenty-First Century has brought considerable attention to the problem of rising economic inequality.

But it is not strong on solutions. As Piketty admits, his proposal – a progressive global tax on capital (or wealth) – “would require a very high 22

and no doubt unrealistic level of international cooperation.”

We should not be focusing on quick solutions.

The really important concern for policymakers everywhere is to prevent disasters – that is, the outlier events that matter the most. And, because inequality tends to change slowly, any disaster CFI.co | Capital Finance International

probably lies decades in the future.

That disaster – a return to levels of inequality not seen since the late nineteenth to early twentieth century – is amply described in Piketty’s book. In this scenario, a tiny minority becomes super-rich – not, for the most part, because they are smarter or work harder than everyone else, but because

Summer 2014 Issue

fundamental economic forces capriciously redistribute incomes.

In The New Financial Order: Risk in the 21st Century, I proposed “inequality insurance” as a way to avert disaster.

Despite the similarity of their titles, my book is very different from Piketty’s. Mine openly advocates innovative scientific finance and insurance, both private and public, to reduce inequality, by quantitatively managing all of the risks that contribute to it. And I am more optimistic about my plan to prevent disastrous inequality than Piketty is about his.

Inequality insurance would require governments to establish very longterm plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise. I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. Just as one must buy fire insurance before, not after, one’s house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains.

In 2006, I co-authored a draft paper with Leonard Burman and Jeffrey Rohaly of the Urban Institute and Brookings Institution’s Tax Policy Center that analyzed variations on such a plan. In 2011, Ian Ayres and Aaron Edlin proposed a similar idea.

Underlying such plans is the assumption that some substantial degree of inequality is economically healthy. The prospect of becoming rich clearly drives many people to work hard. But massive inequality is intolerable.

Of course, there is no guarantee that an inequality-insurance plan will actually be carried out by governments. But they are more likely to follow such plans if they are already legislated and take effect gradually, according to a formula known in advance, rather than suddenly in some revolutionary departure from past practice.

New Haven, Connecticut: Yale University

“The really important concern for policymakers everywhere is to prevent disasters – that is, the outlier events that matter the most.”

To be truly effective, increases in wealth taxes – which fall more on highly mobile retired or other affluent people – would have to include a global component; otherwise, the rich would simply emigrate to whichever country has the lowest tax rates. And the unpopularity of wealth taxes has impeded global cooperation. Finland had a wealth tax but dropped it. So did Austria, Denmark, Germany, Sweden, and Spain.

Increasing wealth taxes now, as Piketty

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proposes, would strike many people as unfair, because it would amount to imposing a retroactive levy on the work carried out to accumulate that wealth in the past – a change to the rules of the game, and its outcome, after the game is over. Older people who worked hard to accumulate wealth over the course of their lifetime would be taxed on their frugality to benefit people who didn’t even try to save. If they had been told that the tax was coming, maybe they would not have saved so much; maybe they would have paid the income tax and consumed the rest, like everybody else.

Moreover, once the reality of a Piketty-type wealth tax was understood, the rich might procreate more, because wealth in the form of children cannot be taxed away – which is why it would probably be better to tax income and maintain a deduction for philanthropic contributions outside of the family. And, if there are to be wealth taxes, instituting them now to take effect only in the future – and only if inequality becomes much worse – would preempt the perception that the rules had been changed after the game had ended.

The advantage of income-tax increases is that they could be based not just on current income, but on some average of income over the course of years, and could allow deductions for investments, thus sharing some features with wealth taxes without penalizing those who saved more to accumulate more wealth. Moreover, a long-term plan legislated by one or a few countries today, before any substantial impact on actual tax payments occurs, could help to promote an international dialogue about appropriate future policy toward inequality. That would create room for a more uniform tax response among countries, thus reducing the ability of the super-rich to evade taxation by switching location.

Piketty’s book makes an invaluable contribution to our understanding of the dynamics of contemporary inequality.

He has identified a serious risk to our society. Policymakers have a responsibility to implement a workable way to insure against it. i

ABOUT THE AUTHOR Robert J. Shiller, a 2013 Nobel laureate in economics and Professor of Economics at Yale University, is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

Copyright: Project Syndicate, 2014. www.project-syndicate.org 23

> OECD:

Achieving a Resilient Economic Recovery

By Rintaro Tamaki, Deputy Secretary-General and Acting Chief Economist of the OECD

The recovery from the Great Recession has been slow and arduous, and has at times threatened to derail altogether. However, the major advanced economies are finally gaining traction and momentum. Private-sector confidence is rebuilding.

After years of weakness, investment and trade volumes have started to rebound.

While unemployment remains unacceptably high, the labour market situation is improving in most countries and has stopped deteriorating virtually throughout the advanced economies.

O

n the other hand, the pace of growth in the major emerging market economies has slowed. Part of this deceleration is benign, reflecting cyclical slowdowns from overheated starting positions - the growth rates now seen in China are undoubtedly more sustainable from both economic and environmental perspectives than the double-digit pace of a few years ago. However, managing the credit slowdown and the risks that built up during the period of easy global monetary conditions could be a major challenge.

The likelihood of some of the most worrisome events that have preoccupied markets and policymakers in recent years coming to pass has diminished. Risks are overall better balanced although still tilted to the downside. Financial tensions in emerging markets are one risk that could blow the global recovery off course and have bigger spill-overs than anticipated. It is not the only one: Falling inflation in the euro area could turn into deflation. Geopolitical risks have also increased since the start of the year.

Policy focus can now switch from avoiding disaster to fostering a stronger and more resilient

“The likelihood of some of the most worrisome events that have preoccupied markets and policymakers in recent years coming to pass has diminished.� recovery. The legacy of the crisis still needs to be addressed. The crisis has left scars in the labour market, notably higher unemployment and lower participation of the more vulnerable groups.

Growth prospects are weaker than they were in the pre-crisis era. Moreover, one of the key lessons of the crisis is the need to make our economies and societies more resilient – more able to withstand shocks, and more inclusive with the welfare gains from stronger growth better shared across the population. While steps have been taken in both areas, much more needs to be done.

After difficult years of low growth and fiscal stringency, policymakers are facing these challenges with depleted political capital. But they need to seize the opportunity to set global

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OECD BRIICS

4

2

0

2010

2011

2012

2013

2014

2015

Real GDP Growth (per cent). Source: OECD May 2014 Economic Outlook database.

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Given persisting downside risks, high unemployment, below-target inflation, and high levels of government debt, monetary policies need to remain accommodative in the main OECD areas. In particular, we call on the European Central Bank (ECB) to take new policy actions to move inflation more decisively towards target and to be ready for additional non-conventional stimulus if inflation were to show no clear sign of returning there.

The high levels of government debt in all major advanced economies mean that there is little room for fiscal accommodation. Nevertheless, following significant progress in stabilising their public finances, most OECD countries can afford the planned slowdown in structural budget improvement. This is not the case in Japan where consolidation needs remain very large. Given its high level of public debt, a credible medium-term fiscal consolidation plan is essential.

In most countries, reducing public debt to more prudent levels and managing future pension and health liabilities will pose a challenge and requires fiscal reforms to ensure the sustainability of public finances without compromising the quality of public services.

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growth on a stronger and more sustainable footing.

This key to supporting confidence and has to be backed by macroeconomic and structural policy actions, including the promotion of institutional frameworks that support the implementation of reforms.

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It is now time to speed up the pace of structural reforms. Such reforms, while often facing resistance from vested interests, can offer a winwin by raising growth potential and allowing many of the poorest to achieve higher living standards.

These policies are critical to the success of Abenomics in Japan, as well as to rebalance of the euro area and foster the convergence to higher incomes by emerging economies.

Summer 2014 Issue

Rintaro Tamaki

“The high levels of government debt in all major advanced economies mean that there is little room for fiscal accommodation.”

While impressive reform efforts have been made by crisis-hit countries, there remains substantial scope to boost productivity and create jobs through policies aimed at removing barriers to domestic and international competition in both advanced and emerging economies. This would increase innovation and help get the most out of global value chains, as well as boost investment in the near term and support resilience.

As unemployment starts receding, measures to tackle long-term unemployment, and make sure it does not become entrenched, are a high priority that requires reforms to remove obstacles to more robust job creation and strengthen and redesign active labour market policies. i

ABOUT THE AUTHOR Mr. Rintaro Tamaki was appointed Deputy Secretary-General of the OECD on August

1, 2011. His portfolio includes the strategic direction of OECD policy on Environment, Development, Green Growth, Financial Affairs and Taxes.

Mr. Tamaki is also currently acting Chief Economist and assumes the responsibility as the OECD Representative at the Deputies’ Meetings of the G20.

Prior to joining the OECD Mr. Tamaki, a Japanese national, was Vice-Minister of Finance for International Affairs at the Ministry of Finance, Government of Japan.

During his prominent 35-year career at the Japanese Ministry of Finance, Mr. Tamaki has worked on various budget, taxation, international finance and development issues. He worked as part of the OECD Secretariat from 1978 – 1980 in the Economic Prospects Division and from 1983 – 1986 in the Fiscal Affairs Division of the Directorate for Financial, Fiscal and Enterprise Affairs (DAFFE). In 1994 Mr. Tamaki was posted CFI.co | Capital Finance International

to the World Bank as Alternate Executive Director for Japan and in 2002 as Finance Minister at the Embassy of Japan in Washington DC. He then became Deputy Director-General (2005), before becoming Director-General (2007) and subsequently Vice-Minister for International Affairs (2009) at the Ministry of Finance.

Mr. Tamaki graduated in 1976, L.L.B. from the University of Tokyo and has held academic positions at the University of Tokyo and Kobe University. He has published books and articles on international institutions, the international monetary system, development, debt and taxation.

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> Summer 2014 Special:

Diaspora Ten: Geared for Success

A

ccording to the International Organisation for Migration (IOM) – an intra-governmental entity set up in 1951 to track the human flow across borders – more than 220 million people worldwide moved from one country to another in 2013.

IOM number crunchers predict that by 2050 this number will have grown to well over 400 million.

Though some migration is caused by war or other forms of conflict, most people pull up their stakes for economic reason.

The European Union, North America, Russia and Australia attract most economic migrants. The urge to seek a better life causes disruptions and tragedy along some borders such as the Mediterranean Sea and the Mexico / US land border. Here untold thousands perished while underway to a promised land of sorts.

However, many people do get to cross borders unscathed, legally or otherwise to find an often less than welcoming – and possibly even disappointing – version of paradise. Language barriers need to be overcome. New customs prevalent in the host country may seem strange or even bizarre. Yet, the ones that make the journey are often those that end up succeeding. It takes courage, determination and persistence to grow roots in a new country.

Only the strongest and most resourceful succeed.

In this issue CFI.co features ten people who battled the odds and forged a new life in a new country.

Some, such as the Australian-American media magnate Rupert Murdoch, are exceedingly rich and had no trouble crossing borders and building up their lives in new places. Others, such as perfumer Francis Kurkdjian, were born in diaspora but kept in close touch with the country of their parents.

Other yet, such as the powerful Luksic family from Chile, went native and lost most – though not all – contact with the home country.

Every migrant has a different story, from the subSaharan man perched on a barbed wire fence waiting to jump into a Spanish enclave on the north coast of Africa to the multimillionaire who, worn down by taxes and bad weather, seeks refuge in a welcoming tropical haven. No two stories are

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alike, save for the fact that all migrants actively search for an improvement in living conditions.

It follows that the uneven distribution of the world’s wealth is the principal engine of migration.

Once countries become somewhat developed or experience a period of economic boom, migratory pressures abate. This happens in Angola where oil wealth is slowly trickling through and most people have stopped searching for greener pastures over the borders. In fact, this year Angola has become a destination for migrants receiving more people than its sends abroad. China is another case in point and no longer delivers millions of hardworking immigrants to the world’s biggest and most dynamic cities.

The predictions of the International Organisation for Migration are cause for slight worry. A doubling of migratory flows by 2050 may indicate a further deterioration of the world’s inequalities. This is set to occur at the same time when host countries such as the United States and EU member states become increasingly reluctant to receive economic migrants. Pressure along the borders may very well mount to breaking point.

Instead of pouring untold billions in often misdirected and ineffective development aid, well-off host countries may want to consider extra spending on good governance which has already produced some notable results in Africa and Latin America.

Most people do not become part of diasporas just because they are curious to look over the horizon; they move across borders in order to escape the incompetence or violence of failing states – countries that insist on carrying out misguided policies that have been proven wrong time and again.

Still, those in the diasporas are often the cream of the society from which they either fled or just moved away. These migrants do not take no for an answer and have the will to take destiny into their own hands and make something of it. They should be welcomed and be made to feel at home. By their very nature, migrants are geared for success. i

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Summer 2014 Issue

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> FROM SOMALIA TO THE UNITED STATES - AYAAN HIRSI ALI The Big Questions of Our Time Barely twenty years ago, Ayaan Hirsi Ali aged 23 at the time, arrived in The Netherlands to apply for political asylum and eager to make her mark on a society she considered both “surprisingly compassionate and efficient.” Coming from war-torn Somalia, the events leading up to her arrival in The Netherlands remain murky. Ms Hirsi Ali spent some time in the refugee camps on the Somali-Kenyan border tracing lost family members before arriving in Germany and crossing over into The Netherlands.

She was granted asylum in a remarkably short time. After holding down a few odd jobs while getting to grips with the Dutch language and attending evening classes, she enrolled in Leiden University political science. She obtained her master’s degree in 2000. While at university, Ms Hirsi Ali got involved with politics, becoming first a fellow at the Wiardi Beckman Foundation – the think tank of the centre-left Labour Party – and later joining the centre-right People’s Party for Freedom and Democracy (VVD). In 2003, Ms Hirsi Ali was awarded a prominent place on the VVD electoral roll and promptly landed in parliament where she went on to gain notoriety as a fierce opponent of religious bigotry.

During her studies, Ms Hirsi Ali had renounced Islam to become an atheist. She primarily objected to the perceived inequality of the sexes in Islam. However, her high profile and status as the darling of both the right and the left also brought renewed interest in her past.

Holes started to appear in her life’s story as told to Dutch immigration officials. She had provided them with false information on her real name, her age and her travels before arrival in The Netherlands.

The ensuing controversy ended with a fullblown parliamentary debate. Considering her extraordinary contributions to public debate, all major political parties supported a motion asking Minister for Integration Rita Verdonk to consider the “special circumstances” in Ms Hirsi Ali’s case and waive any sanctions. The minister reluctantly granted the request.

Ms Hirsi Ali’s brief but impressive political career in The Netherlands was destroyed by the affair. In 2006 she moved to the United States and a position at the American Enterprise Institute for Public Policy Research in Washington DC. She has authored four books on her own life and journey, and on gender issues. She is the founder of the AHA Foundation, an American non-profit organisation dedicated to the defence of women’s rights.

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Summer 2014 Issue

> FROM CROATIA TO CHILE – THE LUKSIC FAMILY From the World’s Driest Desert to the Forbes List In Chile, everyone knows the Luksics and their remarkable story that started with Policarpo Luksic who left his native Croatia as a young man to try his luck in the mineral-rich Atacama Desert in Chile’s far north. Here, in purportedly the world’s driest desert, Policarpo Luksic did reasonably well. He married the granddaughter of a hero from the War of the Pacific (1879-1883) that pitched Chile against Bolivia and resulted in the latter losing its access to the ocean.

It was the next generation that would find the success Policarpo had travelled the world for. In 1952, his son Andrónico Luksic Abaroa (19262005) laid the cornerstone of what was to become the family fortune and, indeed, one of the world’s greatest fortunes. That year Andrónico managed to buy a 25% share in a local mining company for next to nothing, selling it two years later to a Japanese conglomerate for a cool $500,000.

The proceeds of the sale were immediately invested in other mining ventures. In the years following, the profits from Andrónico’s deals started to accumulate. As they did, he successfully diversified his investments taking stakes in any kind of business that caught his fancy.

Today, the third Luksic generation, headed by Andrónico Luksic Craig and his brothers Guilermo and Jean-Paul, are in charge of a veritable business empire that generates close to $14 billion in annual revenue. The Luksic’s Quiñenco holding company has interests in rail roads, mining, banking, breweries, shipping, television, energy and telecom. The impression is that the Luksic family has a stake in almost everything that goes on in Chile.

The political turbulence experienced in the early 1970s – a time when private business was not encouraged – caused the Luksic family to look elsewhere for opportunity. They expanded their business interests in Argentina, Colombia, and Brazil where the Luksic’s again acquired stakes in an eclectic range of businesses.

With Croatia becoming the newest member of the European Union and a place safe for business, the Luksic family is at long last returning to its roots. Property is being snatched up left, right, and centre. The family is also supporting an impressive number of initiatives to help with the social development of Croatia: significant contributions are made to improve healthcare, education, and the preservation of national Croat culture. On the business side, $800 million has so far been invested in Croatia. The family sent fourth generation Davor Luksic to manage its affairs in Europe.

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> BACK TO AFRICA – CHIBWE MASABO HENRY The Diaspora as a Driver of Development

Having medical doctors, specialists, nurses and other healthcare workers readily available to take charge in case of illness may be the norm in many developed countries; it still is much the exception elsewhere on the globe. Countless lives are lost or ruined simply because no medical personnel were available to help patients overcome often relatively simple ailments. In many emerging countries, politicians enjoy cutting ribbons at newly built hospitals and health centres but often neglect to provide funding for proper staffing.

The shrinking aid budgets have not improved the situation.

Contrast this to the many thousands of highly trained African medical professionals who were lured overseas by attractive salaries but often yearn to return home if only they could. This is where Diaspora for African Development (DfAD) steps in to help remedy the situation. DfAD is an initiative of Chibwe Masabo Henry from Zambia who is also involved with the global Enough Food for Everyone campaign. Mrs Masabo Henry is convinced that Africa’s social and economic 30

development can be significantly boosted by tapping into the wealth of knowledge and experience of the continent’s diaspora.

DfAD actively engages African expat professionals, associations, businesses, and communities to help deliver sustainable progress. “Many of the skilled people who left the continent were trained here at great expense. Countries such as Canada and the UK have drained Africa of many thousands of physicians. These are precisely the people we need to come back. In order to do so, we must create the right conditions and this is what DfAD aims to do.”

Mrs Masabo Henry emphasises that if the current situation endures, over one billion people worldwide will never see a health worker: “Whereas Africa bears 24% of the world’s disease burden, the continent has only 3% of the world’s health workers. For North America these numbers are inverted. There, 37% of all global health professionals deal with barely 10% of the global disease burden.”

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DfAD has enjoyed some success in creating awareness in the UK of the issue. Recently, the high commission of Zambia in the UK launched an ambitious drive to register all Zambian health workers in its jurisdiction.

The aim is to find areas of cooperation that could, in time, benefit healthcare in Zambia. The high commission is organising events with a view to rallying expat health professionals to its cause.

“It is not just about convincing these workers to return home. Some may not want to do that yet, but most are willing to lend their expertise to further healthcare programmes and help train new professionals.” Mrs Masabo Henry’s Diaspora for African development also runs comprehensive programmes aimed at influencing decisionmaking processes in both home and host countries, furthering education through engaging with the diaspora, and helping small business owners gain a toe or foothold in Africa.

Summer 2014 Issue

> FROM ARMENIA TO FRANCE AND BACK – FRANCIS KURKDJIAN Fragrances from the Past Though born in France, celebrated perfumer Francis Kurkdjian has remained in close touch with his Armenian roots. On the most recent of his many visits to Yerevan Mr Kurkdjian was received by Minister of Diaspora Affairs Hranush Hakobyan who asked him to lend his fame and support to policy initiatives by the Armenian government aimed at fostering closer ties between the diaspora and the home country.

Currently in the process of bringing part of his business home to the country of his parents, Francis Kurkdjian is also engaged in a project that seeks to introduce young Armenians to the art of perfume making. Details are currently being worked out with Mrs Hakobyan’s ministry.

The French / Armenian perfumer also plans to open one or more upmarket shops in booming Yerevan. “The moment is right to expand my business and doing so in Armenia is an obvious choice.”

Francis Kurkdjian is the creator of numerous exclusive perfumes such as Rose Barbare (Guerlian), Silver Shadow (Davidoff), and Le Parfum (Carven). In 2001, Mr Kukrkdjian was awarded the coveted Prix François Coty for his lifetime achievements. In 2009, the French government honoured Francis Kurkdjian with the title Chevalier des Arts et des Lettres for his efforts at reinvigorating the perfume trade through the display of fragrance dispensing art in public squares and other emblematic places.

Mr Kurkdjian did not set out to become a perfumer. In fact, it was his second choice, elevated to the top spot only after failing to gain admittance to the Paris Opera School of Dance in 1983. Mr Kurkdjian went to the ISIPCA perfume school in Versailles instead.

He graduated in 1993 and proceeded to obtain a master’s at the Paris Institute of Luxury Marketing.

Now properly set up for success, Mr Kurkdjian promptly created one of the world’s best-selling perfumes for Jean Paul Gaultier, Le Male, in 1995. At the time, he was only 26. He has since created well over forty fragrances for nearly all major fashion designers and purveyors of luxury goods.

Today, the perfumer manages his own Maison Francis Kurkdjian, a bespoke fragrances atelier, that battles against the “dumbing-down” of his trade. Mr Kurkdjian is strongly opposed to the recent trend to “democratise” perfumes by diluting products with inferior ingredients in an attempt to bring down cost and increase market share.

As if to prove this point, the Maison Francis Kurkdjian invested heavily in the re-creation of 17th century fragrances which required academic research to rediscover the sources of the art of perfumery. The first result of this quest

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is now in: The re-created perfume as used by Marie-Antoinette, the Dauphine of France from 1770 to 1774, Queen from 1774 to 1792, and brought to the guillotine in 1793.

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> FROM GREECE TO CANADA – GEORGE DELAPORTAS Big Dreams Need Big Country

George Delaportas is writing a new language and needs four years of research, and about EUR 80,000, to compile its dictionary and syntax. This young Greek entrepreneur, now at home in Vancouver, hopes that crowd-funding – and some chutzpa – will allow him to get the job done.

Barely 29, Mr Delaportas is much the quintessential geek. He crossed the ocean westward in order to link up with his peers and exchange ideas on esoteric programming languages with professors and visionaries at MIT (Massachusetts Institute of Technology) and other universities and research centres.

Mr Delaportas is also an entrepreneur. He is the founder of Pandoo TEK, a Vancouverbased company dedicated to the research and development of web-based technologies.

The programming language Mr Delaportas is currently working on aims to offer a single

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framework that unites the wildly different hardware components used to deliver, for example, cloud-based services. The language, provisionally named ALPHA, also seeks to provide a bridge between different operating systems and other computer code sets. As such, ALPHA is being designed as a way to interconnect basically everything that is being driven by bits and bytes.

Mr Delaportas does not believe in patches or half-measures: Behind the scenes, ALPHA will streamline, and thus speed up, the incessant flow of information over the Internet.

Contrary to popular belief – and, perhaps, to their geeky appearance – IT developers are a passionate bunch, and Mr Delaportas is no exception to this rule. “The bigger the challenge, the greater the passion required to overcome it.

This inner-drive is what gets things done and makes the magic happen.”

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In his quest for über-connectivity there is little place for modesty: “At Pandoo TEK we don’t just invest in the future, we actually build it.”

For Mr Delaportas, writing code comes naturally.

He has been doing that for the past fifteen years – over half his life – and allows him to strive for perfection. “The holy grail of computer languages is to find the least words while doing the most.

It has an element of elegance too. Well written code is a bit like a symphony in which there is not a single superfluous note.”

Greece was too small and distant a place for Mr Delaportas to develop his ideas and see them gain traction. He has no regrets moving to Canada where he is now surrounded by like-minded He has colleagues from England, Holland, Bosnia, Serbia and many other countries. “We all came here for similar reasons, sharing the same idea: to get some ground-breaking IT work done and, in the process, possibly change the world a bit.”

Summer 2014 Issue

> FROM NIGERIA TO UK – DR SOLOMON FUBARA Helping the Diaspora Break into Business Nigerian-born Dr Solomon Fubara did not quite set out to become a member of the UK diaspora community.

In fact, he came to get a university degree in 1983 and had every intention of using his education to get ahead back home. As in many cases, this was not to be. After graduating, Dr Fubara was offered a position in business development and ended up staying. The processes of launching and managing a new business became a life-long fascination. Now, Dr Fubara is the go-to guy for anyone seeking to make a mark in business.

For his work with diaspora entrepreneurs, Dr Fubara was awarded an MBE (Member of British Empire) medal. Specific mention was made of Dr Fubara’s efforts to assist ethnic minority entrepreneurs in navigating the legal maze that surrounds small businesses. Dr Fubara has helped tens of now thriving small business get established in his hometown of Bristol. He has also been active in creating support structures for ethnic minority business owners.

Today, Dr Fubara has taken on a project aimed at encouraging members of the growing Somali diaspora to set up shop and thus grow firm roots in the UK. “Sometimes people pass me on the street and tell me thanks for helping them. That gives me a real sense of satisfaction. I may not always be able to help financially but I think that what BME (Black and Minority Ethnic) businesses need the most is mentorship. A good mentor can make a businesses and a bad one can break it.”

In 2006, Dr Fubara set up the African Caribbean Chamber of Commerce in order to help foster trade links between diaspora communities in the UK and their home countries. “There are still many opportunities to be explored in this area.

Long and well established diaspora communities have significant purchasing power and long for products not normally available in the UK. Through our chamber of commerce we try to assist small and medium-sized companies in Africa and the Caribbean to satisfy that demand.

In the process we hope to open up markets and contribute our bit to the sustained development of the countries involved.”

Dr Fubara also exports his business knowledge and acumen to Africa where he is involved with a number of business development projects financed by development agencies.

He is specialised in strategic policy analysis, business evaluation, and the development of strategies. He holds MBA and PhD degrees and is an active member of numerous professional associations. Over the course of his career, Mr Fubara has worked in private business as well as for UK government agencies.

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> FROM AUSTRALIA TO THE WORLD – RUPERT MURDOCH The Future of Newspapers in the Age of the Internet Australia is simply not big enough for Rupert Murdoch, though the country did give him his first break into publishing and broadcasting: Two Adelaide city newspapers and a small town radio station in the outback. From these rather humble beginnings, Keith Rupert Murdoch conquered the world – or at least a significant part of its media.

Born in Australia to parents of English, Irish and Scottish ancestry, KR Murdoch was destined for the newspaper world. His father, a former foreign correspondent and publisher of the Adelaide News, taught young Keith Rupert the tricks of the trade. Returning home after studies in England, the young Murdoch promptly turned his attention to the family business. At the Adelaide News, he vastly increased sports and society coverage, brazenly splashing scandals onto the front page and seeing both circulation and profitably soar almost instantly.

Emboldened by his early and easy success, Rupert Murdoch sought out troubled newspapers elsewhere in Australia to add to his nascent media empire. Each paper underwent the same set of changes that had proved such a success at the Adelaide News. Soon, Australia became too small a market and Rupert Murdoch descended upon New Zealand where he promptly repeated his performance.

In 1968, Mr Murdoch arrived in the UK, buying the News of the World and, barely a year later, The Sun which he moved from broadsheet to tabloid format injecting scarcely clad ladies in the process and a dose of jingoism for good measure. From a struggling newspaper, The Sun was swiftly transformed into a giant attracting over 10 million readers by 1997.

Murdoch’s media empire News Corp today comprises a vast collection of newspapers, publishing houses and marketing agencies active on three continents. News Corp’s flagship is Dow Jones & Company, owners of the Wall Street Journal and the financial wire service. Through its UK subsidiary, News Corp owns The Times, The Sunday Times and The Sun newspapers.

Said to have single-handedly invented and popularised the tabloid newspaper format, Rupert Murdoch makes no apologies for the editorial style he imposes on his publications. Though he has kept The Times largely true to its heritage and refrained from introducing extensive sports coverage in the Wall Street Journal, Mr Murdoch does not win any prizes for style. Still, it is a major accomplishment to successfully run a daily newspaper in the days of instant news delivered wirelessly to a plethora of high-tech devices.

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Rupert Murdoch not just survived the onslaught brought about by the Internet; he actually thrived by appealing to a fairly low common denominator staying true to the advice dispensed by American satirist, editor and essayist HL Mencken: CFI.co | Capital Finance International

“Nobody ever went broke underestimating the taste of the American public.” Rupert Murdoch applied these words worldwide and proved Mencken right by doing so.

Summer 2014 Issue

> FROM LEBANON TO BRAZIL - JOSEPH SAFRA A Global Presence The Safra family fortune – today expressed in billions of dollars – originated on the dusty tracks of the well-trodden camel route between Aleppo, Syria and Istanbul. At the dawn of the 20th century, Jacob E. Safra, a successful gold trader, opened a bank in Beirut to help finance the burgeoning trade between the far-flung provinces of the Ottoman Empire and its capital city Istanbul. Soon, Safra Bank was entrusted with the wealth of rich Sephardic Jewish families from Syria and Lebanon who keenly appreciated his care and discretion in financial matters.

Scion of a prominent Jewish / Lebanese family of traders, Jacob E. Safra did well and saw his family’s fortune blossom. However, the turmoil that followed the collapse of Ottoman rule and, later, the regional tensions and strife arising in the post-war years, caused the Safras to make a bold move. The family pulled up its stakes and in 1952 left Lebanon to cross the ocean to a new life in Brazil – then, as now, seen as a land of opportunity.

Three years later in São Paulo, a new Safra Bank was founded. Jacob Safra was joined in the venture by three of his four sons: Edmond, Moise and Joseph. Though their father passed away in 1963, the three brothers continued to expand the business. Indeed, they made it into a global corporate behemoth spanning five continents with interests in banking, agribusiness, telecom, real estate and manufacturing.

Currently headed by Joseph Safra (75), the Safra Group employs over 8,500 people worldwide and continues to have a strong presence in the Middle East. One of Lebanon’s oldest and most prestigious banks, the Banque de Credit Nationale, is partially owned by the Safra Group as are other companies in the country.

According to Forbes, Joseph Safra’s personal net worth currently hovers around $16bn. This lands him on the 52nd spot of the magazine’s famed billionaire’s list. Together with Moise, the two Safra brother have recently expanded their real estate holdings, buying a 40% stake in the 50-story General Motors building in New York for $700m and a 50,000m2 office building in London for some $800m.

Today, the Safra Group controls an estimated $72bn in assets and follows a conservative and carefully laid out track to future growth.

Rather than jump into market bubbles or onto bandwagons, the group keeps its focus on sustainable lines of business that assure stable and sustainable growth. It’s the family secret.

“If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm.”

Jacob E. Safra

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> FROM HAITI TO CANADA – MICHAËLLE JEAN A Viceroy from the Caribbean The world over, Canada enjoys a reputation as a country most welcoming to immigrants. Newcomers are not just welcomed with open arms; they are also cordially invited to actively participate in the life of the nation. Canadians thoroughly enjoy welcoming immigrants to their vast and often frozen land. Their warmth knows no equal.

Fully 20% of Canada’s population – or some 6.8 million new or aspiring Canadians – is foreignborn. That, however, does not keep them from claiming the highest offices in the land. It was thus that between 2005 and 2010, Haiti-born Michaëlle Jean served as Canada’s 27th governor general – the federal vice-regal representative serving at Her Majesty’s pleasure, the majesty in this case being the Canadian monarch Queen Elizabeth II residing in Buckingham Palace, London.

Michaëlle Jean was born in Port-au-Prince, Haiti in 1957 to a school teacher and his wife.

In order to avoid her having to swear allegiance to then-dictator François Duvalier, as all Haitian school children at the time were expected to do, Michaëlle’s parents opted to home school their daughter. After Jean’s father was arrested and tortured by the dreaded Tonton Macoute secret police, the family decided to flee the country arriving in Canada in 1967 as political refugees.

In her new country, Michaëlle Jean grew up to become a journalist, television presenter, and filmmaker. She made news as the first person of Caribbean descent to present a newscast on French-Canadian television. Before long, Michaëlle Jean had become a fixture on national TV and an accomplished filmmaker.

Her 2004 documentary film Haiti in All Our Dreams received wide acclaim and a number of prestigious awards.

In August 2005 it pleased the Queen, and most Canadians as well, to appoint Michaëlle Jean as governor general of Canada upon the recommendation of Prime-Minister Paul Martin who said of her: “She is a woman of talent and achievement. Her personal story is nothing short of extraordinary. And extraordinary is precisely what we seek in a governor general who, after all, must represent all of Canada to all Canadians and to the rest of the world as well.”

Michaëlle Jean was an instant hit with the public. She toured the country extensively and, more surprisingly, took a keen interest in her military duties as acting commander-in-chief of Canadian forces. She visited France for the 90th anniversary of the Battle of Vimy Ridge and insisted with the prime-minister on being allowed to visit the Canadian troops in Afghanistan brushing aside security concerns.

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Michaëlle Jean stepped down after five years as tradition demanded, notwithstanding calls by both the public and politicians for an extension of her unofficial term. At the time of her departure from office, Michaëlle Jean enjoyed an approval

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rating of well over 60%. During her time as governor general, she showed by doing and being that all newcomers to Canada are free to dream and work towards the highest goals attainable.

Summer 2014 Issue

> FROM GERMANY TO SOUTH AFRICA – THE OPPENHEIMERS Diamonds Are Not Forever

“I’m a philistine.” Nicholas F Oppenheimer, worth some $6.5bn, is not likely to be spotted at a theatre or opera house anytime soon. The vast library of rare antique tomes his grandfather Ernest (1880-1957) lovingly accumulated over a lifetime remains but the tangible expression of an odd hobby. The grandson is down-to-earth, discrete, focused, and – according to some – at times as ruthless a businessman as his father Harry was.

At the close of 2011, “Nicky” Oppenheimer (69) made the momentous decision to sell his 40% stake in De Beer’s, a cartel of companies that dominates the diamond industry and, indeed, sets its course. Founded by famed British mining magnate and empire-builder Cecil Rhodes in 1888, De Beer’s has been in the Oppenheimer family since 1927 when German-born Ernest took over the company. Earlier, Ernest Oppenheimer and American financier JP Morgan had set up the AngloAmerican mining company in Johannesburg, South Africa. It was precisely

to this company that Nicky Oppenheimer sold his shares in De Beer’s – closing, as it were, the circle.

an increasing number of countries out of dire poverty is fuelled by private investment rather than aid money.

The $5.1bn sale was a unanimous family decision bringing the Oppenheimers hundred plus year-long involvement with the diamond industry to a close. It also showcased, briefly, the philosophy that built the family fortune: In business there is no place for emotion. In the 1940s, Ernest Oppenheimer famously refused to supply the allied forces with industrial diamonds at reduced prices for the war effort.

The Oppenheimer family is now in the process of allocating the capital raised by the sale of De Beer’s among a number of ventures in Africa.

“We will be looking for opportunities and we are very Africa-orientated and we are going to be looking, obviously, around the world, but there will be a very clear African bias to what we hope to do in the future.”

Nicky Oppenheimer is no stranger to controversy either. He caused uproar in 2005 with the statement that Africa was suffering from “donation fatigue.” Mr Oppenheimer went on to explain that the continent would be much better served with investors putting their money into income-generating projects. In fact, Mr Oppenheimer’s comment was both timely and spot-on. The current economic boom lifting

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The Oppenheimer family, originally from Leipzig in Germany, is today thoroughly South African.

Nicholas Oppenheimer’s father Harry (19082000) – at the time one of the richest men on earth – was actively engaged in anti-apartheid politics and financed the Progressive Federal Party. He also served a term a member of parliament for Kimberley, eventually becoming the opposition’s spokesperson on economics, finance and constitutional affairs.

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> Cover Story: Matteo Renzi to the Rescue?

Cover Story

European Union: Looking for a Leader to Reassert Its Role

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Italy: Rome

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To the pundits and other talking heads who wrote off Europe as a spent force: You ain’t seen nothing yet! The hand-wringing is about to be cut short as the old world prepares for a makeover. Indeed, the exercise may be long overdue but that doesn’t detract one iota from the role the European Union is destined to play on the global stage.

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umbers tell the story. With a GDP of well over $16.5tn (EUR12.9tn) that is unequalled by any power, the EU boasts the world’s largest economy.

Significant though they are, the US and China play second and third fiddle when it comes to raw economic – and financial – power.

The differences become even clearer when taking into consideration the current account balance – a fairly accurate profit/loss indicator of any given economy. Since a number of years the United States is being run at a significant loss. Last year, the US current account balance, though narrowing, ran at a deficit of some $400bn (down from almost $800bn in 2010) whereas the European Union managed to obtain a rather healthy surplus of $95bn.

Cover Story

MONEY MATTERS In fact, the US has been running current account deficits since the late 1970s with a one-off respite in 1991. Meanwhile, European surpluses have been fairly constant. In simplified practical terms this means that the US economy – including its assets and means of production – is slowly but consistently being bought up by non-US investors who supply the wherewithal to ensure the necessary zero-sum outcome on the balance of payments.

These providers of liquidity are to be found in the countries producing surpluses on their current accounts: China, Norway, Russia, the countries of the Middle East and, indeed, the countries of the European Union. The United Kingdom, France, Germany, Luxemburg, and The Netherlands are amongst the largest investors in the US, not just when it comes to foreign direct investment, but also with regards to snapping up treasury papers.

Europe seems to derive an almost perverse pleasure in downplaying its economic might. The EU may not dispose of an impressive army to help throw its weight around; it does possess a nicely filled war chest with which to make waves.

The union is home to over 505 million people, fully half of whom are waiting for consistent growth to deliver increased prosperity. The EU’s economy thus offers plenty room for domestic growth. The union’s already formidable GDP is ready for take-off as the less-developed nations of the former Eastern Bloc shake off the legacy of their unfortunate past and welcome the first post-communist generation into the productive demographic.

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“If we want to save Europe, we must change Europe.”

Prime Minister Matter Renzi

MILITARY MIGHT Even militarily the EU is much less feeble than it is made out to be. With a combined annual defence expenditure of EUR192bn ($261bn), and fully 1.5 million military personnel of whom 425,000 are ready for instant deployment, the union is no pushover. Together, the 28 EU member states can field around 6,500 main battle tanks, 46,000 plus armoured fighting vehicles, over 2,100 self-propelled howitzers and close to 350 state-of-the-art attack helicopters.

The EU’s combined naval forces include four carriers (with two super carriers under construction in the UK), 18 assault and support ships, almost sixty submarines, and 170 destroyers, frigates and corvettes for a grand total of 550 plus ships. The combined EU air forces are similarly impressive with over 2,000 fighter jets and over 500 transport, tanker and air-lift planes.

These numbers may still pale in comparison with the forces the United States can and does deploy around the world. However, Europe is not about military conquest. In popular parlance: It has done that, been there and got the resulting t-shirt blown to shreds. Americans may think their country has a manifest destiny as leader of “the free world” – or some such slogan – Europeans have suffered wars and now know better than to conquer the world. Standing armies remain a necessity, but only for self-defence and a few humanitarian interventions should the need arise.

THE SEARCH FOR COMMON GROUND Europe of course still lacks a degree of cooperation, integration and, perhaps, an increased sense of togetherness. The European Union is very much a collective of cooperating nation states, each with its own unique makeup, history, and culture. Language remains a barrier to integration: The EU has no less than 24 official languages providing healthy incomes to a veritable army of translators and writers.

Though Greece bears little resemblance to Belgium, and the Polish instinctively distrust the CFI.co | Capital Finance International

Germans (as do the Dutch and a host of others), the European Union is – for all its diversity – very much a contemporary version of the concert of nations (Vienna, 1815), providing for stability, mutual dependencies, growth and prosperity. It has been doing so since the 1950s.

As the UK mulls an EU-exit, expressing grave doubts about the union’s increasing say in domestic matters and its perceived lack of transparency, the country is seen to cling to its glorious past as the ruler of a quarter of mankind.

For the British it may be hard to grasp and accept the fact that the empire has gone and that their green and pleasant land now stands all alone in a fast-changing world. Worse, the fair isle is about to be split in two as the rather unruly Scots seem to fancy the idea of becoming a fully sovereign state.

EXIT OPPORTUNITY The much-discussed pros and cons of a UK exit from the EU constitute an opportunity, as welcome as it is unique, to showcase the full extent of the union’s relevance to both individual citizens and nation states. The only possible good that may be produced by the UK turning its back to the continent could be summarised as a drop in London real estate prices, making life in the city somewhat more affordable to nonmillionaires.

Frankfurt would be grateful. The German city stands to become the premier financial centre of the world in case the UK opts out of Europe.

No multinational corporation would keep its European head offices in the UK as the union is decidedly unfriendly to those who do not belong.

Economically it doesn’t make any sense to turn your back on a market of some 505 million avid consumers to which the country now enjoys full and unfettered access.

How some 57 million people crowded on a possibly divided island could possibly ensure lasting prosperity in a world of large trading blocs is a question the politicians of the UK Independence Party have so far utterly failed to address.

Summer 2014 Issue

“Europe of course still lacks a degree of cooperation, integration and, perhaps, an increased sense of togetherness.”

CHEAP CALLS Politicians, and not just the UKIP ones, are the bane of the continent. Since the inspired generation of Adenauer, Monnet, Schuman, Spaak, and Mansholt – the great post-war visionaries who forged the Treaty of Rome that evolved into today’s EU – few politicians have dared take Europe to the masses. Fewer still have found the courage to explain in plain language the historical importance of the paneuropean edifice that was, and still is, being erected in Brussels. In today’s impoverished political landscape – in which debate has been reduced to parallel discourse – leaders with eloquence and vision are few and far between.

The pro-European lot are a sorry sight to behold.

Take the leader of the Dutch Democrats 66 (D66), a staunchly pro-EU party, Alexander Pechtold. Explaining on primetime national television the great importance of the union, and the untold benefits it delivers to common folk, Mr Pechtold twice mentioned cheap calling rates: “Before, when you were vacationing in Greece or Italy, calling home might have set you back up to three euros a minute. Today, thanks to EU regulation and network integration that call can easily be made for pennies.”

Normally Mr Pechtold is a reasonable and reasoned man who abhors any and all forms of extremism. He appeals to people’s common sense and their ingrained sense of justice.

However, when it comes to the EU, Mr Pechtold insists on spouting nonsense. It is almost as if one can hear the audience thinking: “So… because we now can call home cheaply while relaxing on a Mediterranean beach, we must also be ok with bailing-out all these almost-broke countries.”

Popular perception in the Netherlands, and elsewhere in the union, is largely based on the antics of pro-EU politicians who insist on running before the troops. Nigel Farage, Geert Wilders, Marine Le Pen and other euro-sceptics merely reap the electoral harvest sown by the likes of Alexander Pechtold.

sovereign powers to a supranational body specifically set up to rule in the common interest of all states pertaining to the group.

After centuries of almost continuous war and strife, Europeans – perhaps rather slow on the uptake – have decided that the only way forward is through increased, and ever increasing, cooperation. The implementation of this simple concept has revolutionised the world. Before the European Economic Community (now EU) came into being, there were no trading blocs other than empires and a very loose, and rather dysfunctional, British Commonwealth.

The EU directly inspired the formation of today’s great blocs of countries seeking common ground and a shared future: Mercosur in Latin America, Asean in Southeast Asia, NAFTA in North America, Caricom in the Caribbean, the African Union, and many others. All these supranational structures were built on the mould first shaped in 1950s Europe. The Old World must have been doing something right.

LEFT OUT Yet, most Europeans feel completely left out of the processes unfolding and see the rise of the union as a scary show in a faraway place over which they have little to no control. That perception is not without a few kernels of truth.

The EU’s powers-that-be do have a tendency to ride roughshod over the express wishes of voters, the prime example being the rejection by the electorates of France and The Netherlands in 2005 of the EU’s proposed constitution.

After the French and Dutch delivered their solid “No”, other member states cancelled their referenda in order not to suffer like blemishes to their reputations. Following the constitution’s defeat at the ballot box, the document was CFI.co | Capital Finance International

revised – and amazingly enough expanded upon – and rechristened as the Treaty of Lisbon to be duly ratified (if not rubberstamped) by the parliaments of all member states.

And then politicians from across the union wonder out loud why today voters refuse to participate in sham elections for a European Parliament that has virtually no say in any matters of importance and holds no budgetary powers to speak of. The few who still try to make their voices heard are now being told – by the UK government in this particular case – that the political bloc with the most votes may not deliver the next president of the European Commission – the entity in charge of the day-to-day affairs of the union. No matter promises made before the election took place last May. Getting 28 member states to unanimously agree to anything is a thankless exercise at best, and a hopeless one most of the time. The practical result of the union’s insistence on unanimity is that only the most common and obvious policies are set out. All members agree to the earth being round and spinning on its axle while traveling an elliptical route around the sun. This is about as far as commonality will get you. Almost anything beyond the most basic of understandings is apt to be controversial and draw loud protests out of some far corner of the union.

TRIED, TESTED, FAILED The alternative to rule by unanimity has also been tried and tested. It may be seen in action as Germany and France team up – with Italy and Spain in tow and the UK going half-heartedly along as a good sport – to bully the lesser powers into compliance with whatever has been decided for them. The perception, popular in some quarters, that Germany won the war forty odd years after its conclusion is not entirely devoid of 41

Cover Story

THE UNTOLD STORY The story that almost nobody wants to tell is that the European Union is without doubt the greatest experiment at nation-building the world has ever seen. Never before in history has an assembly of independent and well-established nation states come together in order to voluntarily relinquish

Prime Minister: Matteo Renzi

Cover Story

European Parliament building in Brussels, Belgium

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“Not a single one of the 28 heads of government engaged in the struggle for power – not excepting Matteo Renzi – has stood up to demand attention be paid to the issues at hand: The worrisome alienation of electorates throughout the union; the alarming levels of unemployment affecting young Europeans; the lack of a vision for the continent; the abject failure of the union’s European Neighbourhood Policy in the Ukraine; the dangers posed by an assertive and unpredictable Russia; and the patently unlawful and unfriendly activities of US spy agencies on EU territory.” reason. Armed with the purchasing power of 80 million hard-working and thrifty Germans, Mrs Angela Merkel is swinging her purse in ways that Margaret Thatcher couldn’t even have conceived of.

However, the dictates of Chancellor Merkel, the thinly-veiled threats of Prime Minister Cameron, and the indecisive mutterings of President Hollande do not contribute in the least to the unlocking of the EU’s phenomenal potential.

Quite the contrary, the ongoing rivalries between uninspiring leaders; the never-ending stream of silly mandates thought-up by bored Brussels bureaucrats; the spineless resolutions of the Council of Ministers; and the refusal to allow for more openness, all conspire to deprive Europe of its true calling – to be a beacon of freedom, liberalism, reason and prosperity in an often dangerous world. The lighthouse serving that vital role previously is currently dimmed as it slays phantoms around the world by remote control or otherwise.

MATTEO RENZI APPEARS ON SCENE To keep to the analogy, a light is flickering down south, in Italy. That country’s youthful Prime Minister, Matteo Renzi, was the only head of government in the EU to receive an unequivocal mandate from voters to proceed with the European project. Prime Minister Renzi (39) ran on a refreshingly simple and straightforward platform: “If we want to save Europe, we must change Europe.”

Cover Story

On top of Mr Renzi’s wish list is a drastic move away from staid orthodox monetarist policies that keep economies gasping for liquidity, wreck societal cohesion, cause infrastructure to crumble, and hurt industry. “Europe must shift its focus to growth, employment and reform.

Without significant investment in jobs and growth, any measure linked to austerity is bound to fail.”

In order to get his vision on the agenda, Prime Minister Renzi must first put his own country’s economy – the third largest in the Eurozone – on a track to sustained growth. He has unveiled comprehensive policy initiatives to rid Italy of its stifling bureaucracy, inject dynamism into the country’s vast network of state-run corporations, increase the competitiveness of the country through increased productivity and reduce clientelism in politics.

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Gauging by the poll numbers, Mr Renzi has struck a chord. His moderately progressive Democratic Party trumped all others, claiming 40.8% of the popular vote in the May 25 election for the European Parliament (EP). The party now holds 31 seats in the 751-strong EP, displacing Germany’s Christian Democratic Union as the largest parliamentary caucus.

DELIVERY TIME After his stunning victory at the polls, it is time for Prime Minister Renzi to start delivering on his promises. His performance may not just benefit Italy; Mr Renzi’s success at home may well be a harbinger of a fresh start for Europe. A year shy of forty, Prime Minister Renzi is much aware that he is one of the first of his generation to lead a major European power. As such, Mr Renzi has been handed an opportunity to not just set a new agenda, but also to capture the changing zeitgeist and perhaps become the man Europe has been waiting for to lead the continent across the watershed.

This former mayor of Florence, who took Italy’s national political scene by storm earlier this year, is widely considered a future heavy-weight in European politics. Though the continent boasts a few other promising politicians eager to carry out the needed reforms – Swedish Prime Minister Fredrik Reinfeldt (48) and his Dutch counterpart Mark Rutte (47) come to mind – only Matteo Renzi is backed up by a large nation that explicitly mandated him to impose a new style of politics, not merely on Italy but, more importantly, on Europe.

the two main candidates for the job, Brussels reverts to its politics-as-usual mode that most eligible voters couldn’t be bothered with a few weeks earlier.

Not a single one of the 28 heads of government engaged in the struggle for power – not excepting Matteo Renzi – has stood up to demand attention be paid to the issues at hand: The worrisome alienation of electorates throughout the union; the alarming levels of unemployment affecting young Europeans; the lack of a vision for the continent; the abject failure of the union’s European Neighbourhood Policy in the Ukraine; the dangers posed by an assertive and unpredictable Russia; and the patently unlawful and unfriendly activities of US spy agencies on EU territory. These are but some of the issues that may appeal to people in all EU countries.

Instead, EU leaders such as the president of the European Council Herman van Rompuy explain in fine detail why a directly elected commission president is an inconvenience. This “Mr Compromise” is his own worst enemy: Sorely lacking originality in both ideas and action, Mr Van Rompuy leaves no stone unturned to keep the current status quo intact and to ensure that Europe muddles along from one crisis to the next.

Everything points to Mr Renzi being aware of the weight that now rests on his shoulders: “If mainstream politics becomes convinced that it has survived the danger and goes back to shut itself away again, the eurosceptics will come back with great strength. If we had not done an electoral campaign in the midst of the people, in the piazzas – hard-nosed and open-faced in a very strong way – we would have been carried away, as happened in other countries.”

RENZI TO THE RESCUE In that sense, the UK’s dogged insistence on immediate change is to be appreciated. However, due to its long-standing tradition of scepticism towards the EU, Britain is unable to obtain any tangible results. The growing popularity of the blindly anti-European UK Independence Party further undermines Britain’s negotiating position.

Yet, Italy’s Matteo Renzi may come to the rescue.

Should Mr Renzi decide, as he well may, to join forces with the UK, Sweden, The Netherlands and Denmark, his support may well tip the scales and make Mrs Merkel think twice before dictating the terms of surrender in the current tug-of-war over who’s to hold the 12th presidency of the European Commission.

A BATTLE AS USUAL Meanwhile, now that the European elections are over and a new parliament has been installed in Strasbourg, the battle is on for the nomination of the successor of Mr José Manuel Barosso, president of the European Commission. As 28 heads of government jockey for position behind

Strengthened by his strong mandate, Mr Renzi could indeed make as much of a splash in Brussels as he did in Rome. For the sake of the union, and thus for the greatest effort at statecraft the world has ever seen, it is to be hoped that Italy’s young Prime Minister hears his calling. i

CFI.co | Capital Finance International

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The Euro - A Paradox Checks Into Hotel California It could have been conceived a bit more thoughtfully, but as a project the European common currency is not altogether farfetched or indeed destined for failure. The euro was specifically created to offer an alternative to the erstwhile all-mighty US dollar as the world’s reserve currency. At the time, Europe’s leaders still entertained visions of grandeur for the continent and were able to muster the courage to pursue their ambitions.

H

owever, be careful what you wish for.

Being the issuer of the world’s reserve currency is not necessarily a blessing. It brings the dreaded Triffin Paradox into play.

Belgian-American economist Robert Triffin (1911-1993) identified a conflict of interest between desirable domestic and international monetary policies faced by any country whose legal tender is being used as the world’s reserve currency.

In order to satisfy the international demand for its currency, the US must be willing to supply the dollars required. This implies running a significant current account deficit. Domestically, the US economy would be much better served by a current account surplus.

A PARADOX EXPLAINED The Triffin Paradox was the principal cause of the demise of the Bretton Woods Era. By the early 1960s the US dollar – still on the gold standard – had become seriously overvalued.

The Marshall Plan, cold war military spending, and rising imports all conspired against monetary prudence, resulting in a gaping current account deficit.

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The US government tackled the issue by restricting the amount of dollars in circulation through budget cuts. It also raised interest rates in an attempt to encourage the repatriation of as many dollars as possible.

US monetary policy swung from one side of the Triffin Paradox to the other, and back again, until President Richard Nixon in 1971 surprised both friend and foe by taking the dollar off the gold standard, effectively scrapping Bretton Woods by recognising that the US was no longer able to maintain anywhere near the required levels of gold reserves and trade surpluses.

There is no known solution to the dilemma first identified by Robert Triffin – it is impossible 46

“To make matters worse, these politicians also forgot – conveniently or otherwise – to include any provisions for a euro exit should a member state fail to properly adapt to the common currency.” to run a current account deficit and surplus simultaneously.

For all its woes, the new-fangled euro has so far been spared a brush with the Triffin Paradox. Only about a quarter of the world’s allocated monetary reserves are currently euro denominated as opposed to 61.2% for the US dollar. This allows Europe to run sizeable current account surpluses which in turn bolster confidence in the currency’s strength. These surpluses also explain why the euro has significantly appreciated in value against the US dollar since its introduction.

A NEAT SET OF TOOLS A current account balance expressed in solid black numbers offers central bankers an exceedingly nice and effective toolset with which to implement policy. For one, it allows them to keep interest rates low since there is absolutely no need to lure overseas deposits back home to plug any gaps. Low interest rates also make up for any loss in competitiveness suffered by a strong currency’s resistance to devaluation. The cherry on the top is, of course, the fact current account surpluses significantly contribute to a nation’s wealth.

Rather than trying to push the euro into the topspot as the world’s reserve currency of choice, policymakers at the European Central Bank (ECB) in Frankfurt and elsewhere in the union could do worse than concentrate on the ironing-out of the many design flaws that plague the euro. It is CFI.co | Capital Finance International

not so much the international reputation of the euro that needs the ECB’s attention, as it is the domestic trouble the common currency causes.

With the benefit of hindsight it is rather easy to state that the euro should initially have been adopted by only a handful of EU members. As it happened, the politicians in charge of the euro project at the turn of the century opted for a silly the-more-the-merrier approach using creative bookkeeping techniques to justify the inclusion of even the most fiscally unsound member states.

HOTEL CALIFORNIA To make matters worse, these politicians also forgot – conveniently or otherwise – to include any provisions for a euro exit should a member state fail to properly adapt to the common currency. EU countries that fail to comply with the fiscal dictates as laid down in the 1992 Maastricht Treaty may expect punishment in the form of fines and other administrative sanctions.

Moreover, punishment of unruly members is meted out quite arbitrarily.

Once an EU member state has adopted the euro, it has checked into Hotel California: “You can check out any time you like, but you can never leave.” Euro countries cannot get rid of the currency other than by renouncing their membership of the union. No country, and especially not one troubled by economics woes, can seriously consider shutting itself off from a 505 million-strong market. Thus, Greece, Spain and Portugal – to name but a few – are condemned to the euro on pains of reverting back to their rather unenvious pre-EU existence.

Rather than rushing through a banking union, fiscal union, transfer union or any other halfbaked plan aimed at averaging out the EU’s internal differences, the EU’s leaders should implement a much more pragmatic monetary policy that answers the concerns of voters across the union, accepts the lessons history teaches, and allows struggling nations a shot at monetary redemption.

Summer 2014 Issue

Instead of clinging to the mistaken notion that there is no way back for any country once contaminated by the euro, policymakers would be wise to accept that some – such as Greece – are just not ready for it. However hard the authorities in Brussels, Frankfurt and Athens may try, Greece will not become a sun-bathed version of Germany anytime soon. In fact, it requires no faculty for prescience to predict that the Greek will suffer long and hard before being confronted by the obvious: It is not going to work.

ACCEPTING THE INEVITABLE Why then not accept the inevitable and allow Greece to revert to its drachma which the country may then happily devalue to a point where both the trade and current account balances revert to surpluses? When faced with the consequences of their traditionally rather loose monetary policy, the Greek have always allowed the drachma to slide. And they are most assuredly not the only ones to have done so.

Even France habitually solved its many recurring issues – lagging productivity and a rather feeble level of international competitiveness – by depreciating the franc. When faced with the burst of a real estate bubble in 1992, even the Swedes – usually rather annoyingly vociferous when it comes to their supposed collective superiority – had to jack up interest rates to over 500% annually in a failed and foolish attempt to protect the kronor from implosion.

In fact only a select few EU countries have been able to get ahead without falling prey to

fiscally prudent lifestyle that – once attained – could very well lead to the painless adaption of a strong common currency.

REMOVING THE CORNERSTONE As it is, the euro has been made into a cornerstone of the EU edifice. This must be undone. The common currency is to be an option for those member states that can afford it. The euro is not to be the imposition it is today.

Interestingly enough, support for the euro is fairly high in the countries hurting the most from the monetary straightjacket imposed by Brussels.

Elsewhere in the union, eurosceptics are riding the wave of popular discontent over bailout packages and plans for further EU integration and amalgamation.

For all their eloquence and high-mindedness, those in the pro-euro camp fail to realise that the project, due to its very nature, will drive a wedge between the countries of Northern and Southern Europe. This the continent can do without.

The brinkmanship of the pro-euro faction is entirely unwarranted and rather selfish to boot. In order to protect their access to the lucrative markets of Mediterranean Europe, countries geared for export and trade such as The Netherlands and Germany dread the day they are shut off from these avid consumers via devaluation. A severely weakened drachma would work wonders for Greece but would also make Dutch and German products and services prohibitively expensive to Greek consumers.

The Greek, however, must be allowed to do what’s in the best interest of their country and society.

Right now, that best interest calls for an easy and quick fix as can only be delivered by a sharp devaluation of the means of exchange. Once the financial waters have calmed and the economy is humming again, European know-it-alls may of course dispense sound advice and apply gentle prodding to guide the country towards a more CFI.co | Capital Finance International

It is the Greek who are most in the spotlight due to the severity of the crisis their country is being made to suffer. Their plight, however, differs but little from that of the Spanish, Portuguese, Irish, and Italians.

VOX POPULI Whereas the Mediterranean countries have clearly shown a willingness to learn and adapt, the more monetarily prudent northern member states are reluctant teachers. In the end nobody is either happy or satisfied, making the union squeak and burst at the seams. The proposed patches – yet further integration, i.e. more of the same – run counter to public opinion in most northern member states, precisely the ones asked to foot the bill.

EU politicians need to pay much closer attention to what their voters are saying, instead of arguing that public opinion is ill-informed, motivated by emotion rather than fact, or just plain wrong.

Europe – and indeed the euro project – deserves much better than to be guided by the arrogance of technocrats or those misguided souls intent on financial world domination.

Let the US deal with the contradictions of the Triffin Paradox and the many other issues arising from its status as the issuer of the world’s reserve currency. Europe has other business to attend to. i 47

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The currency slipped anyway; banks tumbled and fell left, right and centre; GDP contracted by over 5%; and their economic model – previously hailed as being close to perfect – crumbled and was unceremoniously dumped. In the end, devaluation saved the day just as it did in France, Italy, Spain, Portugal, and Greece.

the easy cop-out of devaluation. Germany, The Netherlands and Finland spring to mind. Others like Belgium, Denmark, Austria, and quite possibly Hungary and the Baltic states, have been able to keep currency devaluations limited to within the bounds of reason. Members of both these groups would have been the natural candidates for a monetary experiment as farreaching as the euro aims to be.

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United Kingdom - Splitting Rage Takes Root For all admiration the British nation inspires, anglophiles and others slightly less impressed are wondering what is wrong with the United Kingdom and its people.

It’s not just that Scotland mulls independence, but also that the remainder of the UK (rUK) is increasingly enamoured with the idea that turning its back to the continent is actually an idea worth entertaining.

T

he most recent Vox Populi opinion poll commissioned by The Times shows that 40% of respondents favour leaving the European Union, whereas 37% feel comfortable staying in. Though these numbers are likely to change should a referendum be actually held, the outcome of such an exercise will be a close call.

In the election for the European Parliament of last May, the UK Independence Party claimed 27.6% of the vote leaving both Labour and the Conservatives trailing far behind. Meanwhile up north in Scotland the Yes Campaign is slowly gaining momentum. After the most recent faux pas of Chancellor of the Exchequer George Osborne, who rather abruptly dismissed the idea of a currency union between an independent Scotland and rUK, the yes votes shot up to 43% of the total.

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RUNNING GAG The problem with secession referenda is that they keep recurring. No is never the final answer.

Secessionists just wait a decade or two before trying again. Sooner or later a yes vote will be produced which is, by its very definition, final.

In Québec they keep on trying to get out of Canada every twenty odd years, while Catalonia is pressing hard to get the Spanish government to agree to a first referendum regarding its independence. A no vote in Scotland will not stop secessionist from trying again in a couple of decades. This running gag will go on until, through sheer exhaustion or supreme annoyance, voters actually agree – if only momentarily – to the proposed split.

In the case of Scotland the yes campaign is not likely to succeed this first time around. A devomax solution whereby the Scots gain a larger degree of autonomy within the UK is a much more plausible outcome. First-Minister Alex Salmond does himself and his cause no favour by insisting that an independent Scotland retain the British Pound as its currency; keep its (nonexisting) membership of the European Union; and preserve its access to superior BBC radio and television programming.

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“The problem with secession referenda is that they keep recurring. No is never the final answer.”

Disentangling Scotland from the UK is of course a Herculean task. However, given time and effort it can probably be done. A currency union is an entirely different matter. If some Scots seem dissatisfied with socially insensitive macroeconomic policies set in London – and see this as one of many reasons for supporting an exit from the UK – why would an independent Scotland allow its monetary policy to be set by the Bank of England? That makes absolutely no sense whatsoever.

A WEE BIT LOST The pro-independence movement led by FirstMinister Salmond at times seems a wee bit lost and quite unaware of the way sovereign countries operate and the instruments they use to manage their domestic affairs. A proper currency is one of those essential instruments. If an independent Scotland truly wishes to manage its own affairs it simply cannot use the British Pound. Unless the First-Minister thinks that the Bank of England is actually going to take Scottish national realities and aspirations into consideration when setting its monetary policy.

An even thornier issue concerns Scotland’s status vis-à-vis the European Union. Again, the pro-independence camp seems motivated by wishful thinking. Though for all its libraries of rules and regulations, the European Union lacks a proper procedure to handle the split-up of a member state. However, common sense dictates that an independent Scotland may face an uphill battle when it tries to remain in the EU. The key here is in the word “remain”. Scotland is most decidedly not a member of the European CFI.co | Capital Finance International

Union. The United Kingdom is. Scotland leaving does not terminate the UK as a sovereign entity.

The United Kingdom will just be a little smaller.

As such, the UK will not see its legal status in the EU changed.

ON THE OUTSIDE LOOKING IN Since an independent Scotland is to be a new sovereign state with all the attendant trappings, it will find itself outside the EU. This logical course of events and its outcome were repeatedly confirmed by European Commission President José Manuel Barroso on British television.

Mr Barroso did not make this stuff up as some of the more ardent proponents of Scottish independence suspect.

Thus Scotland will need to apply for EU membership from scratch. That should not pose a challenge. Having been formerly part of an EU member state, Scotland already abides by all the rules and regulations. But that’s only the administrative part of the story. For the exact same reason why the African Union refuses to award diplomatic recognition to break-away states, the European Union does not want to reward secessionists with instant membership status: It is likely to open the floodgates and cause severe disruption.

Catalonia is a case in point: Spain would rather not see one of its most prosperous regions depart.

However, the Catalans will not think twice should Scotland manage to gain fast-track access to the EU as an independent state. What is to stop the Basques to follow suit? The northern regions of Italy may very well want to go at it separated from the more cumbersome south. Belgium will split at its language seam while France will have to deal with the Corsicans. The list of possible splits and divisions is well-neigh endless.

ANOTHER SPLIT Then, of course, the UK – with or without the preceding “r” – increasingly seems to fancy a split of its own, seriously entertaining notions of independence from the eurocrats in Brussels and their interfering ways. Gone are the days of

Summer 2014 Issue

the late 1960s when, deprived of its empire and say in the world, Great Britain couldn’t wait to gain access to the then- European Economic Community in order to bolster its flagging fortune.

Britain’s first attempt at joining the continent was blocked by a loud French “non” in 1963.

President Charles de Gaulle suspected – not entirely without reason – the British of wanting to sabotage the community at the behest of their American overlords. A second attempt in 1967 failed as well due to French opposition. It was indeed American prodding that persuaded the British government to give it a third go in 1969 which resulted in the UK finally being admitted as a member in 1972.

Scotland: Edinburgh

Barely three years into its membership, some UK politicians already wanted the country to pull out. In 1975 a referendum was hastily organised to put the question to the electorate. However, slightly over 67% of voters wanted the UK to keep its EEC membership.

Even though British opposition to the European Union is reasonably argued, some countries – notably France and even Germany – are growing rather tired of the incessant complaints emanating from across the Channel. Most continental politicians have just about gotten over the antics and tirades of Margaret Thatcher who in 1980 lost her cool over the perceived largess of “Brussels” and threatened to withhold VAT payments, famously exclaiming in the presence of her stunned continental colleagues “I want my money back!”

SICK MAN SHOUTING It certainly made for good television and boosted Mrs Thatcher’s sagging popularity at home.

However, her outburst came at a time when Britain was still very much the sick man of Europe – a country where only recently the lights had gone out during a coal miners’ strike and home to an economy burdened by monumental inefficiencies, a weak currency, and an unruly and unproductive workforce.

Interestingly enough for someone who complains about democratic shortcomings, Mr Cameron gets quite worked up over the fact that the next CFI.co | Capital Finance International

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For all her handbag swinging and banging, Mrs Thatcher was considered but a British oddity in Brussels – someone best left to her own, rather eccentric, devices. Just as the UK had slipped silently back into the European fold along comes Prime-Minister David Cameron, threatening to overturn the apple cart yet again. It doesn’t take much imagination to see eyes rolling in Brussels.

Mr Cameron objects to a great many things of the EU: The union lacks transparency and democratic checks and balances; the union is also too large and cumbersome an administrative entity; it interferes too much and too heavyhandedly in the domestic affairs of member states; and it should place curbs on the freedom of movement of people. Mr Cameron’s list of complaints is depressingly long.

Scotland: Edinburgh

president of the European Commission hails from the parliamentary bloc that received the most votes in last May’s European elections.

Mr Cameron just happens not to trust the guy which is why the voters’ express wishes should be ignored.

ALL WORKED UP FOR THEATRICS Mr Cameron goes to Brussels all worked up to play for a home audience of people who have been whipped into as much of a frenzy as the British can possibly allow for by Mr Nigel Farage cand his happy band of eurosceptics, collectively known as the UK Independence Party (UKIP).

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Mr Farage, quite the public speaker and with an uncanny knack for creating Kodak Moments, wants the UK to withdraw from the continent and erect all sorts of barriers in order to shield his beloved isle from wicked foreigners such as the untold hordes of Bulgarians and Romanians that are apparently overrunning the UK and causing havoc wherever they appear.

In fact, the hordes failed to materialise.

When immigration restrictions were lifted for Bulgarians and Romanians as per EU directive earlier this year, nothing really happened. UKIP scaremongers were left Waiting for Godot. He never showed up.

The freedom of movement EU citizens enjoy throughout the union, is one of four fundamental rights enshrined in the union’s founding treaty.

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“The freedom of movement EU citizens enjoy throughout the union, is one of four fundamental rights enshrined in the union’s founding treaty.”

The others concern the freedom of capital transfers, the freedom of movement of goods and the freedom to establish businesses and provide services.

NO LOVE LOST FOR FREEDOMS Mr Farage and his followers do not like these freedoms one bit and would rather retreat to their side of the Channel. No matter that well over one million British subjects have made use of their freedoms to move elsewhere in the union and British corporations profit handsomely from having free and unfettered access to the EU’s internal market – the largest on the planet.

UKIP has so far been most explicit in its desire to take the UK out of the EU. However, it has failed to address any of the post-exit realities. Who will buy Made in Britain products? Will London survive as a hub of international finance? Who will provide work for the hundreds of thousands likely to lose their jobs as multinational corporations move their European head offices to the continent? How does little Britain expect to survive, let alone prosper, in a world dominated by large trading blocs that enjoy throwing their weight around? Where will pensioners go if they no longer enjoy the freedom to enjoy their CFI.co | Capital Finance International

retirement on Mediterranean beaches, with free healthcare thrown in for good measure by their amiable host countries?

STORM IN A TEACUP Rather than leave the EU, the United Kingdom could possibly take a more constructive approach to any outstanding issues by bringing them to the negotiating table with the support of a few allies and friends. Belgium and The Netherlands are obvious choices and so are Denmark, Sweden and the Baltic states. Italy could also easily be brought aboard, thus forming a mighty coalition of like-minded nations that together may provide a counterweight to the now dominant interplay between Paris and Berlin.

Thankfully, all the discussion, talk and noise over Scotland going its own way and the UK being fed-up with the European Union may just be the proverbial storm in a teacup.

Plus ça change, plus c’est la même chose - the more things change, the more they stay the same.

In the end, the British being an exceptionally reasonable people and a nation of shopkeepers to boot, the storm now raging will probably leave little damage. Some reputations may get bruised, some toes may get stepped on – overall common sense will likely prevail. The alternative is too fraught with risk and danger to even seriously consider. i

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Mr Cameron Throws a Tantrum and Loses an Agenda Politics must surely be one of the most fascinating of art forms. The levels of spin employed by artists to justify contradictory statements are at times mindboggling. One of the current top-performers must be British Prime-Minister David Cameron. He has elevated spin to levels seldom achieved before.

F

or quite some time now, Mr Cameron has argued that the European Union needs more democracy and less backroom wheeling and dealing. The EU’s lack of transparency is one of the primeminister’s pet peeves. He is, of course, quite right: The union could do with a bit more voter input.

One would have thought that Mr Cameron would welcome a strengthening of European Parliament’s so far rather limited powers. One would have been wrong. At first, Mr Cameron seemed rather pleased when it was decided last year to allow the EP a say in the appointment of the next president of the European Commission – the executive body of the union charged with running its day-to-day affairs.

It was decided that the blocs of political parties represented in the 751-strong parliament would each nominate a candidate for the post. At election time, this candidate would then be the leading face on the ticket. The bloc gathering the most votes was to be invited to present its candidate to the newly seated parliament for final approval.

The politician so selected would become the EP’s official nominee for the presidency of the European Commission. Government leaders throughout the EU promised solemnly to attach great weight and value to the parliament’s recommendation on this matter. In fact, the EP was told that its nominee would carry the day.

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The European Parliament is dominated by two caucuses: The European People’s Party (EPP, Christian democrat) and the Progressive Alliance of Socialists and Democrats (S&D, Labour). At last May’s European elections the EPP obtained 221 seats while S&D claimed 191 seats.

The EPP candidate for the presidency of the European Commission is the former primeminister of Luxembourg Jean-Claude Juncker whose nomination has now been duly endorsed by the parliament in Strasbourg.

Prime Minister: David Cameron

Back to Mr Cameron and his quest for increased democratic control over the EU. As it happens Mr Cameron severely dislikes Mr Juncker who he considers too manipulative, secretive and – in a word – way too continental, if not a puppet of the French and Germans. The British Prime-Minister will have none of it. In fact, he seems to have gone off his rocker and threatens everything short of outright war should the Council of Ministers have the gall to accept the EP’s nominee for the post.

Most other EU heads of state are quite flabbergasted by the Mr Cameron’s outbursts and are beginning to wonder what happened to his oft-repeated love of democracy. The British prime-minister now argues that his nemesis Mr Juncker is not a proponent of more transparency and represents the much-despised old school.

elephant in the room: Mr Juncker is the European Parliament’s choice for the post. As such, he represents the will of the voters and stands to become the most democratically appointed president of the European Commission ever. That in itself may not mean much, but is surely better than assigning the post to whoever comes out on top after much backroom wrestling between heads of government.

In fact, the British prime-minister is throwing but a tantrum following the example set by Mrs Thatcher. The sad part of it is that he may even wear his opponents down and get his way. Should Mr Cameron succeed in blocking Mr Juncker, the UK will have to keep quiet for a depressingly long time in Brussels. For that is how politics work: You’ve had your way, now please shut up for a while. Thus, an opportunity at pushing through a reform agenda for the EU will be lost. i

However, Mr Cameron fails to address the

“As it happens Mr Cameron severely dislikes Mr Juncker who he considers too manipulative, secretive and – in a word – way too continental, if not a puppet of the French and Germans.”

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> Norton Rose Fulbright:

EU Sets New Financial Laws for Non-EU Entities

By Simon Lovegrove

INTRODUCTION The Markets in Financial Instruments Directive (MiFID) is one of the cornerstones of EU financial services law setting out which investment services and activities should be licensed across the EU and the organisational and conduct standards that those providing such services should comply with.

Following technical advice received from the European Securities and Markets Authority 54

(ESMA) and a public consultation, in 2011 the European Commission published legislative proposals to amend MiFID by recasting it as a new Directive (MiFID II) and a new Regulation (MiFIR). The legislative proposals were the subject of intense political debate between the European Parliament, the Council of the EU (the Council), and the Commission. However, informal agreement between the EU institutions was finally reached in February 2014. This led to MiFID II and MiFIR being approved by the CFI.co | Capital Finance International

European Parliament on 15 April 2014 and by the Council on 13 May 2014.

On 12 June 2014, MiFID II and MiFIR were published in the Official Journal of the EU with entry into force being on the twentieth day after publication. MiFID II and MiFIR enter into application 30 months after coming into force (beginning of 2017). In relation to implementing measures for both MiFID II and MiFIR, ESMA has now published its discussion paper on future

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technical standards and a consultation paper on draft technical advice on the possible content of delegated acts to be produced by the Commission.

The deadline for comments on both papers is 1 August 2014.

THROUGH AN AUTHORISED BRANCH A member state may allow third country firms to provide investment services or perform investment activities to clients in its territory through a branch authorised in that member state.

THIRD COUNTRY PROVISIONS: CHANGES UNDER MIFID II Of all the provisions of the MiFID II and MiFIR texts, the third country provisions were the subject of some of the most heated – and high profile – debate and lobbying. Articles have dropped in and out of different drafts produced by the Council and the European Parliament at a confusing rate, and it has been difficult to keep track of the latest developments.

However, such branch authorisation may only be given by the member state’s national competent authority: • Where the firm is authorised and supervised in respect of the provision of the relevant services in its home third country jurisdiction; • Having regard to the Financial Action Task Force (FATF) recommendations relating to anti-money laundering and counter terrorist financing; • Where co-operation arrangements exist between the relevant member state and third country regulators, relating to the exchange of information for the purposes of preserving the integrity of the market and protecting investors; • Where the branch has sufficient initial capital at its free disposal; • Where branch management consisting of one or more persons is appointed in accordance with, and complies with, the governance requirements of MiFID II and the CRD IV; • Where a tax information sharing agreement (complying with the standards in Article 26 of the OECD Model Tax Convention) has been entered into between the relevant member state and the home third country jurisdiction ensuring an effective exchange of information in tax matters; and • Where the firm belongs to an EU investor compensation scheme.

The term “third country” refers to jurisdictions outside the EU and “third country firms” refers to entities incorporated outside the EU, whether they do, or seek to do, business by way of a branch established in the EU, or on a cross-border basis – i.e. providing services to persons in one jurisdiction from a place of business in another jurisdiction, without any establishment in the client’s jurisdiction.

With the review of MiFID, the Commission has attempted to create a harmonised regime for granting access to EU markets for firms in third countries. However, the regime is limited in scope to the cross-border provision of investment services and activities provided to per se professional clients and eligible counterparties.

As regards the third country regime for retail clients and opted-up professional clients, full EU harmonisation could not be achieved, as member states are free to continue to apply national rules.

However, where member states chose not to maintain their respective national regime, MiFID II provides for a detailed set of rules that are designed to harmonise the requirements with which the branch of the third country firm will have to comply in order to be authorised by the national competent authority of the member state.

To put it in the Commission’s words “third country firms should see this as a positive step forward as it reduces divergences across member states and therefore the legal and regulatory costs for third country operators.” Where a member state makes use of this option, third country firms may not provide services to these clients other than through a branch authorised pursuant to the harmonised procedure set out in MiFID II by the respective member state.

“The author in A third country firm may, however, provide investment services and activities to clients on the exclusive initiative of such client, without requiring authorisation or registration in the EU.”

Third country firms dealing with professional clients or eligible counterparties will, on the other hand, be permitted to operate on a cross border basis either from outside the EU or (if provided for in the respective member state and then subject to further conditions) from a branch in a member state.

In each case, there will be a greater, formalised focus on agreements between the EU and third country regulators and the assessment of third country regimes. There is also an exclusion in the form of exclusive initiative.

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Such branches must comply with various organisational, conduct of business, trading and other MiFID II requirements and will be subject to the supervision of the national competent authority in the respective member state where the authorisation was granted. It is interesting to note that member states will not be permitted, save in limited circumstances, to impose any additional requirements on the organisation and operation of the branch in respect of matters covered by MiFID II and that such branches may not be treated more favourably than EU investment services firms. Insofar, MiFID II amounts to maximum harmonisation.

An important point to note is that the relevant member state national competent authority may only authorise a branch where the applicant is authorised and supervised in its third country home to provide all of the services for which it is requesting branch authorisation. This not only would exclude branches of unregulated firms, but would also restrict the scope of activities that a regulated third country firm can perform through a branch, to the extent that any such services are not regulated in the home third country. This may cause problems given the complexity of the definitional scope of different services and activities in and outside the EU. DIFFERENT TYPES OF CLIENT On the face of it, this provision in MiFID II applies to firms providing services specifically to retail clients and opted up professional clients. However, MiFIR 55

provides that branches authorised pursuant to MiFID II may provide investment services to eligible counterparties and per se professional clients across the EU, provided their third country legal and supervisory framework has been recognised by the Commission as equivalent (see below).

From this, it can be concluded that such branches can provide their services to per se professional clients and eligible counterparties throughout the EU on a cross border basis (with appropriate equivalence decisions). However, where such a third country firm wishes to provide services to retail clients and opted-up professional clients in other member states, it would either need to: • Apply for a separate authorisation in each member state in which it wishes to provide services and establish a branch in each one (where the member state’s regime provides for this possibility); or • Comply with the local regime governing market access in case of retail or opted-up professional clients.

Where a member state has implemented the MiFID II provisions on the establishment of third country branches, a third country firm that has not established a branch in that member state will not be able to provide investment services with or without any ancillary services to retail clients or opted-up professional clients (except on such client’s exclusive initiative, see below).

Where a member state’s regime does not require the establishment of a branch, the provision of services to retail clients and opted-up professional clients will be subject to the respective national requirements.

Author: Simon Lovegrove is a lawyer in the financial services group at Norton Rose Fulbright LLP.

An ESMA registered third country firm will have to inform prospective EU clients that it cannot provide services to EU clients other than per se professional clients and eligible counterparties and is not supervised in the EU. It must also offer to submit any disputes relating to its services or activities to a court or tribunal in the EU.

CROSS-BORDER However, a third country firm may provide investment services to eligible counterparties and per se professional clients on a cross border basis where such firm is registered with ESMA. ESMA will only register such third country firms TRANSITIONAL PROVISIONS where: Where there is no currently effective Commission The Commission has adopted a decision that the equivalence decision in respect of any particular prudential and business conduct requirements third country, member states may allow firms in the firm’s home third country have equivalent from such third country to continue to provide effect to MiFID II and CRD IV; investment services to eligible counterparties • The Commission’s decision also concludes and per se professional clients, if permitted by that such third country also has an effective (and in accordance with) the relevant national and equivalent system for the recognition of regimes. investment firms authorised under the respective third country regime; There is also a transitional provision in MiFIR • The firm is authorised and supervised in its under which firms will be able to continue to home third country in respect of the provision of provide services and activities in accordance the relevant services (as with the requirements with national regimes until three years after the for branch authorisation, this would restrict the adoption of a Commission equivalence decision scope of cross border services that a regulated in respect of the relevant third country. It is third country firm can perform to the extent that not clear whether this transitional provision is any such services are not regulated in the home intended to apply to services provided to all client third country); and types or whether it is limited to cross border • Co-operation arrangements exist between business.

ESMA and the firm’s third country home regulator which, among other things, relate to EXCLUSIVE INITIATIVE OF CLIENT the exchange of information and co-ordination of A third country firm may, however, provide Financial institutions supervisory activities.

Energy investment services and activities to clients on 56

Infrastructure, mining and commodities Transport CFI.co | Capital Finance International Technology and innovation Life sciences and healthcare

the exclusive initiative of such client, without requiring authorisation or registration in the EU. Such “exclusive initiative” rules will likely be interpreted strictly and a number of points in particular must be considered: • There is a clear indicator that a bullish approach to “reverse solicitation”, where firms raise their profile through various forms of marketing and seek to claim that any prospective clients that subsequently get in touch have not been solicited, should not be tolerated; • Once a third country firm that is not authorised in a member state has established a relationship with a client (following the exclusive initiative of such client), it cannot subsequently provide such client with other services (unless such additional services have also expressly been sought at the exclusive initiative of the client). In other words, the “exclusive initiative” test applies on a service by service basis, not on a relationship basis; and • That said, there is some ambiguity as to whether, having been approached by the client (on the client’s exclusive initiative) to provide a service, the third country firm may subsequently provide repeat instances of the same services/ product type to the client. In theory this may be possible, but in practice it is likely to be a risky approach to take. i

Summer 2014 Issue

> CFI.co Meets the Vice President of Global Trust:

Andreas Thanos

A

t a time when Greece was descending into the depths of a financial crisis without equal in the country’s history, one firm was doing just fine, abiding by a simple, yet highly effective, corporate philosophy that puts clients’ interest ahead of other considerations.

Mr Thanos readily admits that change was needed and is now indeed taking place. “The problem with that is that change was imposed in rather haphazard way with foreign stakeholders such as the troika (ed. the triumvirate composed of the European Commission, the European Central Bank, and the International Monetary Fund) emitting diametrically opposed instructions that often made no sense at all. They were micromanaging a crisis that stood in need of a solid macro policy. Moreover, it was expected that Greece carry out these instructions immediately.

This caused havoc not just in the wider society but also in the way it is being run with those doing the running not quite knowing how they were supposed to be doing their job. Radical change imposed from one day to the next without any preparation or forethought whatsoever proved a recipe for disaster.”

“Since the trouble in Greece started some six years ago, we have tripled our staff level and saw a six-fold increase in the volume of assets we manage.” Andreas Thanos, vice-president of Global Trust Independent Financial Advisors explains that while banks were tumbling and people feared losing their money, his firm managed to stay one step ahead of the unfolding crisis and managed to fully protect its clients’ capital through diversification of various financial institutions and through different type of financial products.

“As fear mounted that Greece would revert back to the drachma, we began receiving a surprising number of new clients who entrusted their savings to Global Trust. I’m happy to report that none lost any of their money. Throughout the crisis we actually succeeded in obtaining good returns for our customers via corporate bonds, foreign equities and bond funds.”

Mr Thanos, a certified portfolio manager, since 2001 can look back on a long career that introduced him to nearly all facets of the financial sector. He has been monitoring international financial markets since his student days in London back in 1986. Mr Thanos worked in both Greece and the UK as a financial analyst, consultant and broker, for a number of financial management firms of renown. He has managed Greek, European, US and BRIC equity portfolios, Euro and US dollar bond portfolios, for HNWI (high net worth individuals) and institutional investors. He has also served as head of asset management of both advisory and discretionary services.

Mr Thanos has further honed his skills and is now considered an expert in the management of capital in turbulent times.

“Even though the environment has been very challenging over the past six years, it has not been entirely without opportunity. At Global Trust

VP: Andreas Thanos

we aim to blaze new trails and pioneer effective solutions to any unexpected circumstance.

Success comes through good judgement, hard work, expertise, being one step ahead of what is coming; and above all providing an extraordinary service to our clients”.

Though Global Trust prospered during the lean years past, the firm also has to battle the numerous misconceptions that persist regarding Greece and its business culture. “In some corners of Europe, the Greeks are deemed quite lazy, while in reality some people in the private sector, who during this crisis were shouldered the shortages made, have been working 50 hours a week, or more, for the past two to three years, in order to compensate for others being laid off, or retired. Some of them are getting less money today than before or as much as they were getting ten years ago”.

However, things did turn around. “With a 26% decline in its GDP and a turning of a primary deficit of more than 13% into a surplus, over the last 6 years, Greece has started gaining respect in the eyes of the international financial community. Previously any trader holding any type of Greek asset ran the risk of being summarily fired if found out. Today that trader is buying Greek assets with great appetite and is likely to be in line for a promotion, or a bonus.

After hedge funds moved in and made untold hundreads of millions in the process, investors reawakened to the possibilities and opportunities available in Greece.”

Mr Thanos enjoys long distance running. “I enjoy long distance running as I help manage Global Trust and the capital entrusted to us. Investments are not unlike long distance running in as much as they require stamina and perseverance.

Investing is a marathon and decidedly not a sprint”.

All staff members at Global Trust charged, or involved with managing funds, are certified financial advisors. The firm boasts over a century and a half of accumulated professional investment experience. In its current form, Global Trust has been in business since 1998.

However, the firm traces its roots back to 1990 when it started as a financial consultancy company. Global Trust is currently expanding its offices in Athens. i

“Since the trouble in Greece started some six years ago, we have tripled our staff level and saw a six-fold increase in the volume of assets we manage.”

CFI.co | Capital Finance International

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> European Federalist Party:

Democracy and a Social Contract The Way Forward for Europe

E U ROP EAN FE DE RALIST PARTY

By Pietro De Matteis

It took the worst crisis since the 1930s, five long years of austerity, and constant PARTI EU-bashing by national politicians busily hiding the failures of their own FE DEpolicies, RALISTE but finally it happened: The citizens’ trust in the European project E Ucrumbled.

ROP ÉEN As if that was not enough, by opposing any significant reform towards a more democratic union, our politicians paved the way for the rebirth of nationalist movements across the continent. Bravo!

L

ike an old house hit by a severe storm – call it crisis if you wish – Europe urgently needs a thorough renovation to remain habitable for future generations.

At a time when nationalists and euro-sceptics are riding the fears and the dissatisfaction resulting from the crisis, it has become crucial for each one of us to come out and take responsibility in order to ensure that future generations of Europeans will be able to benefit – as we did – from high quality of life, mobility, peace and, more importantly, hope.

Hope for a better future. Hope has become a scarce resource in today’s Europe where youth unemployment has reached about 25% in the EU and peaks at 50%-55% in Greece and Spain.

If youth is the basis of our future, youth tainted by despair translates in a hopeless future. This is something that we simply cannot accept.

Clearly the way the crisis has been managed, and its social and economic costs, amply justifies the questioning of the policies that have been implemented and the methods of their implementation. In other words: It has become clear to all Europeans that we need to change course.

OPTIONS The question is which path to take. The time to choose is now. Do Europeans want austerity policies or growth? Do they want a mere internal market or a Europe that protects its citizens and their welfare? Do Europeans want to wait another 30-40 years to see any significant improvement take place, or are they ready to change Europe now?

In some ways, today’s Europe resembles a car that is heading straight for a solid brick wall. This wall was erected through Europe’s decreasing competitiveness, its structural and institutional inefficiencies, the rise of new powers, and the arrival of new global challenges.

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“The problem is that the politicians currently in power cling to a potentially catastrophic business-as-usual mode.”

The problem is that the politicians currently in power cling to a potentially catastrophic business-as-usual mode. Even the cleverest ones argue that significant changes are not possible now and that we will have to wait another two or three decades. It is most unlikely that the world will patiently wait for Europe to sort out its own problems. Young Europeans cannot reasonably be expected to wait for three decades either.

The nationalists, however, seem to have taken note of the problems affecting today’s Europe and feel the need to act. Sadly, they are giving the wrong answers to the right questions. Leaving the EU, re-establishing national borders, and scrapping the euro are recipes that will only accelerate Europe’s decline.

Luckily, there is a third way. In stark contrast with the risk-fraught business-as-usual approach proposed by mainstream parties – and with the suicidal policies peddled by nationalists and Euro-sceptics alike – Europe can still count on pragmatic-dreamers who believe that the only way to tackle today’s and tomorrow’s challenges is by building a better union.

It is naïve to think that we can tackle 21st century challenges with 19th century tools. We need a new level that transcends national politics. We need Europe and we need that Europe to be much more transparent, open and democratic.

We want a Europe that is closer to the people and is in touch with their expectations: A Europe with a much more positive vision of the future CFI.co | Capital Finance International

E U ROPÄISCHEN FÖDE RALISTISCHE PARTE I

that actually is in tune with its citizens and truly represents their aspirations. We need the United States of Europe.

This new vision can only be realised with Europeans from across the continent sharing their concerns and offering common solutions.

We could use a Europe-wide Social Contract since it has becoming glaringly apparent that our countries are no longer able to guarantee growth and jobs as they used to in the past.

MISSING TOOLS Right now, Europe lacks both the democratic mandate and the tools to take a lead in these matters. This shortcoming is creating an enormous capability-expectation gap in the popular perception which in turn leads to voters feeling alienated from politics. The high abstention rates, even at local elections (38% in France), is pushing the electorate towards the extremes. Those who still vote are the ones with an axe to grind leading to a polarisation of the political spectrum.

What many Europeans are asking for is a more “social Europe” protecting the mobility of workers / students and job-seekers while reducing social dumping – the worrisome tendency to ignore the plight of entire demographic groups. A Social Europe is a place that common people can relate to, an edifice in which they have a voice and say, and that they can help shape. Europe could do much worse than to introduce the needed level of democracy via an elected president, heading a government that is being kept in check by a bicameral parliament.

This would be a Europe that is able to facilitate the life of small and medium-sized businesses and one that empowers its industry to fully compete in the global market. It is also a continent-wide structure sensitive to issues of paramount importance such as youth employment and the encouragement of key

Summer 2014 Issue

sectors such as energy, transport and research.

Finally, this would be a Europe that is able to effective throw its considerable weight around on the international scene with a clear foreign policy that is backed up by a truly European diplomacy and a sizeable standing army.

Carrying out these reforms does not only make sense from a political point of view, but also from an economic one. In fact, according to a recent study published by the European Parliament Research Centre, we could save at least EUR800 billion annually if we were to mutualise some of the policies outlined above.

This means that we could distribute EUR200 monthly (EUR2.400/year) to each European voter or, as we propose, put in place some ambitious policies boosting economic growth, research, social justice and youth employment.

Unfortunately, what citizens are receiving now is still a far cry from the above. The USinspired crisis that devastated Europe has been associated with the implementation of painful and brutish austerity policies.

Belgium, France, Greece, Italy and Portugal, the EFP launched Europe’s first transnational list for the European Elections (more info: www. votefederalist.eu) in Brussels on May 5th.

As an Italian living in Brussels, I was number 2 in Belgium on the list “Stand Up for the United States of Europe” – a list composed exclusively by young people less than 36 years old.

We believe that changing Europe is not just wishful thinking: It is possible, necessary and urgent. Europeans can vote for another Europe.

But we have to act now. If we want to tackle today’s and tomorrow’s challenges, we have to think on a European level, and we need to actively support those political movements that put Europe at or near the top their political priorities and are unafraid to court a much more ambitious vision for the continent.

BRIDGING THE GAP To bridge the gap between what Europeans want and what the EU is providing, the European Federalist Party (EFP) is busy pushing other political parties to engage in a debate on Europe.

It aims to develop a pan-European political public space. By amalgamating the federalist in Austria,

Only a truly democratic and federal Europe can liberate the energy that is latent in European society, thus triggering a new European Renaissance. If Jean Monnet, one of the fathers of today’s Europe, were with us today, he would tell us that we took enough “small steps”. It is now time to run and take off. We do not want to miss our historic calling. Current and future generations of Europeans will not look kindly to our present inaction and will hold us accountable.

What will you say to your grandchildren if you did not even try to change things? i

ABOUT THE AUTHOR A convinced European federalist, Pietro De Matteis holds a PhD in international studies form the University of Cambridge. After some experience at the European Central Bank and at the EU Institute for Security Studies, he currently works for the European Commission where he manages cooperation programmes with third countries.

An economist by training, he graduated from the University of Milan-Bicocca (summa cum laude) and obtained a Masters-level degree from the European College of Parma. Thanks to some scholarships he had the opportunity to conduct research in the US at Columbia University and in China at Renmin University. He has also worked

for the Chamber of Commerce of Milan and for a Multinational Company in Shanghai.

Pietro first joined the federalist movements after his Erasmus year at University of Paris PantheonSorbonne in 2003.

Following the rejection of the European Constitution in France and in the Netherlands, he started to work for the creation of a truly panEuropean and federalist political party, capable of giving Europeans a stronger and more direct voice in European politics. Since 2011 he serves as the co-president of the European Federalist Party – the only bottom up and pan-European political party with sections in sixteen countries.

The EFP strives for a more democratic, efficient and cohesive Europe.

CFI.co | Capital Finance International

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> European Policy Centre on Financial Transaction Tax (FTT):

Why the EU Needs the FTT but the FTT Does Not Need the EU

By Jan David Schneider and Fabian Zuleeg

BACKGROUND The nature of the continuing crisis in the euro area has changed several times. With the collapse of Lehman Brothers in September 2008 and the subsequent outbreak of the global financial crisis, Europe’s banking sector was on the verge of collapse. With already excessively high public debt levels accumulated in some parts of the European periphery, the required public support for the struggling financial sector overstrained the public financial capacities in these countries.

Consequently, the banking crisis evolved into a sovereign debt crisis which pushed Europe into the worst recession since World War II. The sluggish economic recovery and the unbalanced austerity policy as a response to the crisis have exacerbated the negative social repercussions for some parts of the eurozone’s population, especially among the young. As a consequence, the crisis has developed into a social crisis that is likely to have a long-lasting effect on the well-being of European citizens and on the general state of the EU and its political stability. With potential long-term effects on Europe’s future human capital, record high youth unemployment rates in the periphery and some core countries are challenging our understanding of generational equity.

Nevertheless, the economic fragmentation and divergence among euro area countries makes structural reform at the Member State level as necessary as ever. The countries most affected by the crisis have started their painful reform process which has already – although with mixed results – born some fruit.

At euro area level, important reform proposals to correct for the eurozone’s missing fiscal union have been proposed and implementation is moving forward in many areas. The introduction of the ’Fiscal Compact’, the ’Six-pack’ and ’Two-pack’ have enhanced debt monitoring and prevention while keeping debt mutualisation to a minimum. Furthermore, these actions are also important steps towards improving the much needed fiscal policy coordination between EU countries and, in an even more stringent way, for the eurozone.

In response to the negative feedback loop between sovereigns and banks, the effort to establish a Banking Union is a historical step forward to prevent the nationalisation of banks’ debts in future crises. Founded on a Single Rulebook, major elements of the final proposal 60

“At this point in time, finding the right balance between austerity and counter-cyclical fiscal policies is the key challenge policy-makers are facing.” are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).

Whereas the SSM covers approximately 6000 banks, only the 128 largest banks will be directly supervised by the ECB. The SRM consists of a Single Resolution Board and a Single Resolution Fund (SRF) that is financed by the banking sector. Although the final shape of the Banking Union constitutes a great effort towards stabilizing the financial sector, the feedback loop between sovereigns and banks could not entirely be broken. As the SRF will only be backed by 55 billion Euros, it remains questionable whether the SRM could handle large banks in distress. The SRF needs more funding in order to efficiently eradicate the possibility of further ‘too-big-to-fail’ situations.

At this point in time, finding the right balance between austerity and counter-cyclical fiscal policies is the key challenge policy-makers are facing. Legitimate calls for more fiscal stimulus and immediate support for growth inducing measures have been expressed by many. However, room for fiscal expansion within national budgets will be narrow in the next few years if not decades. As further debt financing is neither viable nor just towards future generations, it would therefore be very useful to tap new sources of revenue – something that the introduction of an EU-wide Financial Transaction Tax (EU-FTT) could contribute to.

STATE OF PLAY The Banking Union proposal is more of a long-term project to future-proof the eurozone for crises to come, but in addition, a timely introduction of the FTT could also benefit the participating countries in the short or medium term by providing them with more space for fiscal manoeuvre. Through an Enhanced Cooperation Procedure (ECP) eleven eurozone countries (ECP11) – among them the four biggest, Germany, France, Italy and Spain – have aspired to go ahead with the introduction of a harmonisation and extension of their partly already existing but scattered FTT-regimes.

CFI.co | Capital Finance International

With respect to this, the European Commission had in February 2013 presented an ambitious proposal outlining three main objectives: (i) preventing Single Market fragmentation by harmonising existing legislation; (ii) discouraging financial transactions which are harmful for the efficient functioning of financial markets and the real economy, and (iii) participation of the financial sector in sharing the burden of the crisis by making a contribution to public finances. Apart from the harmonisation aspect, the innovative part of the EU-FTT proposal would be that all transactions of financial instruments made by financial institutions such as banks, insurance companies, funds and asset managers, will be subject to the tax. This will include transactions of securities such as stocks, company bonds, government bonds, most money-market instruments and most importantly all derivatives, both for organised exchanges as well as over the counter. The original proposal was coined to include ’all instruments, all markets, all actors’. It is also noteworthy that shadow banking activities such as securitisation and repurchase agreements (repos) are covered as well. The inclusion of the latter has however, caused some intense discussions and is unlikely to make it into the final directive. In terms of technical practicality, tax collection could be easily achieved through the involvement of existing clearing houses and trading platforms.

Regarding the revenue potential, the EU Commission calculated the estimated tax receipts from applying the original model to be 30 to 35 billion Euros – an excellent opportunity to create substantial revenues from a sector that, in comparison to others, has been widely undertaxed. These funds would be ideal to, for instance, intensify the fight against high youth unemployment levels. The EU Youth Guarantee scheme introduced in April 2013 will be backed by six billion Euros of EU money for distribution in the next few years. In 2012 the International Labour Organisation has estimated the necessary funding to be in the area of around 21 billion Euros. Would it not make sense to use the FTT as a contribution from those actors that stood at the beginning of the crisis to those bearing the brunt today?

Although retail investors, SMEs and pensioners are explicitly excluded from the transaction tax, the tax will almost certainly be passed on to them, should their transactions involve any financial institutions. Some determined opponents against an FTT have used this fact for horror

Summer 2014 Issue

“The sluggish economic recovery and the unbalanced austerity policy as a response to the crisis have exacerbated the negative social repercussions for some parts of the eurozone’s population, especially among the young.�

CFI.co | Capital Finance International

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scenarios on sharp losses of pensioners’ savings and so forth. However, as longer-term oriented buy-hold strategies will naturally require fewer transactions, the tax will be almost unnoticeable for the aforementioned groups since the rates will be set at fairly low levels – 0.1% against the exchanges of shares and bonds and 0.01% for derivative exchanges applied on the notional value of the underlying transaction. Such rates will nevertheless be high enough to create substantial revenues from those engaged in highfrequency trading due to the sheer amount of transactions that are necessary to sustain these types of business models.

Other concerns brought forward against the original EU-FTT proposal can broadly be assigned to three different areas, all of them involving a reduction of financial liquidity: (i) the dichotomy between hedging and speculation, (ii) relocation and tax arbitrage, and (iii) the inclusion of repurchase agreements (repos).

DICHOTOMY BETWEEN HEDGING AND SPECULATION The discussions around the EU-FTT are inevitably linked to an evaluation of the prevailing theories on financial markets. According to the predominant Anglo-Saxon view on financial markets, trading activity, i.e. liquidity, exactly reflects the necessary amount for smoothing asset prices. An FTT would therefore significantly curb short-term transactions and thus reduce financial liquidity leading to higher asset price volatility, which would have direct repercussions on economic growth and competitiveness for the European economy. On the contrary, the Commission’s proposal is expressing a fundamentally different evaluation of financial markets and criticises the perception of ’the more liquidity the better’.4 Due to a preponderance of short-term speculation, there is excess (or virtual) 62

liquidity that is not necessary for the provision of financial services to the real economy. The reduction of short-term speculation would even have positive effects on asset prices and thus the functioning of financial markets despite the existence of lower overall liquidity.

outflow of financial liquidity from the ECP-11 area to other financial centres such as London or New York. Due to this liquidity loss, price volatility would rise which would, contrary to the intended stabilising effect, negatively impact asset price stability.

A rationale behind the harmful impact of shortterm speculation and positive effects of an FTT on asset prices is exemplified in Schulmeister (2009):5 asset prices are constantly overand undershooting their equilibrium prices in cyclical swings. Empirical findings suggest that short-term speculation prolongs these swings even further, a contradiction to the AngloSaxon view. In turn, this increased volatility for instance, adds to the creation of ‘bubbles’ and causes higher uncertainty, which entails costs to the economy. An FTT could smooth these swings through its dampening effect on short-term trading, in particular on derivatives transactions. Similar to an argument made above, risk hedging related to economic fundamentals requires fewer transactions than speculation and makes it consequently less affected by a low-rate FTT. In fact, the scholar argues that only a small fraction of derivatives trading is part of such hedging activities, the majority can be assigned to short-term speculation. These results are questioned by speculators that need to protect their business models. From a welfare perspective however, these practices are not in the interest of society and are therefore necessary to be corrected for.

Financing, insurance and risk transformation, essential to the functioning of the real economy, are much less affected, if at all.

The Commission’s design of the EU-FTT can however prevent such major outflows, as the tax will not be determined by the location of the financial transaction but by the origin of the involved actors as well as the underlying asset (’residence plus issuance’). For example, a German bank that would want to avoid the payment of the tax would need to ignore its entire market operations in the ECP-11 as well as move its headquarters and cease trading all financial products from this area. The likelihood of this happening shows that a critical mass of participation could be established if the proposal was thoroughly implemented in all participating countries. Naturally, not all tax arbitrage possibilities and relocation effects can be prevented, so wider participation would provide even greater benefits to all participating countries.

RELOCATION AND TAX ARBITRAGE Regarding the potential relocation of financial liquidity, a poorly designed FTT could cause an CFI.co | Capital Finance International

INCLUSION OF REPURCHASE AGREEMENTS (REPOS) A large part of the discussion on the loss of liquidity is connected to the debate around the inclusion of repos into the tax base. Although the inclusion was part of the original proposal from February 2013, in mid-2013 the French government, the ECB and representatives of the finance industry expressed their deep concerns over the taxation of repo transactions. Repos are liquidity-enhancing financial instruments with an advantageous risk management framework.

The ECB considers repos as an essential part in its strategy to move away from being the largest intermediary of liquidity, a role it took over due

Summer 2014 Issue Germany: Frankfurt

to the collapse of inter-bank lending during the crisis.

However, repos also provide an easy and cheap way to create leverage and hence risk, as basically any asset can be used as collateral and transformed into cash through repos. New repos are repeatedly used with the same collateral to create more and more leverage, a practice that could be reduced through a transaction tax. In times of crisis, when collateral depreciates due to plunging asset prices and increasing ‘haircuts’, the repeated use of the same collateral can take its toll, which may lead to massive defaults of financial institutions. The Lehman Brother collapse can in essence be explained by what Gorton & Metrick (2012) called a ’run on repo’.

A final decision on the inclusion of repos into the tax base, has to eventually face the tradeoff between long-term financial stability and the loss in liquidity. Whether such a liquidity loss is acceptable or not is directly linked to the position on the excess (virtual) liquidity issue.

PROSPECTS Some non-participating EU countries have expressed their concerns that the proposal would have implications for their domestic financial sector. In April 2013 the United Kingdom legally challenged the EU-FTT plans, criticising its potential impact on Britain’s financial sector. The Commission responded that only transactions with a connection to the ECP-11 area would be affected which would be fully in line with international law regarding cross-border taxation.

The challenge was eventually dismissed by the European Court of Justice on 30 April 2014.

In addition to the discussions around repos, the willingness to go forward with the finalisation of an ambitious proposal has lost some momentum

recently; some of the envisaged compromises may even threaten the viability of the whole project. On 5-6 May 2014, in the last Eurogroup and ECOFIN meetings before the European elections, the ECP-11 block, apart from Slovenia due to its government crisis, expressed to aim for a gradual introduction, i.e. the initial exclusion of certain derivatives. With the prospect of a full coverage only in the distant future, this may defeat the whole rationale of the tax. Including a wide tax base, thereby closing loopholes for speculation, was at the core of the initial proposal and remains crucial to ensure the collection of substantial revenues as well as for stabilising asset prices. It remains unclear when, and whether at all, a full coverage of all derivatives can be achieved in future. Furthermore the ECP11 now seeks implementation of the directive only by 1 January 2016. Bearing in mind the initial plans for an introduction in 2014, this prevents the tax from being a short-term support to overcome the social impacts of the crisis. In addition, a strong commitment regarding the sensible usage of the tax revenues has yet to be made.

social and unsocial trading practices and by correcting for the latter. i

Please see the online version at cfi.co for references. This Policy Brief is based on an article written by the author and Fabian Zuleeg, Chief Executive and Chief Economist at the EPC, which was published in Polish in the magazine ‘Instytut Idei’ on 09 April 2014.

In the next few months it therefore becomes of vital importance to protect the February 2013 proposal from further far-reaching and counterproductive exemptions while negotiating towards a comprehensive inclusion of all derivatives as early as possible, in the way it was intended in the first place. Bearing in mind that several EU countries already have FTTs in place, a harmonising EU-FTT would also be a step forward for strengthening the Single Market.

Cleary, the EU-FTT is more than just a tax. It is a contribution to the much needed modification of the prevailing global Anglo-Saxon financial system, through making careful judgements on CFI.co | Capital Finance International

Author: Jan David Schneider is Economic Research Assistant at the European Policy Centre (EPC).

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> Connie Hedegaard, EU Commissioner for Climate Action:

Breaking Europe’s Imported Fossil Fuels Addiction

E

urope is by far the largest importer of fossil fuel in the world. Recent developments in Ukraine, Syria and Iraq highlight once again how vulnerable our economy is to price spikes, external energy shocks and other regimes’ wishes.

Like a patient hoping to get better, the drip-feed of imported fossil fuels is keeping the European economy alive, but isn’t providing the remedy to spur new growth.

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Just take our energy bill as an example. For years, imports of fossil fuels have weighed-in negatively on the European balance of trade. Today, Europe imports more than two thirds of all the gas and almost all the oil it consumes. And it pays more than EUR1 billion per day for its imported fossil fuels, which represent more than a fifth of total EU imports.

Energy dependency costs, that much is clear: But how about the political costs? Just an example: CFI.co | Capital Finance International

Six EU countries depend on Russia as the single external supplier for their entire gas imports and three of them use natural gas for more than a quarter of their total energy needs.

Wouldn’t it be wise to break this dependency by saving and producing energy here in Europe? The foreign providers may freeze oil and gas supplies, but they can’t freeze our sun or our wind. They can’t charge us for the energy we don’t consume.

Summer 2014 Issue

Our path to real energy security begins at home.

We can always dig more coal, some would argue.

Would that be the solution? Obviously not: Coal is not only the top contributor to climate change, but it is also the cause of smog, acid rain, and toxic air pollution. It is therefore against our climate policies and targets.

Energy security and climate action go hand in hand. You can’t have one without the other. That’s why renewables and energy efficiency must be the two key ingredients: they’re both good for the climate and our energy independence.

The good news is that Europe is already saving EUR30bn annually by replacing imported fossil fuels with locally produced renewable energy. In other words, we invest the money here in Europe instead of sending it to Putin’s Russia and other fossil fuel providers outside Europe.

By 2050, the EU could halve its imports of oil and gas – representing a saving of 3% of today’s GDP. Much of the required additional investment expenditure can be recovered from what we save on energy costs. Money that now flows abroad can be invested in our domestic manufacturing industries and services instead.

So for Europe, energy security should not only be about the diversification of gas supply away from Russia. We must build an economy that is less dependent on imported energy through increased efficiency and greater reliance on domestically produced clean energy. We must also complete the internal energy market, improve the energy infrastructure and get better at exploiting our own energy resources.

need to see these domestic actions translated into an ambitious international commitment.

It’s all about priorities. The way to greater energy independence goes through ambitious climate policies. The European Commission paved the way with the 2030 climate and energy package.

By taking bold action on climate change, EU leaders will be preserving Europe’s energy security and boosting a sustainable economic recovery. i

ABOUT THE AUTHOR Connie Hedegaard is the European Commission’s fist Climate Action Commissioner. She started her political career in 1984 as a Member of Parliament in Denmark for the Conservative Peoples Party. Before joining the European Commission, she has been Minister for Environment (2004-2007), Minister for Nordic Cooperation (2005-2007), and Minister for Climate & Energy (2007-2009).

From 1990 to 2004, Ms Hedegaard worked as a journalist for several Danish media. From 1998 to 2004, she anchored the evening news magazine “Deadline”, part of the Danish Broadcasting Cooperation, DR. From 1994-98 she was head of DR’s Radio Newsroom. Ms Hedegaard has been a member and chairman of several Boards and Associations within fields like democratisation, journalism and international affairs. She received her Master’s degree in Literature and History from University of Copenhagen.

All over the world countries and companies are turning to climate action for their growth strategies. And what countries have committed to internationally is driven to a significant extent by domestic agendas to increase energy security and competitiveness in key growth sectors.

In January, the European Commission outlined its proposals for climate and energy policies up to 2030. These include a binding emissions reduction target of 40% from 1990 levels and an EU-wide binding target of at least 27% of energy coming from renewable sources. And on energy efficiency, doing more is the least we can do, and therefore more energy saving proposals will come next month. EU leaders have pledged to take a decision on the whole package no later than October.

“Like a patient hoping to get better, the drip-feed of imported fossil fuels is keeping the European economy alive, but isn’t providing the remedy to spur new growth.”

Connie Hedegaard. © European Union, 2014.

ABOUT THE EUROPEAN COMMISSION The European Commission is the EU’s executive body and represents the interests of Europe as a whole (as opposed to the interests of individual countries).

Earlier this month, the US announced draft rules to curb power-plants emissions. This is the strongest action ever taken by the US government to fight climate change and shows that the United States is taking climate change seriously. Also during my recent visit to China, it was clear to me that things are moving in the right direction. China is fast turning climate change into an opportunity for growth and jobs in rapidly innovating economic sectors. We now CFI.co | Capital Finance International

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ANNOUNCING

AWARDS 2014 SUMMER HIGHLIGHTS Once again CFI.co brings you reports of individuals and organisations that our readers and the judging panel consider worthy of special recognition. We hope you find our short profiles interesting and informative.

All the winners announced below were nominated by CFI.co audiences and then shortlisted for further consideration by the

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panel. Our research team gathered additional information to help reach a final decision.

In many cases, senior members of nominee management teams provided the judges with a personal view of what sets their companies and institutions apart from the competition.

As world economies converge we are coming across many inspirational individuals and

CFI.co | Capital Finance International

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

Summer 2014 Issue

> TRADITION AND MODERNITY AT COUTTS: OUR UK BANKING AWARD WINNER

Coutts & Co, established over three hundred years ago, is very much seen as the bank of the rich and famous. It is owned by the Royal Bank of Scotland and acts as its wealth management division.

The CFI.co Judging Panel, confirming the award ‘Best Private Bank, UK’, points out that, ‘Coutts is doing its clients proud and its reputation for quality service is thoroughly deserved. For a bank so steeped in tradition,

Coutts is very innovative and is certainly an important and responsive part of the modern age.’

> QIIB: BEST ISLAMIC BANK, QATAR, 2014

Horizontal - White / Red Box

The Qatar International Islamic Bank success story is one of financial stability, good profitability and strong continuous growth over recent years. QIIB is for good reason perceived as a safe bank that is fully responsive to

changing needs. Customer loyalty has remained strong since the inception of the Bank and performance indicators are good. Management is now exploring options for the possible expansion of operations into Africa and South

East Asia. The CFI.co Judging Panel is pleased to confirm QIIB as the winner of our 2014 award ‘Best Islamic Bank, Qatar’.

> PRISA TAKES THE CFI.CO AWARD FOR BEST CORPORATE GOVERNANCE, SPAIN, 2014

Promotora de Informaciones SA (Grupo Prisa) is the Spanish and Portuguese speaking world’s largest media company and has a significant and growing presence in 22 countries.

According to the CFI.co Judging Panel, ‘Prisa has also distinguished itself through its commitment to and implementation

of the very highest standards of corporate governance.

‘Outside its industry, Prisa is not a massive organisation but it has always taken corporate governance very seriously and develops programmes that allow a speedily evolving group to have in place a plan of action CFI.co | Capital Finance International

entirely fit for purpose and one that puts to shame the efforts of many far larger businesses.

Good corporate governance is part of Grupo Prisa’s DNA and we would like to congratulate and applaud this group for the example it is giving to Spain’s corporate world’.

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> SECOND YEAR A WINNER: NSX IS NAMED BEST EXCHANGE, AUSTRALIA, 2014

The CFI.co Judging Panel accepts the claim of The National Stock Exchange of Australia (NSX) to be a nimble, creative exchange with a flexible range of trading solutions offered at a fair price. The panel is delighted to make a second

consecutive award to NSX in the category ‘Best Stock Exchange, Australia’ saying that, ‘We believe this to be well deserved and congratulate NSX on their convincing win in our 2014 awards programme. This modern exchange, established

fourteen years ago can trace its roots back to the 1930s when it was known as the Newcastle Stock Exchange’.

> CFI.CO WEALTH MANAGEMENT TEAM AWARD, ANGOLA, 2014: BANCO ATLANTICO

Banco Atlantico, Angola, born in the year 2006, has been growing strongly and expanding services sensibly and very effectively according to a statement released by the CFI.co Judging Panel upon confirmation of the award ‘Best Wealth Management Team, Angola, 2014’.

The panel went on to say that,

‘Atlantico considers itself an Angolan bank with an international vision and it is obvious to us that the Bank is very well set to access more markets.

‘Atlantico has shown strong commitment to its HNW clients and has been rewarded with their confidence and trust.

Banking services offered here are sophisticated, very well focused, flexible and reliable and we are delighted to confirm this important award to Atlantico. We congratulate this winner on their achievements to date and great promise shown’.

> KING & SPALDING: IP AWARD IN THE UNITED STATES

The star performance lawyers at King & Spalding LLP have delivered a CFI.co 2014 award to the firm which we now characterise as ‘Best Intellectual Property team, International

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Arbitration, United States’.

According to the Judges,’ King & Spalding moves fast and sometimes furiously giving great service to clients. The firm is

CFI.co | Capital Finance International

experienced across many industries and has a reputation for great results. We have no hesitation in naming the firm winner in this category and wish them further success’.

Summer 2014 Issue

> DLM, NIGERIA: OUR WINNER OF THE AWARD FOR BEST CORPORATE FINANCE ADVISORY TEAM, WEST AFRICA, 2014

The outstanding professionalism in evidence throughout Dunn Loren Merrifield has persuaded the CFI.co Judging Panel to award this Lagos, Nigeria, headquartered full service investment house as ‘Best Corporate Finance Advisory Team, West Africa, 2014.’

According to the CFI.co Judging Panel DLM advisers are truly innovative and like to take a good long look at client problems and come up with effective tailor-made solutions.

They manage client relationships extremely well and are justifiably proud of their outstanding

research capabilities. DLM rightly seek out firstclass minds to work on client business and it shows. This firm has done well in its first five years and we expect to see continued progress in the coming years. Well done DLM’.

> WEConnect INTERNATIONAL: OUR AWARD WINNER HELPS WOMEN SUCCEED IN BUSINESS

WEConnect International sets out to break down the barriers that prevent female business owners from achieving their true potential.

The aim is to encourage growth opportunities for business outside the United States (that have majority ownership by women) through the effectively accessing of major multinational

> ROLAND AGAMBIRE:

corporations.

The CFI.co Judging Panel agrees WEConnect’s vision of a world in which women and men have the same opportunities. According to the Panel, ‘for now there is certainly a need for this kind of support and WEConnect is doing a great job with its strong data base and an

online platform in ten languages. We have no hesitation in naming WEConnect as winner of the 2014 award for Outstanding Contribution to Women in Business, Global. We wish them continued success as they reach out in an attempt to identify female business owners around the world to extend a helping hand’.

CEO OF THE YEAR, GHANA

The inspirational Roland Agambire established Roagam Links in March 2001: a mobile phone repair outlet which was to become the pioneer indigenous ICT manufacturing, assembling and training firm in Ghana, Rlg Communications Limited.

The Rlg Group has presence in China, UAE, Nigeria, Kenya, Gambia, South Africa, Ghana, Rwanda and is still expanding.

In Ghana, the company employs close to 500 permanent staff, 1,000 casuals and has created jobs for over 30,000 young people over the last decade through collaboration with various key stakeholders and government. The company’s training subsidiary, the Rlg Institute of Technology Limited implements similar schemes in Nigeria and the Gambia, working with the respective governments. Mr Agambire CFI.co | Capital Finance International

has won local and international recognition for his innovation, entrepreneurship, commitment to growth and philanthropy.

The CFI.co Judging Panel is delighted to confirm the award CEO of the Year, Ghana, 2014 in the name of Roland Agambire and wishes him luck in his efforts to realise the ambitious $10 billion Hope City project that sets out to create a major ICT hub in Ghana.

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> OUR AWARD WINNER IN NIGERIA: PROSHARE EMPOWERS SOCIETY BY PROVIDING ACCURATE AND TIMELY FINANCIAL INFORMATION

Proshare Nigeria Ltd has been providing strong, relevant and insightful information on the country’s financial markets since its establishment nine years ago.

The CFI.co Judging Panel was very impressed by this company’s commitment to and clear focus on the ways in which critical

information, when properly presented, can provide an empowering force for good. All societies benefit in this way and the need for such expertise as offered by Proshare in the continent of Africa is obvious.

Management at Proshare sees its role as bridging the gap between data and

wealth creation. The CFI.co Judging Panel takes the view that our winner is doing just that and we have no hesitation in confirming the award, ‘Best Capital Market Services and Solutions Team, Nigeria, 2014’.

> BUILDING RELATIONSHIPS: CFI.CO PRIVATE BANKING AWARD ANNOUNCEMENT, NEW ZEALAND

BNZ wins our Best Private Bank Award, New Zealand, for the year 2014. This bank claims to be taking a holistic approach to advising

clients and the CFI.co Judging Panel comments that, ‘BNZ does indeed build strong and lasting relationships and responds well across a broad

range of financial concerns relevant to high net worth individuals. We are certainly hearing good reports’.

> CFI.CO ANNOUNCES AWARD FOR ‘BEST ISLAMIC BANKING, MALAYSIA, 2014’

Hong Leong Islamic Bank, part of a large conglomerate, is a solid, reliable family business and may be the only Chinese-owned Islamic bank in the world. As the Cfi.co Judging

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Panel points out, ‘The success of this efficient and well recognised bank shows that Islamic Banking is not just for the Muslims. The Malaysian Central Bank regularly puts forward

CFI.co | Capital Finance International

Hong Leong as firm and compelling evidence of this claim. We are delighted to confirm that the 2014 award for Islamic Banking in Malaysia goes to Hong Leong’.

Summer 2014 Issue

> KINGDOM HOTEL INVESTMENTS (KHI): PARTNERSHIP PROSPECTS IN EMERGING MARKETS

HRH Prince Alwaleed bin Talal, a member of the Saudi Royal Family, is the founder of KHI and of its owner Kingdom Holding Company.

Prince Alwaleed is a valued partner of many corporations throughout the world and takes investment positions in various industries. He is a very determined and successful investor and is

a good partner to have on board.

Kingdom Hotel Investments, headquartered in Dubai, seeks out higher-end growth potential in emerging markets and has partnered with such names as Four Seasons, Raffles, Fairmont, Intercontinental and Movenpick.

The CFI.co Judging Panel has no hesitation in naming this company as, ‘Best Hotel Investment Partner – Global, 2014.’ The panel congratulates KHI on this award and also applauds the company for its positive CSR efforts.

> BMG WINS CFI.CO RETAIL BANKING AWARD, BRAZIL, 2014

Banco BMG is part of Brazil’s Grupo BMG. The Bank - which can trace its heritage back to the year 1930 - is the main business of the family run group. According to the CFI.co Judging Panel, ‘Banco BMG is doing very well this year despite the present rather challenging

situation in Brazil and the group as a whole must be pleased with its performance in 2013.

We have no hesitation in naming BMG as Best Retail Bank Brazil, 2014. BMG are specialists in consumer credit having pioneered pay cheque loans to both public and private sector

employees in the country. The growth in this area of business has been very strong over the years and this has contributed well to the progress of this outstanding bank. Quality of research at BMG is very high and this organisation is indeed a major player in Brazil’.

> CFI.CO AWARD FOR CORPORATE GOVERNANCE ADVISORY GOES TO MAKHTAG

Makhtag Mashwarti Khedmatuna is the 2014 winner of our award for ‘Best Corporate Governance Advisory Services, Afghanistan’.

The CFi.co Judging Panel were very much impressed by Makhtag’s dedication to helping client organisations really do things the

right way and thereby ensure a brighter future for the country.

Registered with the Afghanistan Investment Support Agency, Makhtag provides governance advice to both the public and private sectors. According to the Panel, ’Makhtag is a CFI.co | Capital Finance International

most deserving winner of this award. Here is an efficient and highly qualified advisory that has a clear and unwavering vision of how adherence to the values of good governance can contribute to the future of the nation and bring happiness to the Afghan people’.

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> SSF WINS INFRASTRUCTURE DEVELOPMENT AWARD, LIBERIA, 2014 LIBERIA

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This year SSF Entrepreneur will be celebrating its tenth anniversary and is now recognised as one of the leading civil engineering companies in Liberia - having gained a proud reputation in the realisation of many important

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infrastructure projects.

The CFI.co Judging Panel has commented that, ‘SSF shows an industry capability and delivery commitment out of all proportion to its size. We have no hesitation

whatsoever in confirming the award for Outstanding Contribution to Infrastructure Development, Liberia, 2014 to this energetic, resourceful and very well managed company’.

> THE RIGHT PATH TO SHARIA-COMPLIANT BANKING SYSTEMS: CFI.CO ANNOUNCES WINNER FOR 2014

Powering Islamic Financial Markets

The outstanding Kuwaiti headquartered software company Path Solutions is the 2014 global winner of the CFI.co award for ‘Best ShariaCompliant Banking Systems’.

The CFi.co Judging panel commented favourably on ‘Path’s outstanding range of Sharia-compliant integrated solutions that have been taken up successfully by some

100 Islamic finance institutions throughout 33 countries. Specifically the i MAL Islamic core banking system allows clients to bring to market secure and competitive offerings quickly, economically and with full and well-placed confidence’.

‘Path Solutions has a deservedly strong share of the market. This company out-

invests its peers in terms of critically important research and development, employs an outstanding team of some 400 professionals, and to cap all this it is by all accounts a very happy environment in which to work. We wish Path Solutions all success in the years to come’.

> ISLAMIC BANKING AWARD FOR SAUDI ARABIA GOES TO AL RAJHI

Al-Rajhi Bank is racing ahead this year in terms of Q1 profitability (up 10%) and branch network (now boasting the largest in the Middle East). Al-Rajhi, having built up its reputation in

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Saudi Arabia over the past half century, is also the winner of the CFI.co award for ‘Best Islamic Bank, Saudi Arabia’ for the second consecutive year. This is the largest Islamic bank in the

CFI.co | Capital Finance International

world and Saudi Arabia’s biggest private bank.

The CFI.co Judging Panel congratulates AlRajhi on this award achievement and expects to see its continued success in 2014.

Summer 2014 Issue

> STOCKBROKERAGE GDSL: OUR WINNER IN BANGLADESH, 2014

An industry leader, Green Delta Securities Limited (GDSL), is a fully owned subsidiary of the Bangladeshi insurance company of the same name. According to the CFI.co Judging Panel, ‘GDSL has an excellent track

record in advising institutional clients, HNW individuals and other experienced investors.

Client service strengths at this brokerage are outstanding and management sets out to be innovative, making good use of technology and

providing strong support services generally. We are pleased to confirm GDSL as the winner of our award Best Stockbrokerage, Bangladesh, 2014’.

> CFI.CO ANNOUNCES AWARD WINNER: BEST ISSUER OF MORTGAGE BACKED SECURITIES, ASIA, 2014

In 2006, Mongolian Mortgage Corporation was set up by the country’s central bank and a number of commercial banks to develop mortgage markets. According to the CFI.co Judging Panel, ‘this was an important government initiative which has made a significant social contribution to

low and middle income families’.

MMC has been operational since June 2013 and is now offering funding at dramatically lower rates of interest than were previously available. The Corporation develops primary and secondary markets for issuing and

selling mortgage backed securities on domestic and foreign capital markets. They are doing so very efficiently. The panel is pleased to confirm this award to MMC for the year 2014.

> BANCO DEL PAIS WINS THE 2014 CFI.CO AWARD FOR CORPORATE GOVERNANCE, HONDURAS

The CFI.co Judging Panel takes the view that Honduras is showing signs of embracing positive change and that this is likely to spur on national development. Tourism is expanding nicely and one senses a maturing political

landscape and some significant opportunities for the business community. Good corporate governance is important for Honduras now and will become ever more important in the years to come. According to the panel, ‘Banco Del Pais CFI.co | Capital Finance International

has strong corporate governance credentials and is providing a good example to Honduras business. We are very pleased to confirm the 2014 award to this bank that is also doing sterling work in microfinance’.

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> CORPORATE GOVERNANCE AWARD TANZANIA: CFI.CO NAMES TTCL WINNER, 2014

The Tanzanian Telecommunications Company Ltd (TTCL) has taken on the not inconsiderable challenge of helping to expand the reach and quality of telecom services throughout the country.

Tanzanian Telecom regulators have been pioneers of best practice in Africa with regulatory firsts such as being the first sub-

Saharan country to introduce a converged licensing framework.

Furthermore the government privatised TTLC to help it become a more responsive business so that management (under the leadership of Dr Kamugisha Kazaura) would be able to assist the Tanzanian Telecoms industry to fully contribute to sustainable economic growth from the capital to the most

remote villages.

TTCL ability to attract international investment and the brightest staff is undeniable and the CFI.co Judging Panel has no hesitation in announcing TTCL as winner of the award for Best Corporate Governance, Tanzania, 2014.

> JORDAN DUBAI ISLAMIC BANK WINS CFI.CO CORPORATE GOVERNANCE AWARD, 2014

According to the CFI.co Judging Panel, ‘Jordan Dubai Islamic Bank takes corporate governance very seriously. This bank has brought into effect a good many important examples of

best practice and is providing a fine example to other businesses in the country. By showing concern for good governance, Jordan Dubai is helping to strengthen the nation’s banking

system, support the national economy and protect the interest of all stakeholders. We are pleased to make this award and congratulate the Bank on its outstanding work over the years’.

> COMPETITIVENESS THROUGH CARE AND CLOSE ATTENTION: RENAISSANCE WINS IN OMAN

Renaissance Services (SOAG) is a listed Omani company operating in 16 countries.

With a focus on the oil and gas industry and extensive onshore operations in Oman and offshore operations abroad, Renaissance employees often find themselves working in a physically challenging environment.

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The CFI.co Judging Panel commends this company for its strong commitment to Health, Safety and the Environment and is pleased to confirm Renaissance as the 2014 winner of their award ‘Best H.S.E. Policy, Oman’.

The panel, noting the Renaissance motto of ‘Safe; Efficient; Green; Local’ applauds

CFI.co | Capital Finance International

this winner for practicing what it preaches.

‘There is an insistence at Renaissance to follow internationally certified quality systems in all business activities and this is seen by management not only as a serious corporate responsibility but also as a means of ensuring continuous commercial success’.

Summer 2014 Issue

> 2014: THE FORTIETH ANNIVERSARY OF GLS, OUR SUSTAINABLE BANK AWARD WINNER, GERMANY

GLS Bank takes the award for ‘Most Sustainable Bank, Germany, 2014’. Established forty years ago, GLS was a pioneer in ethical banking. This cooperative looks to fund cultural, social and ecological initiatives that are initiated by people rather than profit motivated

organisations. GLS is currently funding some 23,000 such projects. Its balance sheet total of Euros 3.2 billion at year-end 2013 showed an increase of 19% over the previous year.

According to the CFI.co Judging Panel, ‘transparency is key at GLC with details

of a lending made public as well as more general information about the development of this most interesting bank. No sign of greedy bankers here’.

> CAPITAL BANK WINS THE CFI.CO 2014 AWARD: BEST SME BANK, MONGOLIA

This Mongolian bank traces its heritage back to the year 1990 when it was established as one of the first commercial banks in the country. The CFI.co Judging Panel commented on Capital’s, ‘outstanding contribution to the development of domestic industries and

exemplary CSR programme’ upon announcing the award Best SME Bank, Mongolia, 2014’.

This bank really does pay careful attention to its responsibilities to SMEs and this includes helping smaller businesses understand how to make optimal use of the banking system.

In terms of corporate social responsibility, Capital shows evidence of keen environmental concern and works for social equality. Presently SMEs account for some 70 percent of the bank’s total business.

> BEST FINANCIAL COMPARISON SITE, MIDDLE EAST, 2014: SOUQALMAL.COM

The CFI.co Judging Panel considers Souqalmal.com to be a highly credible and accomplished site noting that, ‘this award winner

clearly has integrity and is doing a superb job.

Souqamal.com is a young company that has grown phenomenally since its establishment CFI.co | Capital Finance International

two years ago and its site is available in the English language as well as Arabic’.

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> XACBANK, OUR CORPORATE GOVERNANCE WINNER IN MONGOLIA, 2014

The CFI.co Judging Panel has named XacBank as winner of the 2014 award for Best Corporate Governance, Mongolia. The Judges commented that, ‘this winner had the foresight to plan for good governance from an early stage

in the life of the business. XacBank started out with a small project 16 years ago, has grown magnificently and now boasts assets of $1 billion. The XacBank motto is ‘People, Planet, Profit’ and this organisation is moving

forward with confidence and a desire to always do the right thing. We wish XacBank well and congratulate management on this well-deserved accolade.

> GATE CAPITAL: OUR M&A AWARD WINNER FOR MENA

Gate Capital, a strong performer throughout the GCC and further afield in the region, is our 2014 winner of the award ‘Best M&A Advisory Team, MENA and this operation by all accounts represents a good choice for businesses considering regional expansion opportunities.

According to the CFI.co Judging Panel, Gates’ highly professional approach to client requirements, its strong expertise, enviable technical know-how and obvious nimbleness are highly prized by its clients of all size.

The Panel was pleased to hear from Gate Capital management that the company has always been busy commenting that, ‘Gate filled a significant gap in the market and has some very special and interesting skills on offer. They deserve to be busy’.

> ALLIANZ RE: WINNER IN THE CFI.CO INSURANCE AWARDS PROGRAMME, 2014

The Allianz Re Risk Transfer approach is one of welcoming unusual and complex risks and developing and executing intelligent and highly innovative solutions. The CFI.co Judging Panel

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comments that, ‘the Alliance Re proposition is compelling and involves outstanding creativity and an extremely high level of expertise. We have here deserving winners for a global award

CFI.co | Capital Finance International

and have no hesitation in naming Allianz Re as ‘Most innovative Risk Transfer, Capital Markets, 2014’.

Summer 2014 Issue

> FINANCIAL ADVICE: GLOBAL TRUST IS OUR 2014 AWARD WINNER IN GREECE

The CFI.co Judging Panel is delighted to announce Global Trust as winner of their 2014 award, ‘Best Financial Advisory Team, Greece.’

Global Trust prides itself on the independent and impartial advice it gives to clients and the strong relationships that have

thereby developed. Originally located in Crete, Global now has a branch office in the capital.

The Panel pointed out that, ‘Global has an outstanding client retention record over the past five years. During this period – which has being a difficult time for the country - there

has been a trebling of Global personnel and a sixfold increase in their assets under management.

This company set out to provide efficient capital preservation for their HNW clients and their strategy has proven to be highly successful’.

> PNA OUR LEGAL AWARDS WINNER: MAKING A NAME IN REAL ESTATE LAW

Pinheiro Neto Advogados wins the CFI. co Legal Award for ‘Best Real Estate Team, Brazil, 2014’ against some strong competition. The Panel was impressed with the strong negotiating skills

of a great team of lawyers who ‘can be trusted on very complex matters. At PNA we see a great focus on and dedication to client needs. It is significant that this firm works exclusively on

real estate matters and it does so with a great deal of skill and obvious good judgement’.

> COMMUNITY ENGAGEMENT STRENGTHENS THE BUSINESS: ROSHAN WINS THE CFI.CO 2014 AWARD IN AFGHANISTAN

The CFI.co Judging Panel is delighted to declare Roshan as winner of the award for Best Community Engagement Afghanistan, 2014.

Roshan’s impact on the economic and social development of Afghanistan goes far deeper than that of being the largest telecoms provider in the country. Roshan has demonstrated clearly that it is possible to work to the highest ethical standards in Afghanistan and produce sustainable financial results and real and

meaningful benefits for all stakeholders.

This firm, established in 2003, has moved forward to become the largest private contributor to the revenues of the Afghan government. The panel felt that a key contributor to the financial success of the business has been Roshan’s approach to engaging with communities in Afghanistan.

Roshan understands how best to empower local communities to the benefit of all. Be it giving CFI.co | Capital Finance International

local villagers a real stake in the infrastructure of their mobile network or through creating sustainable jobs for women, Roshan sees the community as a key component of their business and are not afraid to implement innovative solutions. The Panel felt that by trying to properly understand the needs of local communities Roshan has been able to build a stronger business.

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> The African Renaissance:

Almost Ready for Take Off Just before the turn of the century, few if any would have believed that wartorn Mozambique stood any change of clearing a path to sustained economic development. Emerging from a 17-year civil war that cost the country $15bn – or about seven times its GDP – and millions of displaced people looking for both homes and jobs, Mozambique seemed the archetypical basket case and the poster child of decolonisation gone awry.

T

oday, however, Mozambique is booming.

Over the past 14 years per capita income has almost tripled. GDP growth rates are among the highest in the world, regularly outstripping China’s and setting the pace for the current boom of sub-Saharan economies.

Mozambique is now set to become one of the world’s largest energy exporters. The country’s recently discovered natural gas reserves are about double in size to Saudi Arabia’s. Add to this the vast coal deposits currently being exploited and Mozambique is seen heading for an enviable future.

This story is repeated to a greater or lesser extent in Angola, Tanzania, Uganda, Kenya, and – surprisingly enough – in unstable Somalia. Not too long ago The Economist dismissed Africa as a “hopeless continent” for its reluctance to embrace reform and move on from its unfortunate past. “There remains a chasm between perception and reality when it comes to Africa. The facts, however, tell a different story – one of reform, progress, and growth” noted the international accountancy firm Ernst & Young in a recent report on developments across the continent.

A 2012 report by the World Bank concludes that most countries of sub-Saharan are likely to experience a long period of sustained economic growth: “Africa could be on the brink of an economic take off, much like China was thirty years ago and India 20 years ago.” The growth is being fuelled in large part by the boom in revenues from oil and natural gas. High energy prices, pushed upward even further by the economic recovery in the US and Europe, deliver the cash required to underwrite the accelerated development of Africa.

NOT A LUXURY Rapid economic expansion is not a luxury, but a necessity if the continent is to accommodate the estimated 120 million young Africans who 80

“Africa could be on the brink of an economic take off, much like China was thirty years ago and India 20 years ago.” will come onto the labour market between now and 2020. According to a study by the McKinsey Global Institute, this “demographic dividend” will give Africa a larger labour force than any other country or region – including China and India – by 2035.

Things are looking up in other ways as well, though perceptions are often more difficult to change than reality. The McKinsey Global Institute found that the African Renaissance has now firmly taken root. The continent’s per capita income is already higher than that of much-talked about India. Six sub-Saharan countries even boast income levels higher than China’s.

According to data from Transparency International, in 28 sub-Saharan countries corruption - while still wide-spread - is actually considerably less than is faced in Russia by both citizens and businesses. Six of those countries score better than India on corruption.

When it comes to the ease of conducting business, African countries are barrelling ahead as well. On the World Bank’s Ease of Doing Business ranking, eight sub-Saharan countries trump Russia, twelve are ahead of Brazil, and thirteen beat India.

Between 2011 and 2015, no less than seven African countries are expected to clock average annual growth rates of over seven percent: Ethiopia, Mozambique, Tanzania, Congo, Ghana, Zambia, and Nigeria. Current growth rates already surpass those obtained in Latin America, the Middle East, and Central and Eastern Europe.

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GOOD GOVERNANCE These impressive rankings and statistics reflect the result of a concerted effort to improve the quality of governance across the region. While some African countries have made significantly more progress than others, nearly all are now fully aware of the importance of good governance as an essential and integral part of their development strategies. Democracy is on the march as well.

Corrupt despots, accountable to no one, are increasingly rare. Zimbabwe’s Robert Mugabe now represents a species threatened with extinction.

Though single-party states and autocratic rule have not yet been banished, the likes of Rwanda’s Paul Kagame and Uganda’s Yoweri Museveni are becoming the exception rather than the rule. “Africa has reached the point where Scandinavian countries were a century or so back. They decided to stop fighting each other and work toward a shared and peaceful future. We are now doing the exact same thing here in Africa.

Peace and stability will translate into growth and prosperity,” says Ifediora Amobi, director of the African Institute for Applied Economics in Enugu, Nigeria.

Another contributing factor to the African Renaissance is the way in which countries now manage their incomes and budgets. Central bankers and financial officials have become better managers. Ghana is the perfect example of this. Hit by low commodity prices in the late 1970s and throughout 1980s and deteriorating terms of trade, the country initially responded by squeezing the export sector, controlling consumer prices, and expanding the civil service ten-fold, thus clamping the nation into a straightjacket.

Inflation soon reached 120% annually while both agriculture and industry withered away. Since coming to its sense and removing these shortsighted, harmful policies, the Ghana government has succeeded in putting the nation on a trajectory of sustained growth averaging an astonishing

Summer 2014 Issue

5% annually over the past quarter century. Ghana proves that Africa’s potential is as huge as it is being underused or even spilled.

GETTING HOOKED UP While these improvements were taking place, the continent also got connected to the IT Age. According to World Bank data, each year over 60 million Africans gain access to mobile phone networks.

The importance of the communication revolution currently taking place can hardly be underestimated.

Mobile phone networks already reach the far corners of the continent. Coverage is available throughout vast tracts of the Sahara Desert and deep into the jungles of the Congo.

The Internet, available via smartphones and cheap almost-smart phones, gives people across Africa direct access to information previously unavailable.

“Africa had no connectivity, and now everybody is connected by mobile phone. That has changed economic and social dynamics everywhere,” says Jacko Maree, CEO of the South-African Standard Bank Group.

Banks and other international lending institutions have also eased up on their demands from heavily indebted African nations. Interest on the continent’s foreign debt fell from 16% of export earnings to barely 8%. This has freed up considerable funds for the development of the infrastructure needed for accelerated growth. These funds are also being applied toward improvements in education and healthcare.

Some serious issues, however, remain to be tackled.

Though diminishing in scope, corruption and a bloated and inefficient civil service are obstacles to development. Civil strife in Somalia and the Democratic Republic of Congo, not only discourage investment, but perpetuate outdated notions about the continent.

Another challenge facing Africa is its dependency on the export earnings from raw materials such as oil,

natural gas, minerals, and agricultural products. As such, many countries remain exposed to the vagaries of the international marketplace where commodity prices tend to fluctuate rather wildly.

THE NEED TO DIVERSIFY Though the current going is pretty good, the national incomes of most African countries are still subject to prices set in London, Chicago, or Rotterdam. “A lot of growth is still driven by natural resources. Africa has so far failed to diversify and encourage the creation of a home-grown industry able to compete internationally.

If the continent wishes to break through the glass ceiling, it must invest heavily in education. Only in this way, the most can be made of the tens of millions of young people now coming of working age,” says Vijaya Ramachandran, senior fellow at the Washington-based Center for Global Development.

Extractive economies are also notoriously weak at creating job opportunities. Many of the oil workers in Nigeria, Angola, and elsewhere are still foreign nationals trained by their companies to pump out the wealth. While this may generate great revenue for the host countries, it does not help the unemployed. If economic history holds any lessons, one may be that caring for small and medium-sized businesses (SMEs) is the best way, by far, to ensure full employment.

However, SMEs are precisely the ones targeted by cumbersome bureaucratic processes that either stop these smaller companies from flourishing or drive them underground where they can neither be taxed nor nurtured.

According to the numbers of the McKinsey Global Institute, only 28% of Africa’s workforce enjoys the benefits of formal wage-paying employment. The remainder gets by in subsistence farming or informal trades. This army of “vulnerably employed” has so far noticed little to nothing of the African Renaissance.

“Visitors are often mighty impressed by our economic growth,” says Omotunde Johnson, country-director in Sierra Leone of the London-based International Growth Centre: “However, that growth comes almost exclusively from iron ore mining. The mines are owned CFI.co | Capital Finance International

and operated by foreigners. The wealth they create has failed to trickle down. This, in turn, may cause an unwelcome rise in social tensions.”

In the past, income from the export of raw materials has not been used for the public good; it has lined the pockets of dictators and their henchmen.

However, the communications revolution is giving a rapidly increasing number of Africans direct access to uncensored news. As the Internet provides for two-way communication, a great many people are finding their voice and no longer need to keep quiet.

IT is putting checks and balances into place that will eventually assure good governance. Dictators can no longer build their power on the ignorance of the nations they hold hostage.

OPTIMISM That development gives cause for optimism. As extractive economies boom people are bound to demand a more equitable deal for their nations.

The windfall profits produced across Africa as the continent cashes in on its natural resources must be applied toward economic diversification. Though attempts at progress have been made on this front, the results obtained are rather dismal.

Africa’s manufacturing sector, as a share of gross domestic product, has in fact shrunk from 15.3% in 1990 to 10.5% in 2008.

“That trend has now been reversed but much more is needed to wean Africa off its dependency on natural resources and ensure sustained growth without any further hick-ups or setbacks,” says Mr Johnson in Sierra Leone.

Small markets, tough borders, and dearth of infrastructure hamper cooperation and trade within Africa. “In order for manufacturing to take off, businesses need access to larger markets. African countries should concentrate their efforts at promoting regional and continent-wide cooperation and even free trade. It has worked elsewhere and there is no reason why it should not work here.” i 81

> PwC Nigeria:

Does Size Really Matter? Economic and Fiscal Implications of Nigeria’s Rebased GDP

By Taiwo Oyedele

Gross Domestic Product (GDP) is an internationally recognised measure of economy size and strength. It is importance to have up-to-date data so the rebasing is a step in the right direction. It is expected to make planning and investment decisions more robust and informed. For example, the performance of the government in revenue collection, capital spending, external debt and budgeting can be benchmarked against similar economies.

N

igeria’s GDP was recently rebased from about USD 270 billion to USD 510 billion for 2013. This increase of about 90% was attributed to new sectors of the economy such as telecommunications, movies, and retail which were previously not captured or underreported. As a result of the rebasing, Nigeria is now the largest country in Africa and 26 largest in the world.

However, Nigeria needs more than GDP rebasing to stimulate the economy. While it is important to have up-to-date statistics, this will not of its own lead to economic prosperity or change the reality on the ground. It is like a farmer who breeds animals but has not properly counted his animals in the past. He has just discovered that he has more than he thought because he previously left out some new species that have now fully developed. Feeling richer than his neighbours, he wants to throw a party to celebrate his new status but a wise man reminds him that he still lives in poverty, unable to pay his children’s school fees and so on. The statistics may have changed but the reality remains the same.

One obvious arae of underperformance is taxation which is immensely important to national development as a key source of sustainable revenue and an indicator of economic wellbeing.

Compared to other sources of revenue, tax revenues can be relatively predictable and governments are able to plan with a greater amount of certainty than when relying majorly on natural resources.

VERIFIABLE EVIDENCE & UNDISPUTED FACTS While some may have doubts about the veracity of the rebased GDP figure, tax revenue offers verifiable evidence and indisputable facts. The tax-to-GDP ratio compares the amount of tax collected to the nominal GDP. Generally the ratio in poor countries is around half of what is obtained in developed nations. According to the 82

“If we isolate the tax revenue from oil, then the tax-toGDP ratio for the sector will be about 27% while for the non-oil sectors it comes to about 4.6% which is one of the lowest in the world.”

Heritage Foundation 2012 data, France had a tax to GDP ratio of 44.6%, Sweden 45.6%, UK 39%, US 27%, Tanzania 12%, Burkina Faso 11.5%, and Nigeria 6.1%.

If we consider all levels of government (federal, states and local councils), Nigeria had about 14.6% for 2013 before the rebasing which is now about 7.8% for the same year. This is based on about NGN 4.8 trillion (about USD 30 billion) collected by the Federal Inland Revenue Service (FIRS), NGN 833.4 billion (about USD 5.2 billion) by the Nigeria Customs Service, and about NGN 648 billion (USD 4 billion) by the states and local councils compared to the rebased GDP of USD 510 billion.

If we isolate the tax revenue from oil, then the tax-to-GDP ratio for the sector will be about 27% while for the non-oil sectors it comes to about 4.6% which is one of the lowest in the world.

This is notwithstanding that the tax collection figures above include tax refunds and credits due to taxpayers which should really not be reported as revenue. In addition, there is tax revenue collected from sectors which are not officially included in the GDP calculation such as religious activities and the informal sector.

According to the National Bureau of Statistics (Nigeria), GDP is the market value of all officially recognized final goods and services CFI.co | Capital Finance International

produced within a country in a given period. With appropriate adjustments therefore, the ratio will fall even further. Perhaps Nigeria needs to rebase her tax revenue generation model.

If Nigeria uses the “output” approach in calculating the GDP, then VAT on goods and services would be the appropriate tax indicator.

In the case of “expenditure” approach, the tax indicator should be VAT and import duties while in the case of “income” approach for GDP calculation, personal income tax on wages and withholding tax on rent, interest and dividend should be the corresponding tax indicator. These will help complement the GDP figures for a more informed economic planning.

It is now very clear that the tax revenue generating capacity of the Nigerian economy is yet to be harnessed and that the current tax system is ineffective in many ways. The Minister of Finance, Dr Ngozi Okonjo-Iweala in reaction to the rebased GDP, has given the FIRS a charge to raise collection from taxes. The aim is to get the ratio to at least 20%. This implies a revenue target of about NGN 14 trillion (USD 87.5 billion) up from the current NGN 6 trillion (about USD 37.5 billion) for the FIRS alone. It is important to note that the rebased GDP growth rates for 2011, 2012 and 2013 were 17%, 13% and 13% respectively. To improve the tax revenue to GDP ratio, tax collection must grow faster than GDP. RESISTING THE EASY WAY The manner in which the tax authorities will go about this revenue drive will have its effect, positive or negative, on the economy. For instance, it will be counterproductive for the FIRS to focus its revenue drive on the few, easy targets, already compliant group of taxpayers rather than seeking to expand the tax base especially to bring tax evaders into the tax net. The practice of subjecting already compliant taxpayers to unproductive and time consuming audits, which drain resources of

Summer 2014 Issue

“The general awareness and tax education amongst the populace is also a very important factor that has the potential of shaping the attitude of the public to voluntary tax compliance.�

CFI.co | Capital Finance International

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“A pragmatic way to boost the tax-to-GDP ratio is through improvements in the fiscal system.” both the taxpayers and the tax authorities alike, will not achieve the desired results.

What this will do in effect is to impose unnecessary burdens on the larger and more visible taxpayers while tax evasion particularly in the informal economy continues unabated.

This can compromise the competitiveness of tax compliant entities and individuals by overburdening them with never ending audits which in turn discourages potential investors and stifles economic growth.

A pragmatic way to boost the tax-to-GDP ratio is through improvements in the fiscal system.

Nigeria’s tax regime is unnecessarily cumbersome and notoriously unfriendly to taxpayers. In the report Paying Taxes 2014 – the latest iteration of an annual study by the World Bank and PwC that compares the ease of paying taxes globally – Nigeria ranks 170 out of 189 economies. Clearly a lot needs to be done to make tax compliance less onerous for the average taxpayer.

In addition, a systematic approach should be adopted in identifying the tax gap and devising a means of bridging it. For instance, a study of the economic activity reported per sector of the rebased GDP in comparison to the amount of tax revenue generated from that sector should be undertaken to determine areas of primary focus for revenue drive. The logic behind this is that with the rebasing of the GDP, the tax authorities also need to consider rebasing their tax net. You may be surprised to see a couple of sectors with negative ratios which is possible if they have been granted more in tax incentives than their contribution by way of tax payment.

With the increase in the automation of processes, increased online transactions leaving electronic trails, the tax authorities have more information to work with which can be used to achieve other objectives of curbing corruption and money laundry.

MEASURING SUCCESS Success should not be measured only in terms of more tax revenue generated but also in terms of the ease of compliance, the number of new taxpayers that are brought into the tax net, cost of collection, tax refunds processed, speed of tax audit completion, improvement in voluntary compliance, number of prosecuted tax fraud cases, opportunity cost of waivers/incentives and so on. The general awareness and tax education amongst the populace is also a very important factor that has the potential of shaping the attitude of the public to voluntary tax compliance.

Simple rate cards and tax calculation templates as well as a bouquet of all the applicable taxes 84

Author: Jonathan Cawood

levied by governments at all levels should also be readily available and accessible to all.

As taxation issues become more prominent in public discussion, companies doing business in Nigeria must be prepared to pay their taxes correctly and on time. Any failing in this regard could have significant reputational damage in addition to the financial penalties.

To increase public confidence and promote a positive taxpaying culture, Nigerian leaders and politicians must lead by example. Relevant agencies must scrutinize the tax records of current and aspiring political office holders in order to break the vicious cycle of tax conspiracy. i CFI.co | Capital Finance International

ABOUT THE AUTHOR Mr Taiwo Oyedele is the Head of Tax and Regulatory Services at PwC Nigeria. He is an ardent advocate of tax reforms with particular emphasis on tax simplification and transparency.

He runs a blog on tax matters (www.pwc.com/ nigeriataxblog).

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.

> CFI.co Meets the CEO of SSF:

Sam Shawki Fawaz Mr Sam Shawki Fawaz, managing director and CEO of SSF Entrepreneur, has accumulated over forty years of experience in Liberia’s business world. His career has crisscrossed the economy from forestry to construction and road building.

Though born in Lebanon, Mr Fawaz has spent his entire adult life working and living in Liberia. He arrived in the country in the 1960s as a teenager. He is married to a Liberian lady.

M

r Fawaz graduated in business management and started his career in 1974 at the United Logging Company where he first rose to the position of operations manager before becoming the company’s managing director. He also provided management support to subsidiary companies in other parts of Liberia.

These positions afforded him the opportunity to bear direct responsibility for the construction and maintenance of the feeder road network within the logging concession areas and for other major roads required for the unimpeded transportation of round log cargoes from the forests to the ports for overseas shipment. The construction and maintenance of this road network was critical to the operations of logging companies, ensuring that the cargoes of logs were readily available at various point of discharge for export.

partner to the Government of Liberia in the road construction sector. He has amply demonstrated to possess the required capacity to take on even the most challenging contracts awarded by the Ministry of Public Works – the entity charged with statutory oversight responsibilities for road construction across Liberia.

Although Mr Fawaz has no formal training as an engineer, he has accumulated vast knowledge of road infrastructure and building techniques, as well as an enviable stock of managerial competences. This valuable experience is largely responsible for the level of success SSF Entrepreneur has achieved today. Mr Fawaz believes the success of his company may be ascribed to his foresight in exploiting niches in Liberia’s road infrastructure sector.

CEO: Sam Shawki Fawaz

The closure of logging operations in 1989 – a direct result of the outbreak of the civil war that was to rage on for 14 years – did not diminish Mr Fawaz’ desire to remain engaged with the country.

The end of the conflict awarded Mr Fawaz the opportunity to start a road construction business.

He thus realised a lifelong-desire to run his own company.

services to the UNCHR. He later managed to fully engage in the road rehabilitation sector.

The partnership with UNHCR resulted in the first major intervention by SSF in 2004. This work contributed significantly to the ultimate success of the UNHCR-sponsored return and reintegration programmes for Liberian refugees from Guinea, Ivory Coast and Sierra Leone to the Lofa and Nimba Counties in Liberia.

During the war years, Liberia’s road network was largely destroyed through neglect. As such, it could not support the plans of international organizations like the United Nations High Commission for Refugees (UNHCR) for the return and reintegration of thousands of Liberian refugees from neighbouring countries.

The experience emphasised the importance of good all-weather roads, not just to the livelihood of the displaced people, but to the economic recovery of the country as well. This led to the incorporation of SSF Entrepreneur. In 2005, Mr Fawaz entered a joint ownership of SSF Entrepreneur with Mr Anwar Ezedine.

This situation provided an opportunity to Mr Fawaz who promptly provided consultancy

Over the years, Mr Fawaz has succeeded in establishing SSF Entrepreneur as a formidable

The managerial and entrepreneurial skills of Mr Fawaz – coupled to his close relationships with workers, chiefs, elders, community leaders and other stakeholders – have not only catapulted SSF Entrepreneur to the top spot in the road building sector, but have endeared him to the people of Liberia as well.

This should come as no surprise given his numerous social contributions –including scholarships, donations of medicine to clinics, and the provision of food stuffs to communities in which the company operates. This comes in addition to the long-standing company policy of only hiring local labour.

Even so, this husband and father of six does not rest on his many laurels. Instead, Mr Fawaz now aims to transform SSF Entrepreneur into a regional powerhouse in the construction sector across West Africa. i

“Over the years, Mr Fawaz has succeeded in establishing SSF Entrepreneur as a formidable partner to the Government of Liberia in the road construction sector.”

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> FACRA:

How Investors Can Help Build SMEs in Angola The Missing Middle

By Teodoro DE Jesus Xavier Poulson, Member of Investment Committee, FACRA

By any measure, small and medium sized enterprises (SME’s) form a crucial part of any nation’s economic success. Typically, SME’s range from sole proprietorships to mid-sized companies and ordinary partnerships. These businesses rarely make the headlines but they form the backbone of most of the world’s major industrialised nations.

T

here are millions of these small enterprises and they are the unsung heroes of economic growth. They create jobs and wealth, leading to a healthy competitive market. Crucially, SMEs drive innovation and provide opportunities for investors and venture capital firms. Figures from the Department for Business Innovation and Skills in the United Kingdom show that there were 4.9 million private sector businesses at the start of 2013, employing 24.3 million people with an annual turnover of £3,300 billion.

These figures demonstrate the sheer scale and importance of the SME sector, without which no mature free market economy could survive. How then can a rich nation such as Angola continue to grow when it has almost no SME segment in its economy?

FASCINATING Angola is a fascinating case study. It is not only a fledgling free market but also a fledgling democracy. It has large reserves of oil and it has made enormous progress since 2002 in building infrastructure and educating its people.

Major global organisations are turning Angola in to an exciting place to do business and the government is highly cognisant of the need for economic diversification. This drive has led to a significant injection of capital to support micro, small and medium sized enterprises with more than $600 million provided so far as part of the Angola Investe program, which was launched in 2012 by the Angolan government.

The level of interest and investment in Angola has led to a great deal of positive sentiment from external bodies. The World Bank’s June 2013 Angola Economic Update states that, “Angola’s economy is now gathering momentum with robust GDP growth supported by strong fiscal and external balances, a stable exchange rate and moderate inflation.”

However, despite the positive story and strategic investments, the SME market has so far failed to materialise in a significant way. This missing 88

“Angola is arguably the most promising nation for investment in subSaharan Africa.”

traditionally been successful in Africa has been the lack of access to capital, the high cost of borrowing and reluctance from banks to lend to small businesses. Set up costs can also be high in Angola, particularly Luanda. In the manufacturing sector for example, there are simply not enough factories, so industrial startups may need to buy land in order to build a facility.

middle presents a challenge to the government’s plans for economic diversification – but it also presents investors with a rare opportunity to move into a virgin territory.

It is in areas like this that venture capital companies can step in. They not only provide access to capital and credit but they have an important role to play in guiding and advising young companies.

Angola is arguably the most promising nation for investment in sub-Saharan Africa. It has a stable government, a peaceful society and one of the world’s youngest populations. Most of Angola’s twenty million people live in cities and around half the population is under the age of twenty.

More young people are going to university than ever before and the government provides grants to facilitate overseas education.

Angola also has a large number of entrepreneurs.

Many of these are tiny, micro-entities that exist outside of the tax system. These are essentially sole traders who are self-sufficient but who do not have the infrastructure or access to capital to grow a business. At the other end of the spectrum are the global oil companies and public sector bodies that hire large numbers of Angolans.

Well organised and well-structured SMEs that work in a formal manner, paying taxes and social security, with HR departments and systems are incredibly rare. In most mature economies these businesses are niche players, driving specialised innovation and experience. They create highly expert professionals and a rich and colourful work force. There is a glaring gap in Angola and for this reason it is difficult for the economy to diversify. This is where the real opportunity lies.

LACK OF CAPITAL One of the reasons why SMEs have not CFI.co | Capital Finance International

Fundo Activo de Capital de Risco Angolano (FACRA) is a public venture capital fund that supports Angolan SMEs in building, innovating and expanding their businesses in Angola. Capital investments from venture capital companies or external businesses are greatly needed in order to stimulate local industry, to provide space for innovation to flourish and succeed. This need means that the time is right for overseas businesses to take market share, create jobs and steal a lead in one of the world’s fastest growing markets.

There are a number of areas where SMEs can – and will – play a major part in the growth and development of the nation’s economy. Agriculture and manufacturing are ripe for growth and the government of Angola is particularly keen on working with young businesses and external parties in helping to stimulate growth in these sectors.

The IMF Angola Economic Update 2013 states that growth in agriculture and manufacturing has been relatively strong over recent years but is performing below its full potential. Agriculture employs two-thirds of the Angolan labour force and whilst the sector grew by 7.3 per cent in 2012, it remained below its 10-year average rate of 13 per cent. The report goes on to say that, “….increasing investment to boost productivity

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Angola

in agriculture and manufacturing could make a strong contribution to employment creation, particularly given the human-capital dynamics of the Angolan labour force.”

TECHNOLOGY The technology sector is also underdeveloped, presenting investors with an opportunity to drive innovation in areas such as mobile apps and software. Angola’s communications and information technology industries are expanding rapidly – 4G networks launched in 2012 and mobile phone penetration is more than 50 per cent. Angolans are hungry for technology and with little innovation currently happening in the country, there is a major opportunity for companies to move in and steal a march in the sector.

Hospitality is perhaps one of the largest and most important sectors for development in the country and further afield across sub-Saharan Africa. Luanda is a major business hub and as such requires world-class hospitality. There are opportunities for investment in everything from hotels to restaurants and leisure facilities as the country works towards providing the infrastructure needed to accommodate business and leisure travellers from around the world.

The development of these key industry sectors will also help to boost intra-Africa trade and stimulate a strong regional market. A strong African market will see African goods and services replace the region’s dependence on imports. It will also drive innovation, create jobs and raise living standards across the board.

Angola is a nation that desperately needs to build an SME segment in order to diversify its economy and continue to grow. It has all of the ingredients necessary to make this happen: Political will, a young and hungry population, tax incentives for foreign companies and a stable, peaceful society. The government in Angola is investing billions of dollars of the nation’s wealth in building infrastructure, educating its people and providing a framework for growth.

The country is also attracting investment from external bodies. The World Bank has promised to provide $1 billion for infrastructure development and the Africa Development Bank is set to loan Angola $1 billion to develop its electricity grid.

There is a lot happening in this young nation – but much more to do in order for it to realise its full potential. Attracting the investment of foreign companies is one way in which the people of Angola can benefit from the development of an all-important SME segment. i ABOUT FACRA The Fundo Activo de Capital de Risco Angolano (FACRA) is a public venture capital fund that supports small and medium enterprises (SMEs) in building, innovating and expanding their businesses in Angola.

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> Dunn Loren Merrifield Advisory Partners:

Bringing Innovation to Nigerian Capital Markets & Reinvigorating the Housing Market

S

ince 2009, DLM Advisory Partners have executed some of the most complex transactions in the history of the Nigerian Capital Markets.

OVERVIEW OF THE NIGERIAN HOUSING SECTOR Over the years, Nigeria has experienced rapid urbanization, with over 50% of its population living in urban centers in 2011, compared to an overall average for sub-Saharan Africa of 37%.

Currently production is below 100,000, resulting in an overall accumulated deficit of about 17 million units, as of 2013 [1].

MACROECONOMIC OUTLOOK IN NIGERIA Nigeria’s economy has recorded significant growth over the past years with the post-rebased nominal GDP of NGN80.22 trillion in 2013, making the country the largest economy in Africa. A review of Nigeria’s macroeconomic data gives an impressive account (see Figures 1 and 2).

The Central Bank of Nigeria has significantly curtailed the upward inflationary trend as inflation declined from 12.80% in November 2010 to 8.0% as at May 2014.

Despite the size of the Nigerian economy and impressive macroeconomic data, mortgage loans to GDP still remains very low; with only about 5% of the 13.7 million housing units in Nigeria currently financed with a mortgage (see Figure 3).

MORTGAGE MARKET The Nigerian mortgage market remains underdeveloped despite considerable growth over the last six years. From 2006 to 2009, the market grew at an average rate of 61%. In 2010, due to the banking crisis, outstanding mortgage loans experienced a decline of 7%, before starting to grow again. In 2011, the market stood at NGN224 billion (USD1.42 billion) [2].

6.7% 6.7%

3rdrd fastest fastest 3 growing growing economy economy

6% 6%

NIGERIAN MORTGAGE REFINANCE COMPANY (NMRC) To address the long term funding constraints hindering the growth of the primary mortgage market, and to reduce the funding cost of residential mortgages and availability of housing to Nigerians, the Federal Ministry of Finance in collaboration with the Central Bank of Nigeria (CBN), the Federal Ministry of Lands & Urban Development and the World Bank in Q3 2012 initiated the Nigeria Housing Finance Programme that includes [5] the establishment of the Nigerian Mortgage Refinance Company (NMRC), a private-sector led and managed mortgage liquidity facility.

80% 80% 60% 60%

4.7% 4.7%

2% 2%

2.5% 2.5%

0.9% 0.9%

Nigeria Nigeria

Brazil Brazil

Russia Russia

India India

Source: Trading Economics, DLM Research.

China China

101.5% 101.5%

South South Africa Africa

56.8% 56.8%

46.1% 46.1% 11.0% 11.0%

20% 20% Brazil Brazil

92.6% 92.6%

Relatively Relativelylow low debt debtprofile profile

40% 40% 0% 0%

Figure 1: 2013 GDP Growth Rate.

90

Mortgage lenders primarily use savings and deposits to finance long-term lending, creating a maturity mismatch and limiting the amount of mortgages that can be financed. According to a World Bank Report, an analysis of the 10 largest banks [3] in Nigeria shows that overall liabilities are on average made up of 84% (short-term) customer deposits. It is clear that a mismatch of over NGN800 billion (USD5 billion), or a third of the balance sheet, exists [4].

100% 100%

7.8% 7.8%

3.4% 3.4%

4% 4%

0% 0%

These challenges have limited their ability to respond to market demand and in part, contributed to the current structure of the housing finance market. The development of a sustainable secondary mortgage market is a first step towards stimulating the growth of the primary mortgage market.

120% 120%

10% 10% 8% 8%

“Nigeria’s economy has recorded significant growth over the past years with the post-rebased nominal GDP of NGN80.22 trillion in 2013, making the country the largest economy in Africa.”

22.4% 22.4%

Nigeria Nigeria China China

Challenges confronting mortgage banks: • Difficulty of access to land and land documentation constraints; • Poor collateral; • Limited access to long term funds; • High cost housing construction; • Cost and time of foreclosing; • Competitive finance market; • High interest rates; NMRC was incorporated in June 2013 with the sole purpose of developing the primary and secondary mortgage markets by raising longterm funds from the domestic capital market as well as foreign markets. NMRC will be licensed as a non-depository financial institution.

The establishment of NMRC underpins the transformation of the Nigerian Mortgage Market as it is expected to link the capital market with the housing market, promote the growth of mortgage loans, and mobilize domestic and foreign funds into the housing sector.

Main Benefits of the NMRC • Safety net for the financial system: Ability to refinance mortgage loans and gain access to short/medium term liquidity; • Increased use of deposits: Make greater use of10%deposit-based funding to fund mortgage120% 3 fastest 100% 7.8% lending; growing 8% 6.7% economy • Increased competition: Allow small lenders 80% 6% 60% access the capital markets;4.7% 3.4% 40% • 4% Availability of long-term funds for mortgage 2.5% 20% lending: Allow lenders extend maturity of their 2% 0.9% 0% loans and consider offering products such as 0% Brazil rates; Russia India China South longer Nigeria term fixed Africa • Improved mortgage affordability: Provide cheaper and longer term funds, thus making banks able to lower their weighted cost of funds for mortgage loans; • Regular issuer of attractive fixed income securities: Investors benefit from slightly higher return than government bonds; rd

60%

50.0%

50% 40%

32.0% 15.0%

20% 10%

South USA South Euro Euro USA Africa Africa Average Average

0.6%

6.0%

0% Nigeria

India

Malaysia

Figure 2: 2013 Debt to GDP Ratio.

Figure 3: Mortgage Loans to GDP.

Source: Trading Economics, DLM Research.

Source: World Bank, DLM Research.

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31.0%

30%

China

South Africa

Euro Average

56.8%

11

Brazil

Ni

The objectives of the NMRC include the following:

2

1 Refinancing eligible mortgages

4

3

Developing the primary mortgage market

Summer 2014 Issue

Developing the secondary mortgage market

Deepening the capital markets

Figure: The objectives of the NMRC.

The lifeline of the NMRC is the capital markets and access to long-term investors like the Pension Funds and Insurance Companies. The Nigerian Bond Market has witnessed significant growth over the years to emerge as one of the most liquid Bond Markets in Sub-Sahara Africa (SSA) – excluding South Africa, supported by a considerable increase in market capitalization and turnover.

The opportunity presented to the housing market with the advent of the NMRC can be fully exploited if all Government agencies (State and Federal) and Private Sector stakeholders act responsibly with improved communication and collaboration.

HOW DOES THE NMRC OPERATE? Long-term Funds for Long-term Investments into Housing: • Channel long-term funds from pension funds and insurance companies into housing sector by making long term funds available to mortgage lenders; • Serves as an intermediary between capital markets and the primary mortgage market;

Connecting Mortgages and Capital Markets: • NMRC funds itself by raising funds through corporate bond issues and then advances loans to mortgage lenders; • Issued corporate bonds by NMRC will be guaranteed by the Federal Government of Nigeria to enhance their credit rating; • Loans advanced are secured by mortgage lenders pledging part of their mortgage assets as collateral for the loans; • Thus NMRC operates with minimal levels of risk and can raise funds cheaply; Standardising Mortgage Loans: Developing Uniform Underwriting Criteria: • NMRC will standardise the mortgage market by making mortgages a standard commodity regardless of its originator; • It will play a role of standard setter in the mortgage market by requiring standard terms and documentation; CREATING AN ENABLING ENVIRONMENT FOR AN EFFICIENT SECONDARY MORTGAGE MARKET In order to create a sustainable secondary

mortgage market, we must have an efficient primary market for mortgage lending. This means that the housing delivery system and the process of creating, registering and enforcing a legal mortgage must be effective, predictable and transparent.

This can be achieved through the following: • Providing land and establishing a transparent pricing methodology for land • Providing waivers on fees • Encouraging efficient housing service delivery • Enacting model mortgage law to enforce foreclosure It is important to highlight that Nigeria’s housing deficit cannot be financed by the domestic market alone, based on the current statistics.

At present, the total Pension Contributions is estimated at c. NGN4 trillion while the total assets of deposit money banks stood at NGN24.7 trillion as at April 2014. This indicates that the potential aggregate asset base in the financial system is still inadequate compared to the estimated funding deficit in the housing market.

NMRC: Summary Model of Operation.

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“Mortgage finance is seen as one of the drivers whose immediate development would enable the financial sector to catalyze growth in other parts of the economy.”

This emphasises the need for Government’s active investment in soft infrastructure (land, legal/regulatory, fees and service delivery) in order to increase efficiency, reduce cost and attract domestic and international private capital required to finance hard infrastructure (i.e. construction of bankable houses) on a sustainable basis.

A COLLABORATIVE APPROACH Mortgage finance is seen as one of the drivers whose immediate development would enable the financial sector to catalyze growth in other parts of the economy. However, unlocking the potential in the housing market through mortgage refinancing will require multiple and interrelated market functions to work effectively to bring about: i. Conducive macro policies that provide for stable and low inflation; ii. Reduced cost to business transactions in land registration and foreclosure; iii. Good quality and efficient building and construction It is also clear, that any meaningful housing reform or policy must be integrated at the state level to be effective. A realigned incentive is therefore required across the housing value chain, to support strong loan quality and an efficient mortgage market, this will certainly reposition the housing sector for effective housing delivery.

ABOUT DUNN LOREN MERRIFIELD ADVISORY PARTNERS Dunn Loren Merrifield Advisory Partners (DLM Advisory Partners) is the advisory and capital-raising arm of Dunn Loren Merrifield Group—a full service financial investment house that combines the attributes of origination, distribution and trading of securities. The Group nurtures and delivers bespoke solutions to sovereign/sub-sovereign entities and private & non-private corporations.

DLM Advisory Partners advises on financing strategies designed to meet our clients’ specific needs—providing best-in-class deal structuring and execution. Over the years, our dedicated and multidisciplinary team has enabled us to lead and manage several novel transactions and work with clients in creating and selecting optimal structures to provide the right backdrop for successful transaction execution.

Focal points managed by our advisory specialists include: • Financial Advisory • Capital Raising • Underwriting OUR STORY OF THE FIRSTS Within a short span since 2009, our team has 92

executed some of the most complex transactions in the history of the Nigerian Capital Markets.

We have equally introduced some of the most innovative structuring solutions to our clients’ financing challenges. Some of our novel and outstanding achievements are – Tower Funding Plc. NGN4.63Bln Series 1 Floating Rate Bonds Due September 2018 DLM Advisory Partners executed the first tranched structured corporate debt issue guaranteed by a foreign development finance institution (GuarantCo), with the Tower Funding Plc. N4.63Bln Series 1 Tranche A Floating Rate Bonds Due September 2018. The team also structured the first “AAA” rated tranched corporate bond listed on the Nigerian Stock Exchange with the N1Bln Series 1 Tranche B Floating Rate Bonds issued by Tower Funding Plc. in 2011.

Notable Achievement: This enabled Tower Group of Companies to access the debt capital markets through a special purpose vehicle established as a debt issuance subsidiary of the Group and backed by the credit strength and cashflows of each of the companies within the Tower Group, thereby achieving a weighted average credit rating above that of each individual company, an innovative product in the Nigerian capital markets.

Establishment of the Nigeria Mortgage Refinance Company DLM advised on the establishment of the Nigeria Mortgage Refinance Company on behalf of the Ministry of Finance, World Bank and Central Bank of Nigeria under the Nigeria Housing Finance Programme.

Developmental Impact: The NMRC is being set up to meet the current housing finance sector needs in Nigeria by bridging the funding cost of residential mortgages and promoting the availability and affordability of housing to Nigerians by increasing liquidity in the mortgage market.

The successful implementation of this programme will, conservatively estimated, set a growth process in motion that will deliver 75,000 homes per annum, and generate and sustain at least 300,000 direct and 488,000 indirect jobs after the initial project period.

Bayelsa State Government of Nigeria NGN50,000,000,000 13.75% Fixed Rate Bonds Due 2017 DLM independently advised on the first subsovereign debt restructuring transaction in Nigeria involving the conversion of a bullet bond in an aggregate principal debt outstanding of CFI.co | Capital Finance International

N50Bln to an amortising bond, a landmark precedent transaction in the Nigerian Capital Markets.

Notable Achievement: The proposed revised payment structure resulted in monthly savings thus validating the fact that the amortising structure was the optimal repayment structure for the State that ultimately reduced its cost of capital in the medium-to-long term. This subsequently changed the market practice by providing transaction precedence for issuing amortising bonds.

OUR OUTLOOK The recent rebasing of Nigeria’s GDP which saw it emerge as the largest economy in Africa has brought to the fore, the huge structural gaps and deficiencies in the country’s economy. These structural changes in Nigeria’s economy highlight the need for increased financial intermediation to attract the capital formation required to develop and unlock capital in emerging industries in the Nigerian economy.

DLM sees these structural gaps and opportunities in the Nigerian economy as a demand for improved governance and transparent capital structures that will provide investor confidence; and more importantly for increased skill in creating innovative products, financing structures and financial instruments that can accelerate financial intermediation and the flow of capital necessary to deepen Nigeria’s financial markets, attract funding to emerging sectors and transition the economy from a frontier to an emerging market. i

References [1] Source: Ministry of Lands, Housing and Urban Development.

[2] World Bank Report No: 78760-NG page 3.

[3] Compiled by World Bank from publicly available bank reports.

[4] World Bank Report No: 78760-NG page 103.

[5] The Programme has three components: (i) Land and Legal Framework; (ii) Access to Affordable Housing Finance; and (iii) Housing Development and Construction.

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Summer 2014 Issue

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E

REPREN LIBERIA

E

S.S.F.

C

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TRUCTI

O

INC.

SSF O

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Building Roads and a Future Too

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> SSF Entrepreneur:

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SF Entrepreneur, a Liberian-registered road construction company, has been engaged in relief work and operations for a number of years, partnering with the country’s Ministry of Public Works and development agencies to bring tangible benefits to the population at large. SSF Entrepreneur prides itself on the maxim that “Road Is Life”.

Without passable, all-weather motorways, people would find it extremely difficult to access hospitals, schools, and many other services.

Roads empower economic progress as well, allowing producers better access to both markets and consumers.

In Pictures: Partners Fawaz and Ezedine brief former Minister of

In Pictures: Asphalt Plant.

Public Works, Kofi Woods (left) on ongoing project.

SSF Entrepreneur has now managed to assemble the country’s best team of road experts – engineers, project managers, consultants and other specialists from Great Britain, Ghana, Lebanon, Syria, Uganda and, of course, Liberia.

This team of seasoned professionals allows SSF Entrepreneur to carry out its corporate mission to near perfection.

Though no two projects are exactly alike, all share a set of basic techniques and strategies required for the proper execution of road works.

SSF Entrepreneur ensures that each project receives the right personnel and equipment.

The deployment of a technical and managerial team suitable to the job at hand is of paramount importance for the successful conclusion of any undertaking.

The company is keen to meet and exceed international best practices as a way to ensure full client satisfaction. In order to attain its corporate objectives, SSF Entrepreneur retains a sizeable team of knowledgeable consultants and experts in all fields related to road building.

SSF Entrepreneur also maintains a fleet of wellkept road construction equipment and related hardware that puts the Liberian company on par with any of the other major civil engineering companies in the region. The extensive SSF fleet is comprised of front loaders, motor graders, dump trucks, excavators, tankers for water and fuel, compactors, bulldozers and a large number of other heavy-duty vehicles and machinery. This fleet is maintained to the highest operational standards by a team of dedicated professional mechanics. A mechanical engineer is on permanent standby to ensure the smooth and uninterrupted operation of all earthmoving equipment.

This professionalism has made SSF Entrepreneur into one of the leading, best-equipped and most reliable road construction companies in 94

SSF Frontend loader and a dump truck at a project site.

SSF workers laying culverts at one of its road works site in Monrovi.

Liberia. The SSF Entrepreneur management has a thorough understanding of the country’s challenging topography. This knowledge enables the company to keep working throughout the rainy season. SSF Entrepreneur is so far the only road construction business in Liberia that works reliably year-round.

ensures that its corporate social responsibility is not limited merely to the use of local labour in its contract area. The company regularly donates healthcare supplies and educational material to the communities in which it operates. Community ownership and participation are key values that guide SSF Entrepreneur’s day-to-day operations.

The company strives to offer its growing labour force the best possible work conditions.

Under the expert leadership of Shawki Fawaz, and his managing partner Anwar Ezedine, SSF Entrepreneur has gained a solid reputation as a dependable partner-in-progress of the government of Liberia and the development agencies present in the country.

The Liberian government and society are currently committed to the execution of a thirty year development plan – Liberia Rising 2030.

The first component of the ambitious plan is the Agenda of Transformation that seeks to address the most pressing challenges faced by the nation.

In order to help with the implementation of this agenda, SSF Entrepreneur has recently invested $7 million in new facilities. The company built crushing, asphalt and concrete plants on the outskirts of Monrovia that now supply its crush aggregates needed for pavement projects across the country.

As a responsible business, SSF Entrepreneur CFI.co | Capital Finance International

SSF Entrepreneur was founded by current CEO Sam Shawki Fawaz. The company was bought into by Anwar Ezedine – now a key partner. It has grown from an asset base of barely $250,000 to a company boasting well over $20 million in assets.

In Liberia, SSF Entrepreneur has now become synonymous to both road building and homegrown success in business. As such the company is the embodiment of the renewed entrepreneurial spirit that has now firmly taken hold in Liberia. The future remains bright, as growth opportunities in the road construction sector show no signs of abating. The post-war infrastructure needs of the country are numerous.

However, time is required for investment levels to reach optimum levels. SSF Entrepreneur is now actively looking to expand its operations into other West African countries. i

Events Calendar

Riyadh International Convention & Exhibition Centre, Riyadh, KSA

KUWAIT

24 - 26 November 2014

Kuwait

Kuwait International Fairgrounds Kuwait City, Kuwait

Malaysia

Kuala Lumpur Convention Centre Kuala Lumpur, Malaysia

Qatar National Convention Centre Doha, Qatar

7 - 9 December 2014 4 - 6 February 2015 24 - 26 March 2015 5 - 7 April 2015

Jeddah Center for Forums and Events Jeddah, KSA

Cairo International Convention & Exhibition Centre, Cairo, Egypt

9 - 12 April 2015 21 - 23 April 2015

> Christopher Colford:

Speed Bumps Along the Road to Competitiveness Egypt’s Self-Inflicted Limits on Economic Efficiency

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t’s an axiom of economic policy: The future belongs to the efficient. In a relentlessly competitive global marketplace, those who manage to get just one step ahead of their rivals are destined to gain outsized rewards. Competitiveness requires policymakers to adopt efficiency-focused “rules of the road” that remove obstacles, accelerate innovation, mobilize capital, liberate ideas and speed goods to market.

That’s a universally accepted principle, right?

I certainly thought so – until I hopped into a car in Egypt and began traveling the country’s highways.

Granted, we’re not talking about a rational environment here: This is more akin to a nearanarchy of motorised chaos. Egypt’s every-manfor-himself roadways are notorious for their mayhem. Traffic accidents, vehicle repairs and highway deaths reportedly reduce the country’s GDP by about 3% annually – an enormous drag on the competitiveness of a struggling economy that can ill afford any additional woes.

So perhaps I should have been prepared for the highway bedlam that I experienced during my travels in Cairo and Giza last winter and during my explorations this spring around a broad swath of the Nile Delta region. You haven’t fully experienced traffic-jam frustration until you’ve endured the anarchy of Egypt’s roadways, where every vehicle known to humanity – from the humble donkey-cart to the most stylish limousine, from the most aggressive “tuk tuk”

“Mercilessly effective in forcing traffic to slow down, unmarked speed bumps are built into Egypt’s highways at unpredictable intervals.” taxi to the most overladen multi-unit freighter – contends ruthlessly for every last centimetre of scarce road space.

BUMPS IN THE ROAD Yet the mind boggles at one of Egypt’s selfinflicted impediments to mobility and efficiency: the ubiquitous use, on roadways large and small, of the speed bump – smack-dab in the middle of major highways, forcing free-flowing traffic to come to a screeching halt.

Focusing on strengthening urban productivity – analysing economies through the lens of the “competitive cities” approach, which weighs the many factors that contribute to metropolitanlevel dynamism – I’ve come to see Egypt’s use of the speed bump, even on what should be top-speed superhighways, as a metaphor for the country’s deeply troubled competitive position.

Initially, I hesitated to write about the speedbump factor – dreading that, as just an occasional visitor to Egypt, I might be overgeneralising, based on travels mostly on the Cairo region’s traffic-choked roads. But amid my most recent travels in additional regions, I continuously

observed the same speed-bump phenomenon – around the Nile Delta city of Mansoura and then up toward Damietta, and around smaller towns like Talkha, Markaz Sherbin and Bilqas. The speed bump is clearly a widely used Egyptian traffic-management tool, inspiring wonderment and begging for further analysis.

Mercilessly effective in forcing traffic to slow down, unmarked speed bumps are built into Egypt’s highways at unpredictable intervals. They require drivers to be ever-vigilant, for fear of bottomingout their cars and ruining their transmissions.

Just to clarify: Egypt’s speed bumps are not like the modest, inches-high humps that decorously restrain drivers in suburban European or North American cul-de-sacs: We’re talking about majorleague obstructions in the roadway.

On otherwise modern superhighways around places like Sheikh Zayed City and 6 October City in the Giza governorate – where urban planners are creating modern cities in the once-empty desert, hoping to relieve some of the pressure on overcrowded Cairo – traffic must come from milea-minute cruising speed to a near-standstill when drivers spot each tall, unpainted speed bump. On the narrower north-south highway paralleling the Nile River, where passenger cars must already contend with heavy trucks trundling to and from Mediterranean ports, drivers’ wariness of stealthy speed bumps is an added factor slowing traffic to an exasperating crawl.

THE PHARAOH WITHIN Why the speed bumps – along major traffic

The old party headquarters (left) of ousted autocrat Hosni Mubarak, along the Nile River near Tahrir Square in Cairo. The buildings were looted and burned in January 2011 during the early stages of Egypt’s revolution.

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policy interventions to bring some rationality to human behaviour in various civic pursuits – not just in regulating something as straightforward as traffic, but in restraining the most complex areas of the pell-mell modern economy. Since individuals cannot always be trusted to obey the agreed-upon social contract, societies often resort to imposing quasi-irrational speed bumps on behaviour – restraints that can, cumulatively, become a debilitating drain on efficiency.

In a dusty desert town in Egypt, I happened to run across a local example of the practical impact of international assistance to developing countries. A prominent plaque on the courtyard wall of the Al-Saida Preparatory School in the town of Markaz Sherbin declares, “This school has been established in co-operation with [the] World Bank.”

arteries, no less? As Egyptian friends explained to me, most Egyptian drivers routinely ignore any posted speed limit – and, it seems, just about every other attempt at traffic regulation.

“When we climb behind the wheel,” I was told, “we discover that there’s a little bit of a Pharaoh within all of us.”

In a desperate effort to reduce accidents and highway fatalities, the system of unpredictable, unmarked speed bumps can achieve what even a battalion of traffic cops could never accomplish: enforce slower speeds.

Insidious by day and invisible at night, the speed bumps are a potentially ingenious traffic-control tool – yet their side effects can inflict a jolting impact even on cars with skilful drivers. Woe to any car (like mine) that fails to anticipate a looming speed bump, even at moderate speed: The impact on a car’s suspension and transmission – and its passengers’ spines – can be shattering.

We accidentally took the full-on impact of a speed bump near the town of Mit Ghamr – wrenching our car’s front brakes out of alignment for the remainder of the week, and forcing us to wonder whether, in case of an emergency, the scraping-and-grinding brakes might fail.

Self-imposed speed bumps along the arteries of commerce, it strikes me, are a useful metaphor for what ails so many economies. Societies sometimes resort to deliberate and self-limiting

SUB-OPTIMAL RESTRAINTS We tolerate convoluted tax policies to try to socially redistribute some wealth, aiming to compensate for the tendency toward ever-greater inequality that – as Prof. Thomas Piketty of the Paris School of Economics has conclusively proven – is an inherent problem within modernday capitalism. We condone a patchwork of narrowly targeted investment incentives, aiming for idealistic outcomes, yet often merely reward rent-seeking oligopolies and political cronies.

We sometimes enforce hair-splitting antitrust standards to limit the threat of monopolistic abuses, yet we allow corporate incumbents to dominate vast and economically strategic industries. We enact full-disclosure regulations and anti-insider-trading safeguards to prevent dishonest dealing in securities markets, yet we wink at split-second trading platforms that give decisive advantages to hair-trigger traders armed with privileged data. We impose tariffs and quotas to protect uncompetitive local industries from more efficient international rivals, yet posturing free-market fundamentalists claim (especially in the United States) that we’d never even think of adopting any sort of strategic “industrial policy.”

Safeguards are vital, to be sure – but at what cost to efficiency and productivity? Such metaphorical speed bumps often succeed in slowing economic traffic, but they can also skew incentives, provoke resentful non-compliance and disrupt the “just-in-time” delivery of goods to market.

Moreover, excessive restraints – especially those that reinforce the privileged status of entrenched incumbents – can interfere with the mobilisation of capital for far-sighted investment, impede the liberation of ideas for innovation, and undermine confidence in markets’ fairness.

In the relentless global economy – which champions efficient competitors and condemns low-productivity pursuits to oblivion – society’s speed bumps must be continually reconsidered and recalibrated. As nations’ competitiveness evolves, policymakers must continually rethink whether yesterday’s improvisations can effectively deliver tomorrow’s solutions. Familiar social-welfare mechanisms can sometimes become outdated; longstanding tariff barriers can outlive their usefulness; anachronistic provisions in the tax code can become counterproductive; chronic dependence on subsidies can distort markets more than promote inclusion.

CRYING OUT FOR REFORM For policymakers, some of the social speed CFI.co | Capital Finance International

“Safeguards are vital, to be sure – but at what cost to efficiency and productivity?” bumps that we have imposed on our economic landscape cry out for reform; others may remain tolerable, despite the economic toll they inflict.

That’s where public-spirited politics and good governance enter the picture.

The challenge is to get the balance right in today’s hyper-speed global marketplace that is ever-eager to exalt successful competitors and expunge economic laggards. Continuously adjusting those wise restraints that enhance social fairness, and recalibrating those tolerable trade-offs that promote shared prosperity, is a perpetual test of “the art of the possible.”

Coming back to the context of Egypt and its speed bumps, both literal and metaphorical: My hunch is that, just as Cairo’s motorists will have to continue to negotiate highway speed bumps long into the future, Egypt’s would-be jobcreators and innovators will have to continue to confront their society’s built-in barriers – fiscal, regulatory, political, social and behavioural – that collectively impede the country’s economic performance.

Building city-focused competitiveness seems to be the most promising place to seek workable solutions to grand-scale economic challenges.

For policymakers in Egypt, and in every country, strengthening competitiveness at the urban level may be the surest way to help make national economies more vibrant and productive.

The world’s emerging megacities are destined to be the engines of the global economy.

Concentrating on building competitive cities offers insights that can help policymakers analyse policies that optimise productivity. The focus on urban competitiveness can also offer us new perspectives on the socioeconomic speed bumps that are bound to pop up, rationally or irrationally, along the road toward the destination that we’re all seeking: a world where we have, at last, eliminated extreme poverty and built shared prosperity. i

ABOUT THE AUTHOR Christopher Colford is a speechwriter and editor at the World Bank in Washington, D.C. He was previously a consultant at Hill & Knowlton Public Affairs Worldwide and a senior editor at McKinsey & Company.

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> Mohammed bin Rashid Al Maktoum:

The Brain Regain

D

UBAI – In 1968, while studying at the Mons Officer Cadet School in the United Kingdom, I needed to visit a hospital. There I met a doctor who, to my surprise, spoke fluent Arabic. I learned that he was new to the UK, so I asked if he intended to stay long or return home. He replied with an Arabic saying that translates as: “My home is where I can eat.”

That doctor’s words stayed with me for

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many years, because they underscored the contradiction between our idealized view of “home” and the harsh realities of life that push talented people to leave their homes.

The doctor was a classic case of the “brain drain” phenomenon that has afflicted developing countries for decades. These countries spend scarce resources educating doctors, engineers, and scientists, in the hope that they will become engines of prosperity. Then we watch with dismay

CFI.co | Capital Finance International

as they migrate to the West, taking with them the promise of their talent.

It is, of course, everyone’s right to choose a better life, wherever in the world they wish. We understand why they go. Talent is drawn – like a magnet – to opportunity.

For the countries left behind, however, it feels like an endless vicious cycle: they need talent to create opportunity; but without opportunity,

Summer 2014 Issue

talent gravitates to the bright lights of the West. Indeed, the United Nations and the OECD report that migration for work has risen by one-third since 2000. One in nine university graduates from Africa now lives and works in the West. Many will not return: skilled workers are six times more likely to stay away.

But now something remarkable is happening. In some countries, the brain drain has reversed its flow. The causes are fascinating, and there is reason to be optimistic that the vicious cycle can be broken, transforming the balance of hope and opportunity between developing and developed economies.

A new study by LinkedIn, the world’s largest online professional network and recruitment platform, has measured the net international movement of talent among its members. Topping the list as a destination for talent is my own country, the United Arab Emirates, with a net talent gain of 1.3% of the workforce in 2013.

Other net “talent magnets” include Saudi Arabia, Nigeria, South Africa, India, and Brazil.

Most interesting, fewer than one-third of net talent importers are developed countries. In fact, the top talent exporters in this study are Spain, the UK, France, the United States, Italy, and Ireland. Rich countries that until recently had been tempting away our brightest minds are now sending us their own.

Of course, this is only one study, and many poor countries still suffer from a chronic talent exodus. OECD data show that many countries in Africa and Latin America have migration rates for graduates above 50%.

Dubai: Marina

“Talent flows naturally to countries that create an environment for economic growth; that make life easy for enterprise; that attract and welcome investment; and that nurture a culture of achievement.”

We do know that brain drain is often a function of safety and security as much as economic opportunity. Part of the tragedy playing out in Middle Eastern countries beset by conflict and instability is that if only their most talented sons and daughters could apply their skills at home, they would become part of the solution: agents of peace through development. This makes it all the more important to examine how some developing countries succeeded in reversing the outward flow.

The basic ingredient is opportunity. Talent flows naturally to countries that create an environment for economic growth; that make life easy for enterprise; that attract and welcome investment; and that nurture a culture of achievement. Skills are attracted to challenge and possibility.

Opportunity on this scale is becoming

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a scarce commodity in many parts of the West. But this is not the case in the developing world – at least among countries with the appetite and determination to deploy strong governance and continually raise their competitiveness.

Second, quality of life matters greatly. A generation ago, many talented individuals would consider working outside the West a “hardship posting.” Today, standards of living in the UAE, for example, are among the highest in the world. We have shown that the business of reversing brain drain is also the business of creating a better life for citizens and residents. Building happiness is, after all, the primary business of good government everywhere.

Ours is a story of great hope for the Middle East in particular, where generations of conflict and despair have driven high levels of outward migration. I have always argued that, besides good governance, the best solutions to the divisions and strife of the Arab world lie in grassroots development and economic opportunity. Now, we have shown that it is possible to reverse the forces that had driven away our most talented young people.

Another source of hope is that this turnaround can happen remarkably quickly.

Research shows that small countries suffer disproportionately from brain drain. But we have shown that even for a small country like the UAE, and even in a region divided by conflict, it is worth building an island of opportunity.

But let me be clear: reversing brain drain is about more than plugging a leak. It means turning a vicious cycle into a virtuous one.

By attracting the best talent from around the world, we can create a vibrant and diverse society that fuels innovation and prosperity – which in turn attracts still more talent.

To make this work, we must believe in people. Human beings – their ideas, innovations, dreams, and connections – are the capital of the future. In this sense, the “brain regain” is not so much an achievement in itself as it is a leading indicator of development, because where great minds go today, great things will happen tomorrow. i

ABOUT THE AUTHOR Mohammed bin Rashid Al Maktoum is Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai.

Copyright: Project Syndicate, 2014. www.project-syndicate.org

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> Qatar International Islamic Bank:

Soaring High on Islamic Finance and Solid Banking

Horizontal - White / Red Box

The Qatar International Islamic Bank (QIIB) has come a long way since its establishment as a full-service bank committed to Sharia principles in 1991. With some sixteen branches at convenient locations and over eighty cash dispensers across Qatar, QIIB is well-placed to provide a full array of retail and corporate banking services to its growing customer base.

A

customer-centric bank, QIIB is gaining prominence in the financial world as Islamic banking attains momentum.

Islamic banking is now considered both a viable and sustainable proposition alongside conventional banking. Through strategic alliances, the Qatar International Islamic Bank is now growing at an accelerated pace and has become one of the premier Islamic banks operating in the Middle East region and beyond. QIIB continues to actively explore new markets for strategic alliances.

QIIB’s guiding principle is to provide modern Sharia-compliant financial services that meet and exceed its customers’ expectations and satisfy their needs in an efficient, user-friendly manner. Qatar International Islamic Bank is guided by its firm commitment to deliver value to its customers, shareholders, and employees consistent with their aspirations.

In retail banking, QIIB focuses on maintaining efficient delivery channels and personalised service. The branch network covers major population areas and provides convenient access to customers.

Telephone banking, SMS banking, and a 24/7 call centre provide additional access and convenience, and further enhance the security aspects of QIIB’s banking operations. The bank offers various deposit and financing services to consumers. Additionally, QIIB offers debit cards, credit cards, safe deposit boxes, investment services, money transfers and foreign exchange services.

QIIB’s retail banking services also feature specialised financial products to small and

In Pictures: QIIB Main Branch

“QIIB’s guiding principle is to provide modern Sharia-compliant financial services that meet and exceed its customers’ expectations and satisfy their needs in an efficient, user-friendly manner.”

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“To enhance the employees’ skills, competence, and assist people in the realisation of their career potential, the bank allocates significant resources to the development of its workforce.” medium-sized businesses through a dedicated department, staffed with seasoned bankers who are able to respond in a timely fashion to the varying and growing needs of this important segment of the economy.

To large corporations in all sectors of the economy, Qatar International Islamic Bank offers a wide variety of financing and deposit services.

The bank’s relationship managers are seasoned bankers with a thorough understanding of the complex financial needs of larger corporations.

Syndications and financing agreements with other major banks have allowed QIIB to provide seamless service to its corporate customers.

INVESTMENT SERVICES & CORRESPONDENT BANKING Qatar International Islamic Bank’s network of global correspondent banks ensures timely delivery of money transfers and offers extensive foreign trade services to its customers as well.

The bank’s global network permits the continuous flow of services, consistently delivered with unequalled efficiency. This network also ensures the availability of different investment alternatives, carefully tailored to meet each individual customer’s needs.

One of the greatest assets of QIIB is its workforce.

To enhance the employees’ skills, competence, and assist people in the realisation of their career potential, the bank allocates significant resources to the development of its workforce.

QIIB is also committed to the national goal of achieving minimum levels of Qatarisation at all staff levels.

Qatar International Islamic Bank is highly rated internationally. Moody’s awarded the bank its A3 rating with a stable outlook while Fitch recently upgraded QIIB to a long term IDR of A. Both the A3 and A ratings reflect the achievements of QIIB and constitute a clear recognition of the bank’s excellence in management by two of the world’s most renowned rating agencies. Both commented on the strong financial fundamentals of QIIB and in particular its high capitalisation levels.

These ratings were sought by QIIB in the context of its strategic plan to gain access to international capital markets. This forms part of the bank’s expansion objectives and a continued commitment to its customers. QIIB’s strong financial position also aims to assure the customers’ confidence in the bank. The ratings indicate the creditworthiness of QIIB. The bank is perceived as being of low credit risk and boasts a strong ability to fulfil its financial obligations

In Pictures: Dr. Khalid Bin Thani Bin Abdullah Al-Thani, Chairman & Managing Director of QIIB, receiving recognition from CFI.co.

to creditors, including depositors and holders of other rights.

Qatar International Islamic Bank is a recipient of many prestigious awards. At the Global Sukuk Summit in London, the bank received the award for the Best Islamic Bank in Qatar for its sukuk instruments. This award comes on the back of a series of great successes achieved by QIIB in the issuance of sukuks.

The bank’s $700m 5-year sukuk issued in 2012, raised orders exceeding $5bn. This represented an oversubscription of more than seven times the issuance amount and reflected the confidence enjoyed by the Qatari economy amongst international investors. It also testifies CFI.co | Capital Finance International

to the strong financial position of QIIB and the consistently high ratings it receives from reputable international rating agencies.

Qatar International Islamic Bank has been chosen by a number of banks for its excellence in straight through processing (STP). QIIB recently received the Award for Excellence in Straight Through Processing from Commerzbank. The bank received similar STP awards from Citi Bank (New York) and Deutsche Bank (New York).

STP awards are given in appreciation of QIIB’s excellence in formatting payments – i.e. the ability to use the correct fields in SWIFT messages which enable the payments to pass through the receiving banks systems without manual intervention. i 101

> Path Solutions:

The Vibrant Market of Sharia-Compliant Technologies

Powering Islamic Financial Markets

By Rosie Kmeid, VP - Corporate Communications & Marketing at Path Solutions

While business activities in line with the provisions and principles of Sharia have been a feature in the Arab world for over a millennium, recent years have seen the emergence of modern Islamic finance that has established itself as an important component of regional economies. As new geographies continue to open up, industry forecasts suggest that modern Islamic finance will continue to enjoy a solid and vertical growth fuelled by greater acceptance and surging demand for ethical financial products.

Y

et the value of this market is not well perceived and largely underestimated, and the Islamic financial services industry is challenged with figuring out how to serve it effectively and profitably.

Across world markets, and particularly in the GCC, South East Asia and Africa, the strategy has been to encourage the development of a healthy Islamic financial sector to contain and reach out to large unbanked populations, currently estimated at 2.5 billion. This represents an enormous potential and opportunities for Islamic financial institutions to offer a wide range of Sharia-compliant, high-quality, reasonably priced financial products and services.

Investments in innovative Sharia-compliant financial services for the unbanked pay many incentives not only in profitability and crossselling opportunities but also in reducing financial ignorance and the inaccessibility around the world, and pave the way to sustainable growth.

ONE BUSINESS MODEL COMPLEMENTS THE OTHER Islamic banking is more complex than traditional banking in that products and services must conform to the requirements of Sharia by way of usage for sale contracts, leasing arrangements, agency fees, profit-sharing deals and other types of agreements.

Similarly, Islamic banking practices and regulations vary from one country to another. It is recognized that one of the major challenges in Islamic banking is the absence of a single interpretation of Sharia law given that there are different schools of thought. There remains a number of controversies about the ideal practices in Islamic banking and the role of Sharia boards in harmonizing Fatwas required to minimize complexities in structuring Islamic financial products.

102

“With the significant milestones modern Islamic finance has achieved in the recent decade, Sharia-compliant technological advancement will play a bigger role in the growth of this phenomenon worldwide.”

Attempts have been made though to improve standardization by organizations such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), but such standards are not mandatory nor are they universally accepted.

This leads to the absence of conformity across Islamic banking operations. Thus, a universal consensus of what was described above, although not without a few differences will substantially grow the Islamic finance market and will catapult it to exponential levels.

Nevertheless, industry experts widely acknowledge the significant role of Islamic finance in the global financial system. The industry has clearly demonstrated its ability in helping to restore and maintain financial stability worldwide. The wide acceptability that modern Islamic finance enjoys – and the support it attracts from three principal bodies such as the World Bank Group, the IMF, and WTO as evident in the numerous initiatives they have undertaken – are considered enough proof of its viability and relevance to the global financial system, especially in view of the industry’s appeal to leading international banks such as Citibank, UBS, HSBC, BNP Paribas, Royal Bank of Canada and others.

Today, the industry has become systemically CFI.co | Capital Finance International

important and is too big to be ignored. With Islamic finance moving into the next phase of growth, Islamic financial institutions have the opportunity to assess their current capabilities and leverage them to focus on areas of strength to keep on their current trajectory.

THE STRIVE FOR EFFICIENCY INTENSIFIES While the inherent strengths of Islamic finance have contributed to its viability and resilience, going forward the foundations of its sustainability as a competitive form of financial intermediation is yet to be reinforced. Despite a number of challenges, modern Islamic finance remains a demand-driven segment, key to the growth of societies. However, the impact of economic environment on business, margin compression and competitive pressures are forcing Islamic financial institutions to focus primarily on performance and efficiency.

As once observed by Dr Kabir Hassan, Professor of Finance at the University of New Orleans, in his research study on Islamic finance efficiency; Dr Hassan noted that for the industry to influence the patterns of the global financial system and shape the future, it must move beyond its traditional strongholds.

Concerted efforts are thus underway focusing on the further development of the sector. As part of this process, industry experts believe that the use of highly advanced and globally recognized technologies in Islamic finance activities is highly desired and is the only way to enable the industry achieve its full potential. They are confident that the continued development of the sector and its overall expansion are heavily based on strategic investment in technology and the effective use of Sharia-compliant information systems.

A cutting-edge technology combining the best of traditional Islamic values and innovation, able

Summer 2014 Issue

to match the requirements of modern Islamic financial institutions is integral to suppress the various emerging challenges in the sector.

Recognizing the increasing market demand for Islamic-oriented financial products across multiple geographies, Islamic financial institutions expect, as a result of deploying an off-the-shelf Sharia-compliant technology incorporating best practice processes, to adapt to the nuances of a rapidly growing sector by offering their customers superior Sharia-compliant products and services. Such technology, built from scratch on the basis of Sharia, will be completely self-contained, truly geared to address country and region-specific Islamic banking requirements, with the flexibility to define a full and competitive range of Islamic financial products, the scalability to manage large volumes of transactions and the agility to embrace change.

THE CALL FOR SHARIA-COMPLIANT TECHNOLOGIES Nowadays, the parade of new technological breakthroughs in the global financial services sector is relentless. These increasingly sophisticated, evolving and transformative technologies will inevitably promote better practices, greater transparency and increased productivity for the entire financial system.

With the significant milestones modern Islamic finance has achieved in the recent decade, Sharia-compliant technological advancement will play a bigger role in the growth of this phenomenon worldwide. The next few years are likely to see further growth in the development and proliferation of new-generation Islamic technologies in an attempt to meet the demands of this fast-growing sector.

As the sector comes into its own, cuttingedge technology will enable Islamic financial institutions not only to increase their efficiency and enhance customer service, but more importantly cut the cost of their operations considerably. Without doubt, this offers exciting opportunities for these institutions to increase business performance, gain a competitive advantage and grow their market share.

While clearly this is work in progress, Islamic financial institutions remain optimistic that the adoption of high-performing and proven technologies in line with the requirements of the Islamic law will continue to revolutionize the sector in the coming years.

the flexibility and intuitive design of i MAL enables financial institutions to quickly launch competitive Sharia compliant products and services while reducing IT dependency and cost.

Founded in 1992 and building on over twenty years of experience, Path Solutions is well positioned to be the trusted IT partner of forwardthinking Islamic banks willing to capitalize on best-of-breed technologies. The company goes a step beyond traditional software vendors by delivering solutions designed to mitigate Sharia risk, optimize output, minimise costs and which can be easily extended to support geographical and business expansion.

For further details: www.path-solutions.com i

ABOUT PATH SOLUTIONS Path Solutions is at the forefront of the Islamic financial software industry, providing a broad, deep spectrum of Sharia-compliant integrated solutions and services that cover core banking, customer service management, investment banking, risk management, treasury and trading in the GCC and global capital markets.

Designed to meet the needs of modern Islamic banking, Path Solutions’ turnkey solutions are based on an open, flexible architecture and an established deployment methodology. They have been tested and implemented at some of the world’s most sophisticated Islamic banks, Islamic banking windows as well as conventional banks converting into Islamic banking operations.

Path Solutions’ flagship product, i MAL is a powerful core banking solution specifically built from the ground-up to support Sharia banking operations. It is geared to address region-specific Islamic banking requirements. Moreover, CFI.co | Capital Finance International

Author: Rosie Kmeid

103

> IFC Knowledge Series in MENA:

Overcoming Constraints to SME Development in MENA Countries and Enhancing Access to Finance

By Qamar Saleem, Senior SME Banking Specialist, MENA, IFC

The role of the Micro, Small and Medium Enterprises (MSME) sector cannot be over emphasized in terms of its contribution to GDP and employment generation, particularly in emerging economies. Studies indicate that formal SMEs contribute up to 45 percent of employment and up to 33 percent of GDP in developing economies (IFC: Scaling-Up SME Access to Financial Services in the Developing World 2010). These numbers are significantly higher when taking into account the estimated contributions of SMEs operating in the informal sector. In high income countries, SMEs contribute nearly 64 percent to the GDP and 62 percent to employment (Figure 1).

Y KNOWLEDGE FC KNOWLEDGE SERIES IN MENA IFC SERIES IN MENA outh unemployment of 25.1 percent for the Middle East and 23.7 percent for North Africa—versus a global average of 12.6 percent—and femaleIssue 1 entrepreneurship levels of 12 to 15 percent—versus a global average of 31 to 38 percent—severely affect economic growth (Figure 2). Creating jobs for young entrepreneurs and fostering female-entrepreneurship remains a key challenge.

“SMEs account for a very high share of private sector ue 1 employment in the Middle East and North Africa (MENA), particularly in countries with large vercoming ConstraintsConstraints to SME Development Overcoming to SME Development informal sectors.”

SME LANDSCAPEand IN MENA REGION and Enhancing MENA Countries Enhancing Access to Finance in MENA Countries Access to Finance

percent of lending goes to SMEs across MENA, and even less in GCC countries at 2 percent.

This is substantially lower when compared to the middle income countries lending average of 18 percent and high-income countries average of 22 percent (Figure 3).

SME finance in MENA is restricted by the lack of an enabling environment. Regulations are insufficient, financial infrastructure is inadequate, lending capacity and tools are lacking, SME management skills need to be improved, SMEs account for a very high share of private financial transparency needs to be encouraged, sector employment in the Middle East and North estimated at 23-19 million (formal and informal) and the availability of collateral is scarce. Banks e role of the Micro, Small and Medium Enterprises (MSME) sector cannot besector over emphasized in terms its inand The role of the Micro, Small and Medium Enterprises (MSME) cannot be over emphasized terms of its institutions in MENA are also not Africa (MENA), particularly in countries with large in number and comprising 90-80 percent ofoftotal Financial ntribution to GDP and employment generation, particularly in emerging economies.

Studies indicate formal contribution to GDP and employment generation, particularly in most emerging economies.

Studies indicate that formal informal sectors.

According to official statistics, businesses in countries.

Accessthat to finance equipped to offer sustainable and profitable SME MEs contributeMSMEs up tocontribute 45 percent and up toof33 is percent in developing (IFC: economies SMEs upoftoemployment 45 ofpercent employment and toGDP 33 percent of GDPeconomies in developing (IFC: typically account forpercent 10 to 40 one up ofofthe greatest challenges facing MSMEs banking products. aling-Up SME Access to Financial Services in the Developing 2010).the These numbers significantly Scaling-Up SMEin Access to However, Financial Services inWorld the Developing World 2010).

These numbers are significantly higher all employment MENA. employment across globe, and are particularly for higher MENA hen taking intoin account the estimated contributions ofunderSMEs operating in the informal In high income when taking account the estimated contributions SMEs operating in sector. high income MSMEs isinto likely to be significantly whereofnearly 63 percent sector. of the the informal MSMEs do not InCREATING ENABLING ENVIRONMENT AND LEADING untries, SMEs estimated contributein nearly 64records. percent to the and to 62the percent to employment 1). countries, SMEs contribute nearly 64GDP percent GDP and 62 percent (Figure to (Figure official The typical non-GCC have access to finance.

Theemployment total financing gap 1).PRACTICES

High-income

High-income

Middle-income

Middle-income Low-income

Low-income

High-income

High-income Middle-income

Middle-income Low-income

MENA country is estimated to employ as much for MSMEs in MENA is estimated at 210$ to IFC has recently completed a review of leading as 67 percent of labor informally, although only 6 240$ billion (of which formal MSME finance gap SME finance practices and models as part of percent is informal (Loayza & estimated at 180-160$ billion). work with the G20. Key recommendations and a gure 1: SME Sector’s Contributions toContributions GDP and Employment, aisComparison Figureof 1:GCC SMElabor Sector’s toWada, GDP and Employment, a Comparison 2010). collection of best practices from the G20 SubA recent World Bank/Union of Arab Banks survey Group in creating an enabling environment are as DP CONTRIBUTION OF CONTRIBUTION SME AND INFORMAL SECTOR GDP CONTRIBUTION TO CONTRIBUTION FORMAL COUNTRY GDP OF SME AND INFORMAL SECTOR GDP TO FORMAL COUNTRY The majority of enterprises in MENA are MSMEs, of over 130 MENA banks shows that only 8 follows: EMPLOYMENT (MEDIAN VALUES) EMPLOYMENT (MEDIAN VALUES) • Developing country specific strategies: The %100 %100 %100 %100 development of an effective SME finance strategy for an individual country should ideally be based %80 %80 %80 %80 on a comprehensive diagnostic of its SME %60 %60 %60 %60 finance gap and the quality of its SME finance architecture. %40 %40 %40 %40 • Developing a supporting legal and regulatory %20 %20 %20 %20An effective legal and regulatory framework: framework promotes competition by avoiding %0 %0 %0 %0 overly restrictive licensing requirements and Figure 1: SME Sector’s Contributions to GDP and Employment, a Comparison. GDP contribution of SME and informal sector [left]. GDP allows international and regional banks with better SME lending tools to enter the market. contribution to formal employment (median values) [right]. rce: IFC SME BankingSource: Knowledge guide 2010; country Ayyagari, Beck, and2010; Demirg-Kunt (2003) IFC SME Banking Knowledge guide Ayyagari, Beck, and Demirg-Kunt (2003) Source: IFC SME Banking Knowledge guide 2010; Ayyagari, Beck, and Demirg-Kunt (2003).

Competition among financial sector players can uth unemployment 25.1 percent of for25.1 the percent Middle East andMiddle 23.7 percent for23.7 North Africa—versus global Youth of unemployment for the East and percent for NorthaAfrica—versus a global CFI.coof| 12 Capital Finance International erage of 12.6104 percent—and female-entrepreneurship levels of 12 to 15levels percent—versus a global averageaofglobal 31 average of 31 average of 12.6 percent—and female-entrepreneurship to 15 percent—versus 38 percent—severely affect economic affect growth (Figure 2).

Creating jobs2). forCreating young entrepreneurs fostering and fostering to 38 percent—severely economic growth (Figure jobs for youngand entrepreneurs male-entrepreneurship remains a key challenge. female-entrepreneurship remains a key challenge.

Figure 2: Youth Unemployment and Women Entrepreneurship in MENA versus Regions Summer 2014 Issue YOUTH UNDEMPLOYMENT IN THE ARAB WORLD IS THE HIGHEST IN THE WORLD - DESPITE HAVING THE LOWEST PARTICIPATION RATE Number of format SMEs with +1 women owners Millions

Middle East

25.1

East Asia

North Africa

23.7

Cenrral Asla and Eastern Europ

Eastern Europe And CIS

18.9

Developed countries

18.2

Latin America

15.2

South East Asia

14.2

Sub-Sahran Africa

12.3

Sout Asia

9.5

East Asia

8.3

Latin America Sub-Saharan Africa Middle East and North Africa South Asia Total 0

2

4

6

8

10

12

Figure 2: Youth Unemployment and Women Entrepreneurship in MENA versus Regions. Youth unemployment in the Arab World is the higherst in the world - despite having the lowest participation rate [left].

Number of format SMEs with +1 women owners (Millions) [right].

Source: IFC, Education for Employment Report; IFC, Strengthening Access to Finance for Women-Owne

Source: IFC, Education for Employment Report; IFC, Strengthening Access to Finance for Women-Owned SMEs.

be promoted further by introducing technological by a wide range of allowable collaterals remains concentrated on ‘Medium’ enterprise.

Number of format SMEs with +1 women owners Millions platforms in key areas, facilitating a variety of (immovables and movables), the establishment The maximum outreach has been achieved by financial products and services, driving down the of clear priority rankings of claims over Kafalat program in Lebanon for the MENA region.

East Asia access, and reaching previously costs of financial collateral, efficient collateral registries making Another important stimulus can be government untapped markets.

Mexico’s platform for reverse priority interests publicly known, and effective procurement linked to the SME supply chain.

Cenrral Asla and MSMEs account for a• very highreliable share data of private employment factoring Brazil’s information platform for enforcement of collateral in the case of default Building sources sector for SME Easternand Europ venture capital are good examples of government can further enhance risk acceptabilityin of countries SME finance: Anlarge effective data collection framework particularly with informal sectors.

According to o Latin America interventions that can mobilize private resources customers for financial institutions. at the national level should include efforts to 10 to 40 percent of all employment in MENA. However, employmen for SME finance.

• Effective government support mechanisms: standardize the definition of SMEs, centralize Sub-Saharan Africa official Theoftypical non-GCC MENA • Strengthening the financial infrastructure: In all cases, governmentestimated interventionsin should be records. the collection supply-side data by the centralcountry is e Middle East and informally, only 6supervisors percent of is informal ( Establishing a solid financial infrastructure carefully designed and labor better evaluated withalthough a bank/banking andGCC other labor financial North and Africa accounting standards, credit (auditing view to accurately measure their achievements supervisors, and survey SMEs in order to identify South Asia registries/bureaus, collateral, and insolvency in terms of outreach and leverage.

Partialof credit and quantify underserved SME estimated segments.

The majority enterprises in MENA are MSMEs, at 23-19 regimes) should be a priority in financial guarantee schemes should remain an important Demographic data on SMEs in by most number of comprising 90-80 percent of total businesses countries.

Acce Total development.

The aim should be to develop form of intervention. Key guiding principles on employees, turnover, and asset size should be facing MSMEs across the globe, and particularly for MENA where n a comprehensive0 credit 2reporting4 system6 that 8such schemes should contain guidelines on available and help normalize access to data.

10 12 access finance. total financing for would MSMEs in MENA is covers both personal and commercial credit eligibility criteria, coverage ratios,to scalable credit The Computerized business gap registries further information, and can cover MSMEs and help approval mechanism, fees, payment rules,finance use facilitate data gathering process and would formal MSME gap isthe estimated at 180-160$ billion). lenders better manage credit risk and extend of collateral/down-payment, and equity ratios, serve as an important first step for firms joining Source: IFC, Education for Employment Report; IFC, Strengthening Access to Finance for Women-Owned SMEs access to credit. Some countries, such as India, among other parameters.

Chilean FOGAPE the formalof sector.

Annual business andof financial A The recent World Bank/Union Arab Banks survey over 130 MEN have introduced SME rating agencies as an guarantee fund and Small Business Finance reports can provide important measures over goes to SMEs across MENA, and even less in GCC countries at 2 perc additional institution designed to provide more Program in Canada are two good examples. time on the size and trends of the SME sector.

Figure 3: MSME Lending Benchmarking in MENA Region to the middle income countries lending average of 18 percent and information to prospective lenders. Moreover, a There are multiple partial credit guarantee • Address specific market niches: Promoting well-functioning collateral regime characterized schemes in the region (Figure but market 3).penetration female entrepreneurship and enhancing

SME Landscape in MENA Region

SME Landscape in MENA Region

MSMEs account for a very high share of private sector employment in the Middle East and North Africa (MENA), particularly in countries with large informal sectors. According to official statistics, MSMEs typically account for 10 to 40 percent of all employment in MENA. However, employment in MSMEs is likely to be significantly underestimated in official records. The typical non-GCC MENA country is estimated to employ as much as 67 percent of labor informally, although only 6 percent of GCC labor is informal (Loayza & Wada, 2010).

The majority of enterprises in MENA are MSMEs, estimated at 23-19 million (formal and informal) in number and comprising 90-80 percent of total businesses in most countries. Access to finance is one of the greatest challenges facing MSMEs across the globe, and particularly for MENA where nearly 63 percent of the MSMEs do not have access to finance. The total financing gap for MSMEs in MENA is estimated at 210$ to 240$ billion (of which formal MSME finance gap is estimated at 180-160$ billion).

Yemen

Morocco

Lebanon

Yemen

Morocco

Lebanon

Yemen

Morocco

Lebanon

Yemen

Morocco

Lebanon

Yemen

Morocco

Lebanon

Yemen

Morocco

A recent World Bank/Union of Arab Banks survey of over 130 MENA banks shows that only 8 percent of lending goes to SMEs across MENA, and even less in GCC countries at 2 percent. This is substantially lower when compared to the middle income countries lending average of 18 percent and high-income countries average of 22 percent (Figure 3).

%25

%20

%15

%10

%0

Figure 3: MSME Lending Benchmarking in MENA Region.

Source: IFC SME Banking Knowledge guide 2010; Ayyagari, Beck, and Demirg-Kunt (2003).

Source: IFC SME Banking Knowledge guide 2010; Ayyagari, Beck, and Demirg-Kunt (2003) CFI.co | Capital Finance International

105

SME finance in MENA is restricted by the lack of an enabling environment. Regulations are insufficient, financial infrastructure is inadequate, lending capacity and tools are lacking, SME management skills need to be improved,

Figure 4: Profitability Benchmarking of SME Business versus Overall Bank Performance INCOME GROWTH RATES FOR PANEL BANKS Income growth-Bank

INCOME GROWTH RATES FOR PANEL BANKS

Income growth-SME

ROA-Bank

ROA-SME 6%

240 %

5% 50 %

4%

40 %

3%

30 %

2%

20 %

1%

10 % Bank M1 ME segment

Bank S1

Bank S2

Bank S3

Bank S4

0%

SE segment

Bank M1

Bank S2

ME segment

Bank S1

Bank S2

Bank S3

Bank S4

0%

SE segment

Figure 4: Profitability Benchmarking of SME Business versus Overall Bank Performance. Income growth rates for panel banks.

Source: IFC, Benchmarking SME Banking Practices in OECD and Emerging Markets, 2007.

sustainable energy finance is crucial. Experience Proposition, People and Process are three key across different developed markets has shown building blocks of the SME business within a that women have a better repayment record financial institution. The proposition requires Source: Benchmarking in OECDbuilding and Emerging Markets, 2007 and yieldIFC, a higher cross SME sell Banking ratio forPractices financial a servicing model, transactional and institutions. Women Entrepreneur Package by deposit products, credit and financing programs Garanti Bank in Turkey and M-Power Package by and simple treasury products. The people are Access Bank in Nigeria are good examples of how seen as key enablers in terms of SME senior outreach was increased to women in business. management and staff. The importance of In addition, sustainable energy finance provides well defined processes cannot be emphasized opportunities for SMEs to reduce costs as well enough, the front-end and support infrastructure, as increase environmentally friendly operations. business and credit processes, and customer Erste in Czech Republic and eight banks in relationship management tools are paramount.

Russia (in particular Bank-Center Invest) have successfully built profitable portfolios in this SME business set-up and growth within a sector. financial institution also faces significant internal and external challenges. The key INSTITUTIONAL CAPACITY BUILDING internal factors are strategic intent, finding the SME Banking can be a very profitable business. best organizational fit, investment capacity in Returns are often some of the best on a riskearly years of launch, change readiness levels return basis with attractive yields (Figure 4). And within key stakeholders and the significance of according to McKinsey SME banking revenue in the SME initiative within the overall strategic MENA should grow by 18 percent per year to direction. The external factors influencing the reach 15$ billion by 2015. initiative are mainly the size of the revenue pool, the financial institution’s positioning strategy, Specific strategies and business model design the suitability of the economic environment, can help build a strong and sustainable maturity of the regulatory framework and the SME business. The below strategies and focus of the government. New and growing SME recommendations are based on IFC’s 15 years businesses within a financial institution require of experience advising banks in building and deep engagement, commitment and discipline. scaling up SME businesses across emerging markets.

In order to be successful in SME Banking, proficiency across six core areas and 10 enabling SME banking is much more than SME lending. business models is required (Figure 5).

A focus on loans does not allow financial institutions to really look at the client’s needs • Business Model: A dedicated business model and design a suitable proposition. SME customer and appropriate organization fit is required. needs are primarily deposit, transactional, Various business model options, which are not and credit based. While credit needs (loans, mutually exclusive, include retail-based for mass overdrafts, trade finance, receivable finance market, advisory differentiated, segment-based, etc.) are usually focused on, deposit (operating supply chain linked, mobile money-based, niche accounts, term deposits, investment options) markets positioned (e.g. women in business), and transactional banking (internet banking, and alternate financing models. phone banking, mobile banking, transfers, debit • Segmentation: Specific value propositions cards, foreign exchange etc.) contributions are essential to target specific sub-segments. can represent between 60-50 percent of best Typical approaches to segmentation are industry practice SME business profitability and demand led, sales turnover, profitability, geography or greater attention. customer need based, and gender; these not being 106

CFI.co | Capital Finance International

mutually exclusive. A powerful segmentation can help define a bank’s participation model and help optimize costs.

• Products and Services: Financial and non financial products and a differentiated servicing model are required. These include heavy customization of products, Islamic and non-Islamic banking provision, non- financial advisory provision (e.g. training), and information dissemination. Moreover a strong cross-sell focus and bundling of products. Also customer value proposition aligned branding, campaign and communication strategy is needed.

• Sales and Delivery: Tiered sales and service focusing on higher valued customers, branchbased models for small SME volumes, and investment in alternative channels not only enhance customer experience but also help reduce operating costs. Specific customer acquisition, activation, retention and churn policies are required.

• Organization and Systems: Dedicated organization structure for SME focus, separation of acquiring/ retention/ remedial activities, strong relationships across bank, dedicated training and certification programs are necessary. In addition upgrading of IT platform for achieving scale, investment in loan origination platform, credit scoring, credit approval factory, data warehousing, loan management systems, CRM, analytics etc.

• Risk Management: Pricing needs to incorporate data driven risk scoring, development of statistical application and behavioral scoring, strong portfolio management, operational risk management, strong collections framework, and participation in risk sharing facilities driven by government entities etc.

IFC SERVICES IFC provides a combination of Investment and Advisory Services for optimal results. The services can be summarized as follows: Investment Services • Equity investments in financial institutions/ equity funds for SMEs

required (Figure 5): Figure 5: Proficiency Requirements for a Successful SME Business

Summer 2014 Issue

10 KEY MODELS: Customer Acquisition

• vCustomer Acquisition: Prospecting, sales, activation, cross sell

Relationship Management

Communication

• Relationship Management: Tiered structure & KPIs, retention • Capacity building: Information dissemination, training & networking • Customer Servicing: Telephone hotlines, service team, alternate channels, SME centers

Business Model IT & Analytics

Risk Management

Segmentation

Organization & Systems

Products & Services

Capacity Building

• Product Development: Lending, trade, transactional, treasury • Credit Risk: Credit evaluation engine, process reengineering, Portfolio monitoring, Collections • Operational Risk: AML management, error rates, dormancy, quality & control standards, audit readiness • People Alignment: Certification program, scorecards, sales toolkits • IT & Analytics: CRM tools, KPIs, sales & risk analytics, automation

People Alignment

Customer Servicing

Sales & Delivery

Operational Risk

• Communication: Branding, collateral, welcome packs, campaigns, market events, strategic alliances

Product Development Product Development

Figure 5: Proficiency Requirements for a Successful SME Business.

“SME Banking can be a very profitable business. Returns are often some of the best on a risk-return basis with attractive yields. And according to McKinsey SME banking revenue in MENA should grow by 18 percent per year to reach 15$ billion by 2015.”

• Funded lines to expand investment and working capital lines especially in illiquid markets • Blended finance options for selected projects, to support the expansion of IFC’s risk appetite (e.g. grace periods, performance based pricing, subordination, higher risk/lower security or in limited cases, local currency positions) • Focus on underserved segments, such as women, conflict zones, agriculture, and climate • Risk sharing facilities/partial credit guarantees to enhance risk taking capacity and provide capital relief via low risk weightings; avoid foreign exchange mismatches and encourage domestic resources for SME financing Advisory Services • Build capacity of financial institutions in strategy, market segmentation, credit risk management, and product development through new approaches and systems to scale up their financing for SMEs on a sustainable basis • Promote sub-sector focus such as female owned SMEs, sustainable energy SME projects, agriculture SMEs, and leasing • Raise awareness on best practices in the SME finance space • Develop credit reporting infrastructure based on country needs • Support development of secured transactions, collateral registries, legal and regulatory framework • Build capacity of public/private stakeholders through advice and training

Advisory services are supported by the following innovative tools • SME Banking Knowledge Guide: Outlines leading practices and success factors for profitable SME banking operations. The guide has been translated into Arabic, Chinese, French, Russian and Spanish.

• SME Banking Training Program: IFC offers two courses, an introduction or scaling up course. The three day course consists of modules, case studies and exercises covering the following areas: business models for SME banking, identifying market opportunities, customer management, products and services, sales, credit risk management, IT and MIS. • Customer Management Best Practice Guide: The guide outlines key success factors in better serving SME clients and allowing banks to maximize revenue opportunity. It is primarily a technical publication, intended for bank directors and managers interested in acquiring the key capabilities to enhance growth and revenue.

• Customer Management Tools: Provision of du pont model and revenue projection models for the SME segment.

• SME Banking CHECK Diagnostic Tool: A guide to assess SME banking operations and design relevant advisory services projects.

CFI.co | Capital Finance International

• SME Banking Benchmarking: An online SME Benchmarking Survey that automatically benchmarks SME banking practices.

• Market Segmentation Tool: Generates information that can be used by a bank to decide whether to invest in developing SME operations, identify target SME segments, and decide how to target them, design and sell products.

• Assessing and Mapping the Global Gap in SME Finance: A joint IFC and McKinsey report that assesses and maps the global gap in SME finance, including the number of enterprises by region, size and formality, as well as SME’s access to credit and value of the credit gap. i

ABOUT THE AUHOR Qamar Saleem has over 21 years of commercial banking leadership experience while serving in MENA region and has led transformational initiatives of setting up SME businesses for large regional and international banks across many countries. He is currently the lead banking specialist on IFC’s bank advisory projects in MENA and is also responsible for driving some key strategic agendas aimed at enhancing IFC’s value proposition for its clients.

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> Renaissance Services SAOG:

Excellence in Service Anytime, Anywhere

R

enaissance Services SAOG is an Omani multinational company listed on the Muscat Securities Market since 1996.

Renaissance has two core business groups: Marine and Contract Services.

The company also has subsidiaries in marine engineering and education. Renaissance’s operations are focused on providing safe, efficient, quality services to leaders in the oil & gas sector and other industries. The company currently employs over 7,700 people and in 2013 carried out operations in sixteen countries generating revenue of Rials Omani 239.3 million ($621.6 million).

“Renaissance’s operations are focused on providing safe, efficient, quality services to leaders in the oil & gas sector and other industry.”

STRUCTURED FOR GROWTH: ONE GROUP – TWO COMPANIES Last year, Renaissance advanced its One Group – Two Companies Strategy to deliver growth and value through the development of two independent, world-class, internationally competitive businesses.

markets elsewhere. Topaz benefits from a bluechip client base, consisting of international oil company (IOC) and national oil company (NOC) clients as well as other reputable offshore service providers. Clients include BP, Agip and Total.

Headquartered in Dubai, and with over forty years of experience in the Middle East, Topaz is a wholly owned subsidiary of Renaissance Services SAOG. www.topazworld.com

Topaz: A leading off-shore support vessel (OSV) company with a modern and versatile fleet of 95 vessels. Topaz has one of the world’s largest and most modern fleets, with an average vessel age of seven years compared to an industry average of fifteen years. Topaz has a strong market share in the Caspian and MENA (Middle East and North Africa) regions with selective contracts in

Contract Services Group (CSG): A group of leading international integrated facilities management companies providing catering, operations and maintenance, property and facilities management services to large scale projects, with rapid deployment capabilities in emergencies, including for harsh, remote or

beleaguered environments. With over 25 years of experience, CSG has successfully exported the Renaissance Services Standard for operational excellence abroad and has won major contracts against global heavyweights. CSG businesses serve diverse clients within the oil and gas, energy services, health care, education, military, commerce & industry, and ports & marine sectors. www.tiscooman.com VISION Renaissance aims to be recognised as a worldclass, internationally competitive, premier oil & gas services company. This is being achieved through excellence in customer service; good governance, outstanding HSE (health, safety & environment), quality and MIS (management and information systems); a sustained growth and profit record; and a proven ability to improve the economic well-being and quality of life of all stakeholders: customers, employees, shareholders, suppliers and the communities in which the company operates.

Renaissance strongly believes in delivering the very best in oil & gas industry standards no matter which sector the company operates in with a business operating mantra of:

The ‘Caspian Protector’: a Topaz Emergency Recovery and Response Vessel (ERRV) protecting offshore installations in the Caspian Sea.

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SAFE – No harm to people EFFICIENT – Cost effective compliant quality services GREEN – No harm to the environment LOCAL – Serious about in-country value (ICV) i

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Topaz Commander: a DP II Multi-purpose support Vessel (MPSV).

Duqm PAC: A Permanent Accommodation for Contractors (PAC) at Duqm designed to accommodate 16,000 personnel.

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> Grant Thornton UAE:

Bridging the Gap in Private M&A Transactions

By Simi Nehra

T

he increased appetite for mergers and acquisitions (M&A) is prevalent at both a regional and global level. This trend presents plenty opportunity. However trials and tribulations may precede success when considering the MENA (Middle East and North Africa) current market place.

For instance, the second most challenging part of being a regional M&A advisor is being able to secure offers on the firm’s entire pipeline and not being able to close deals quickly due to the bidoffer gap being too large to bridge.

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Obviously, the first and foremost challenge is having no pipeline at all, or worse, one of poor quality. Thankfully, the market in the MENA region has changed in the past 6-18 months with each sector, one by one, showing signs of vitality with deals closing.

According to Mergermarket Ltd data, while M&A deal flow in the MENA region in Q1 2014 ($2bn) was down 31% from $2.9bn in Q1 2013, activity in Q1 2014 managed to double the Q4 2013 value of $1bn. The top five transactions CFI.co | Capital Finance International

alone made up 85.3% of the total M&A value in the region during Q1 2014.

VALUATION TRENDS IN THE M&A MARKET Sectors such as food and beverage, healthcare, hospitality, education and oil and gas are leading the way with valuations potentially running away with themselves. Investors are still shying away from cyclical investments such as contracting companies and real estate developers. Whilst today, debt-raising on asset backed deals can be closed with relative ease, equity fundraising is

Summer 2014 Issue

still challenging in this environment, and it is likely to take another 6-18 months before this trend changes.

Green shoots in the regional IPO market appears to be following the same timeframe and pattern.

In the current market, buyers’ value expectations are still very conservative. Whilst buyers do appreciate distressed sellers have left the market, they still consider a conservative bid should be enough to convert a deal. In contrast, sellers who have weathered the storm over the past five years have now moved into better cash positions. They may also have seen promising revenue and profit growth over the past two years, and may now be considering that this is perhaps not a good time to sell.

This is exacerbated by the media recently producing a flood of good news stories, which really do not affect the sellers’ business valuation today or any time soon. However, it does affect the sellers’ confidence, sentiments and outlook. Some sellers have difficulty letting go of a business where their invested capital is significantly more than the current market valuation.

For direct investments into private businesses, the transition from a buyers’ market to a sellers’ market and vice versa is cyclical. This transition could occur in the midpoint of a change from recessionary times, where there could be a buyers’ market or no market at all, and boom times, where sellers have the upper hand.

In the MENA region, 2014 could well be this midpoint as today’s market appears to be neither a buyers nor sellers. It appears to be slowly heading back towards more positive economic times. Therefore the sellers could soon regain the full upper hand in deal negotiations and terms.

Bid offer differentials in the sale of private businesses in the MENA region can be significant to bridge as M&A advisors. Typically bids range between 50% and 85% of the sellers offer price.

Dubai

“Thankfully, the market in the MENA region has changed in the past 6-18 months with each sector, one by one, showing signs of vitality with deals closing.”

SOME WAYS TO BRIDGE THE GAP Simply convincing a buyer to increase their offer and a seller to decrease their exit expectations in this transitional market is “easier said than done”.

Nevertheless, there are different structures that can be used to bridge the gap and facilitate a deal.

• Deal terms could potentially soften the bridging process for both buyer and seller. For instance, to help the seller reduce their price expectations; advisors could assist by negotiating better earn out terms (such as a sliding scale or a reduced percentage), or requesting the buyer to deposit a certain portion of the deal consideration into escrow (which will then be paid if the conditions are met without risk to the seller).

• Exchange rates can play a key role for sellers looking to repatriate their sales proceeds to their home country. Discussing the future outlook of their relevant currency can sometimes give the seller perspective; if the foreign exchange rate is expected to appreciate considerably in the months ahead, then the bid-offer differential no longer remains material.

• To enable the buyer to raise their offer; an advisor could convince the seller to offer some interest bearing, vendor financing on a certain portion of the CFI.co | Capital Finance International

offer to be repaid post deal in instalments over 2 to 4 years period; or one could encourage the seller to retain a minority share; or even allow the seller to take a non-core asset with them to alleviate the cash flow effect on the buyer.

As the MENA M&A market transitions to be more active and towards a sellers’ market, there are renewed expectations of increased deal flow and increased business valuations in the coming years; an agreed upon theme between regional M&A Advisors. i

ABOUT THE AUTHOR Simi Nehra is the Corporate Finance, M&A partner at Grant Thornton UAE. He has over fifteen years of specialist experience in advising on company acquisitions and disposals or M&A advisory, fundraising and financing strategies, buy-side and sell-side due diligence, company valuations and financial and business modelling.

He focuses on supporting and providing solutions to private equity and corporate clients within the region, and is responsible for developing best practice M&A and coordinating activity both nationally and internationally.

Mr Nehra has led several lead advisory mandates in the Middle East and North Africa region, within a variety of industries ($5 million to $30 million).

He has successfully provided transaction advisory services to high profile IPOs on the UAE financial markets and to UAE government entities.

Mr Nehra joined Grant Thornton UAE in 2010 and successfully set up the firm’s Abu Dhabi practice. Prior to his appointment, Simi held senior positions in a regional investment banking team and a private equity business where he focused on corporate finance, private equity investments and project finance. After relocating from London to join Deloitte, he later became part of the M&A Advisory management team at Deloitte Corporate Finance, DIFC. Mr Nehra is a chartered accountant (ACA) and corporate finance (CF) designate from the Institute of Chartered Accountants England and Wales. He has also practiced alongside leading audit professionals within Ernst & Young, London and has a BSc in Accounting and Finance.

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> Fortress Investments:

Capturing the Essence of the Times

Private Banking & Wealth Management

Fortress is a global leader in private banking and wealth management. Based in Dubai, the Fortress team is comprised of investment advisors possessing decades of experience in international finance across all major asset classes. The firm is driven by its mission to provide holistic financial solutions and surpass client expectations, emphasizing a balanced approach to capital growth. Taking advantage of its strategic location in Dubai, Fortress is able to provide an extensive array of investment options that benefit from both the political stability and the climate of economic growth in the UAE.

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ortress has created specific investment vehicles, such as the 2020 Emirates Taleem Sukuk (2020ETS) and Vanguard, which foster and promote foreign investment into the region.

Attracted by the UAE’s favourable tax laws and its climate of economic growth – as well as the firm’s strong performance record – the firm’s clients have allocated significant portions of their investment portfolios with Fortress.

Streamlining the sourcing of foreign investment capital, has allowed Fortress to implement its strategy of success. With the launch of 2020ETS, Fortress will enrich and expand the educational landscape of the UAE, through the creation of three new innovative American curriculum schools by 2020.

“Being extremely meticulous about when to raise capital, how much to pay for that capital and how to deploy it has been critical to many fund managers and investment banks around the world.

High yield returns and capital protection offer a seriously bolstered investment package.”

Hamed Mokhtar, CEO

VEHICLES WITH SOLID FOUNDATIONS Fortress defines and differentiates itself by developing advanced investment vehicles that are built on a solid foundation of underlying security. This insulates investors from market risk and mitigates the impact of political, economic, and industrial instability. The 2020ETS is aimed at the development of recession-resistant and market-leading Dubai institutions of learning.

This process is to take place within the framework of Sharia compliancy, thereby making the investment vehicle attractive to Islamic investors seeking stable returns.

The 2020ETS bond issue aims to raise $200m, marketed in $5,000 tranches, to further the education ambitions and objectives of the United Arab Emirates. The capital raised is to be applied towards the realization of the goals set in the Dubai 2020 agenda. It entails not only the building of new American curriculum schools but also the opening of vocational and special needs schools. It is hoped that the new learning institutions will attracts students from all over 112

the GCC and from elsewhere in the Middle East and North Africa as well.

The bond issue is being marketed as a unique investment opportunity that not only benefits from the highly dynamic and profitable UAE

In Pictures: Fortress Investments Team

CFI.co | Capital Finance International

education sector, but contributes to societal development as well. Fortress is the sole distributor of the 2020ETS. The subscription period is currently running and will close on Sept.

30. Investors have a choice of two, four and six year maturity terms.

INVESTMENT GRADE The US Export-Import Bank has now approved and endorsed the United Arab Emirates for both short-term and long-term financing, making the country more attractive from an investment perspective. This has helped Fortress Financial raise significant chunks of investment capital throughout the recent downturn.

“We’re willing to stand by every investment decision we make. The returns we’ve seen aren’t magical. There’s no magic genie at work.

We search for quality investments at a bargain following the recipe pioneered by Benjamin Graham and Warren Buffet, the greatest investment minds ever. “We’ve positioned ourselves well and look forward to a sustainable and fruitful cycle,” says Fortress ManagingDirector Hamed Mokhtar.

Summer 2014 Issue

“The US Export-Import Bank has now approved and endorsed the United Arab Emirates for both short-term and long-term financing, making the country more attractive from an investment perspective.”

“Being extremely meticulous about when to raise capital, how much to pay for that capital and how to deploy it has been critical to many fund managers and investment banks around the world. High yield returns and capital protection offer a seriously bolstered investment package,” says Mr Mokhtar.

“The now turbulent financial markets offer fast-moving fund managers the opportunity to tailor certain products to stimulate investors and increase capital thereby taking full advantage of opportunistic times. Value fund managers across the board cannot deny buying power in today’s market is golden. With prime, A-grade stocks undervalued the way they are due to considerably negative market sentiment on a global scale, one cannot expect a rapid turnaround, but a turnaround nevertheless is inevitable.”

GOLDEN OPPORTUNITIES Much like Berkshire Hathaway, Fortress Financial has smartly exploited the lean times by bargain hunting, snapping up select discounted shares in what effectively became a global stock sale.

Glorious times indeed, that bode well for the near future as economic activity picks up its former pace promising even greater future returns than anticipated.

The scope of Fortress’ investments includes education, but also spans including government services, financial services, legal services, and real estate, as well. With subsidiaries throughout the UAE and outside the country, the firm’s managed asset portfolios and client base have significantly and robustly expanded since its inception. However, Fortress has not sacrificed quality at the expense of growth. The company maintains rigorous and selective processes to screen potential investors and investment allocations alike. Strong leadership, a proven track record of success, an investment vision built on managed risk, and stringent client criteria requirements have enabled Fortress to become a trusted investment leader, that continues to innovate, grow, and set new industry standards of excellence. i CFI.co | Capital Finance International

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> Jordan Dubai Islamic Bank:

Corporate Governance Key to Growth and Success “The public image of a corporation will quite accurately reflect the culture of that body. It follows, then, that good corporate governance has to be in the bones and bloodstream of the organization since this in turn will be reflected in the culture.

To carry the analogy further: In the same way that healthy blood and bones are reflected in the healthy look of a person, so an organization whose internal functions are healthy will naturally look so from an external perspective.”

T

he management of Jordan Dubai Islamic Bank (JDIB) views that only a bank adhering to strong corporate governance principles can succeed and sustain that success long-term. The judging panel of CFI.co recognized the management’s efforts on this front and granted JDIB the magazine’s Best Corporate Governance Award for 2014. The judges noted that JDIB is a well-trusted bank in Jordan largely because of its overriding concern for, and attention to, the rigors of good corporate governance.

JDIB’s corporate governance charter provides a flexible framework that facilitates the streamlining of governance programmes. This framework also ensures corporate governance compliance and significantly improves accountability and communication. Furthermore, it also supports policy documentation, change management, and communication and awareness programmes.

The main characteristics of JDIB’s corporate governance policy are: • Discipline - Employees and senior management members are committed to adhere to procedures, processes, and authority structures established by the bank which are recognized and accepted to be correct and proper.

• Transparency - This is mentioned in almost every policy document. All actions implemented and decision processes are available for inspection by authorized entities and provider parties.

• Independence - Mechanisms and regulations have been put in place to minimize, or avoid, potential conflicts of interest that may exist, such as dominance by the chairperson, chief executive or a large shareholder. These mechanisms range

“JDIB’s corporate governance charter provides a flexible framework that facilitates the streamlining of governance programmes.” from the composition of the board to board committee appointments and also involve external parties such as auditors. The decisions made, and internal processes established, are designed in a way that does not allow for undue influences to be exercised.

• Accountability - At JDIB, individuals, committees, and other decision makers acting on the bank’s behalf are held accountable for their actions as per the authorities’ matrix manual.

• Responsibility - JDIB believes that responsible management calls for a pro-active approach to set and keep the bank on the right path. While the board is accountable to the bank, it must at all times act responsibly to safeguard the interests of all stakeholders of the bank.

• Fairness - JDIB has put in place balanced systems that aim to take into account all those that have an interest in the bank and its future.

The rights of various stakeholders have been duly acknowledged and are being respected.

• Finally, JDIB is fully aware of its corporate social responsibility. The bank promptly responds to social issues, placing priority on pursuing the highest ethical standards while believing that a good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitative, and responsible with regard to both environmental and human rights issues.

JDIB’s corporate governance policy aims to provide a solid basis for development and future organizational performance. It also strengthens the level of trust in all of the bank’s activities and dealings. The policy also enables the bank to successfully participate in the further development of Jordan’s banking system. JDIB consequently plays its part in the upgrading of the national economy by creating an environment of reassurance for both shareholders and all concerned authorities.

To be qualified for achieving International and local awards, JDIB has built all of its operations on solid foundations and standards. These are manifested in JDIB’s Vision and Mission Statement: VISION To be the leading Islamic banking, serving all of society.

MISSION To provide distinctive and innovative services emanating from the divine principles of Islam in order to build lasting and solid partnerships and to maximize benefits to all stakeholders.

VALUES Innovation, Knowledge, Quality, Value and World Class Service.

JDIB’s latest Best Corporate Governance award is the latest of a number of awards that the bank has recently picked up. These include the ISO 9001:2008 certification, Best Islamic Bank in 2013, PCI-DSS certificate for the Payment Card Industry Data Security Standard by Trustwave. i

“JDIB consequently plays its part in the upgrading of the national economy by creating an environment of reassurance for both shareholders and all concerned authorities.”

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Summer 2014 Issue

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> CFI.co Meets the CEO of Fortress Investments:

Hamed Mokhtar Hamed Mokhtar is the managing director of Fortress Investments of 2011. Born and educated in the United States, Mr Mokhtar brings a wealth of experience and creativity to both the company and the markets it operates in.

H

is key industry of interest is the educational sector, primarily those of Dubai and Abu Dhabi. Fortress has channelled investments worth many millions into this field. Confident about the continued influx of foreign nationals to the region, Mr Mokhtar describes the UAE as “the intelligent man’s land of opportunity.”

Mr Mokhtar’s greatest mission to date has been to help source foreign investments into Dubai. By so doing, he has been successful in developing relationships and partnerships with the royal families of Dubai, Abu Dhabi and other Emirates, further adding to the support and growth of Fortress Investments.

“Mr Mokhtar’s greatest mission to date has been to help source foreign investments into Dubai.”

The instability of surrounding Arab countries, coupled to the UAE’s privileged economic position, allow Mr Mokhtar to anticipate even more substantial future inflows of expats to the region. His positive economic outlook for the GCC states has also inspired him to encourage family, friends, and colleagues to relocate to the UAE. Mr Mokhtar is also chairman of the Fortress Investment Committee. In this capacity he has established a strong track record by consistently generating solid returns for his clients’ investments. “Our philosophy is to invest in global securities that are undervalued due to a combination of negative market factors – whether they are environmental, political, or sector specific,” explains the Fortress CEO. While most of his peers sought safe harbours in government and corporate bonds and index funds to withstand the recent economic headwinds, Mr Mokhtar and his company chose a different asset preservation model allowing for higher-thanaverage returns. This was achieved by identifying and securing margins of safety within the global equities and precious metals markets.

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CEO: Hamed Mokhtar

“Gold has gone up by some 600% over the last decade while silver has gone up even more.

Opportunities still exist to capitalize on further gains,” says Mr Mokhtar pointing to the recent six-month high gold prices reached as a result of safe-haven buying.

A specialist in US equities, Mr Mokhtar has consistently outperformed the market and CFI.co | Capital Finance International

capitalized on unique asset allocation strategies focused on value investing. Fortress has achieved this by maintaining capital provision ratios of 1:1, as well as a maximum investor rate of return of 8.75%. “We continue to deliver above benchmark yields for our clients and hope to continue to do so well into the future,” concludes Mr Mokhtar. i

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> MIGA (World Bank):

Islamic Finance - A Growing Source of Capital for the Developing World The World Bank has its eye on Islamic finance, and with reason.

I

slamic finance’s recent globalization – in both Muslim and non-Muslim countries alike – has increased the total size of its assets to around $1.5 trillion. In both the public and private sectors, transactions based on Sharia principles clearly have gained a place in global financial markets. The World Bank Group sees the historic and development significance of Islamic finance’s rise and is increasingly coordinating its efforts with respect to Islamic finance. Indeed, the World Bank, IFC (International Finance Corporation), and MIGA (Multilateral Investment Guarantee Agency) recently reported on closed and pipeline transactions in this arena to the group’s Board of Directors.

Importantly, last October, the World Bank announced the opening of the first Global Islamic Finance Development Center in Turkey, under the roof of Borsa Istanbul. This historic facility offers services that include information sharing on the development of Islamic finance, technical assistance, and harmonization initiatives. The creation of this center is a reflection of the global efforts to improve and standardize Islamic finance while contributing to ending poverty and boosting shared prosperity around the world using this increasingly important source of finance.

For its part, MIGA – the political risk insurance and credit enhancement arm of the World Bank Group – has already supported two Islamic finance transactions, and is looking at several more. The first was a port project in Djibouti, for which the agency issued a contract of guarantee in 2007.

A NEW PORT IN DJIBOUTI The Doraleh Container Terminal involved the development, design, construction, management, and maintenance of a new container terminal port terminal in the city of Doraleh. The terminal has a total quay length of 2,000 meters and an annual handling capacity of 1.5 million 20-foot container equivalent units.

MIGA issued guarantees totalling $427 million for both the equity and debt portion of the terminal. Because the sponsor of the project – DP World of the United Arab Emirates – required that the transaction be financed through an Islamic finance structure, the financiers to the project, led by the Dubai office of the Standard Chartered Bank, put together a financing structure involving a Musharaka arrangement.

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“Currently, MIGA is looking at several projects involving yet another type of Islamic finance – sukuk, or financial certificates representing bond issuances to the capital markets.”

Under a Musharaka agreement, sponsors and financiers collectively pool together resources (contract rights and capital respectively) to undertake a joint venture, or partnership, which is the literal meaning of Musharaka.

In the case of the Doraleh Container Terminal, the construction portion of the project was done through an Istisna’a arrangement whereby the financiers allow for cash payments in advance for the construction period in exchange for future delivery of the assets. The Musharaka venture appointed the project company to construct the terminal and ensure delivery of the assets to the joint venture at the end of the construction period.

Finally, the repayment of the financier’s capital was structured through an Ijarah lease arrangement whereby the financiers leased their portion of ownership in the assets back to the project company in exchange for rental payments linked to a floating benchmark. During construction, the rental payments were made in advance of the actual lease, creating an advance lease, or Ijara mawsoofah bil thima, and at the end of construction, the leasing contract buys out the assets in their entirety, at which point the financiers receive periodic lease payments.

Early repayment of the financiers could be accomplished through either a put (purchase undertaking) or a call (sale undertaking), whereby the financiers’ portion of the partnership could be bought out at the original purchase price.

For MIGA, covering such a structure involved major contractual changes to its normal ways of covering a loan. The MIGA contract had to specify that the amounts covered included advance rental and rental under the Ijarah contract, any potential termination payment of the Istisna’a, any payment owed under the put option, and any additional amounts owed to the financiers under a potential unwinding of the Ijarah Musharaka.

Despite the complexities of the transaction, MIGA CFI.co | Capital Finance International

was able to provide the financiers with the comfort they required: both ongoing repayments of the financing and any potential early termination payments would be insured and covered for a political risk event. The Doraleh Container Terminal transaction was a major milestone for both the Republic of Djibouti – it represents half of the nation’s annual GDP – as well as for MIGA. MOBILE NETWORK EXPANSION IN INDONESIA In 2011, MIGA closed its second transaction supporting a project with an Islamic financing structure: A telecommunications project in Indonesia. For this project, MIGA provided political risk insurance to two financial institutions, Deutsche Bank Luxembourg and Saudi British Bank, for their $450 million financing to the Indonesia telecoms company PT Natrindon Telepon Selular, or NTS. The company was majority-owned by Saudi Telecom, and the deal formed part of an overall $1.2 billion financing to help NTS greatly expand its GSM network in Indonesia.

MIGA supported the transaction because the new financing helped the company increase network quality and expand coverage, getting telecommunications to lower-income segments of the Indonesian market as well as to remote islands of the archipelago.

Unlike the Djibouti transaction, which involved Musharaka financing, the NTS project involved a particular type of Islamic finance known as Murabaha financing that essentially involves a sale and purchase of commodities. There are four basic steps, which happen instantaneously, and four basic players: 1. Financier buys commodities at market price from a commodity seller.

2. Financier sells the commodities to the project company at a deferred price with a profit component, so that the sales price plus the profit component matches an amortization schedule on a loan.

3. The project company sells the commodities to a commodity purchaser at the sales price.

4. The commodity purchaser sells the commodity back to the original seller at the sales price.

Since this all happens instantaneously, the commodities never actually change hands, and the transactions are recorded by book entry only so that the financier directly funds the project company. However, though this mechanism,

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unlike a loan, there is no actual interest component, which is prohibited under Islamic law.

Although the concept is fairly simple, MIGA’s documentation was far from it. To add to the complexity, there were a number of novel issues to be addressed.

CHALLENGES OVERCOME Consider these examples: First, there are three separate tranches of funding, and MIGA was covering a minority share of the financing, which had implications for MIGA’s policy covenants; second, two separate currencies were used, whereas the MIGA guarantee was only in US Dollars and the potential currency fluctuations needed to be tackled; third, there were challenging details to work out over coverage of principal and profit (analogous to the interest component of a conventional loan), which resulted in MIGA covering 100% of principal of a loan for the first time; fourth, in addition to the MIGA guarantees, the project involved sponsor guarantees, so it was necessary to ensure that there was no overlap in coverage; fifth, the financing was being syndicated after closing, and the banks wanted to ensure that syndicates could opt-out of MIGA cover; sixth, as the project company was responsible for paying the premium, special provisions and timing arrangements needed to be included for any instance where it may fail to do so; and seventh, MIGA had to obtain reinsurance from the private market, so all of these special provisions were subject to reinsurance approval.

In the end, MIGA was able to tackle all of these issues successfully and to issue the agency’s first-ever contract of guarantee for Murabaha financing. This was an important demonstration of MIGA’s flexibility and – given the growing role of Islamic financial markets in supporting projects in developing countries – it was indeed a landmark transaction.

Currently, MIGA is looking at several projects involving yet another type of Islamic finance – sukuk, or financial certificates representing bond issuances to the capital markets. After having closed its first capital markets transaction using its non-honouring of sovereign financial obligations cover in support of Hungary’s ExIm Bank last October, there has been much interest in expanding the use of this application, including in the Islamic finance model. MIGA is currently in discussion with ICIEC, the political risk insurance arm of the Islamic Development Bank, on using this cover for sukuk issuances.

Islamic financial products are founded on sound principles including investing in a real asset, basing the yield on production or trade income rather than interest, and displaying risk and yield transparently.

Islamic finance emphasizes asset-backing, thereby ensuring a direct link between financial transactions and real economic activities. It is also a more equitable form of financing, as lenders and borrowers share risks and rewards, which increases the focus on long-term goals and discourages excessive short-term risk-taking.

Undoubtedly, these principles dovetail nicely with those of development institutions like MIGA. MIGA is pleased to participate in these types of transactions and hopes to be more active in the industry in the years to come. i 120

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> CFI.co Meets the CEO of INVESTBANK:

Muntaser Dawwas As Chief Executive Officer of INVESTBANK, Muntaser Dawwas joined the bank three years ago in full force, with a proven track record and boasting an impressive level of experience in banking gathered at major financial institutions in both the Far East and the Middle East regions.

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pon accepting his new position at INVESTBANK in 2011, Mr Dawwas expressed a great deal of enthusiasm and indicated that his role as CEO will allow him an opportunity to take a number of initiatives aimed at reinforcing the bank’s leading position in serving corporate and affluent clients alike while adding new services through the bank’s subsidiaries.

Mr Bisher Jardaneh, Chairman of the Board, at the time welcomed Mr Dawwas, saying: “Mr Dawwas is without doubt a great asset to INVESTBANK, with his expertise and knowledge of the financial and banking sector.”

Prior to assuming his current post, Mr Dawwas was Global Head of Consumer Banking at the Arab Bank where he managed a network of well over 400 distribution branches. Previous to this, Mr Dawwas was based in Singapore as Group Chief Marketing Officer for Standard Chartered Bank (SCB) overlooking the bank’s position in no less than 59 countries.

Earlier at SCB, Mr Dawwas was based in Bahrain as Regional Head of Consumer Banking (Northern Gulf & Levant) where his geographic responsibilities included Bahrain, Qatar, Jordan and Lebanon. He was also based in Jordan with SCB as head of consumer banking.

Mr Dawwas’ career started at Citibank in Amman, Jordan as Financial Controller for the bank’s operations in Jordan, Palestine, East Jerusalem, Iraq and Syria.

Mr Dawwas is married and has three children. He received his Bachelor of Science in Accounting and Financial Management at the University of Buckingham in the United Kingdom. He obtained his degree as a certified public accountant (CPA) in the United States.

Through its continuous efforts to consistently adhere to the highest standards of banking services, INVESTBANK’s organizational structure and its experienced professionals will take the bank’s vision and turn it into reality with Mr Dawwas at the helm. i

CEO: Muntaser Dawwas

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> Farazad Investments:

A Solid Reputation that Inspires Confidence

By Mr. Korosh Farazad, Chairman Farazad Investments Inc.

Farazad Investments Inc. (FII) is putting confidence back into lending practices. The company receives several hundred proposals each year and maintains a stringent selection procedure. The secret is in solid underwriting and keeping the best internationally-acclaimed talent on the payroll. This approach has its benefits: FII currently operates across five continents with offices in the United States, Europe, Middle East, Asia Pacific and Australia. FII’s business plan for the short-term future is centred on keeping moderate levels of growth. The company seeks to further facilitate and develop its current structure of regional offices and is in the process of opening a registered office in London, UK, later this year.

F

II is not in the market to become the biggest player or to set high targets for annual deal flow. Rather, Farazad Investments aims to identify quality clients and engage in long term relationships. The company offers an all-round range of services. Our experienced team works directly with project owners to gain a thorough understanding of their vision in order to further expand the capability of that vision within realistic parameters.

FII’s award-winning structure ensures clients are not at risk of default once the loan term expires.

This healthy approach has provided the company with the confidence required to endorse over $2.1bn in projects worldwide.

FII has gained an in-depth knowledge of key sectors, such as energy and real estate development. This has enabled the company to concentrate all its resources in these areas and not diversify into the fields unknown. As a result, lenders now have full confidence in FII’s project endorsements. As a consequence lenders spent considerably less man hours to underwriting.

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“FII’s award-winning structure ensures clients are not at risk of default once the loan term expires.”

REGULATIONS Proper regulation is critical to regaining lost confidence in banking and lending. Most importantly, governments worldwide no longer wish to carry the burden of failure and apply public funds to redress miscarriages of financial institutions. Through detailed due diligence and KYC (Know Your Customer) checks, FII is now able to disclose all hidden facts that may fundamentally affect the outcome of any given transaction.

Since the crisis, regulatory entities have clamped down and imposed strict codes of conduct on the banking system. The past banking culture came into question and a severely damaged system was unearthed. Institutional lenders are now restricted in the disbursement of credit.

This fallout from the 2008 financial meltdown has, however, paved the way for private lenders who are able to provide funding via structured financing schemes. This entails significantly less red tape and also allows for solid lender protection. Private investors now enjoy the first charge on assets in case of default and are offered additional securities that minimise the possibility of default on loans extended to borrowers.

FII’s comprehensive due diligence procedures on each and every selected proposal enables the company to identify compliant clients and pursue the most suited capital structure. Thus, FII bridges the understanding between the lenders

HEDGE FUNDS MORPH INTO FAMILY OFFICES There is a trend that sees traditional hedge funds changing their identity to family offices.

This change is driven by a number of factors, including the fact that family offices need

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250 8

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200 6 150 4 100

and borrowers. The language of banking has changed profoundly and it is quite a challenge for many to fully grasp the subtleties of the new dialect of transparency.

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0 0

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Graph 1: Domestic Credit to Private Sector by % of GDP 2013.

Graph 2: Protecting Investors 2013 – 0 - 10 (Least to Most).

Source: The World Bank - World Development Indicators 2014.

Source: The World Bank - World Development Indicators 2014.

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not register as investment advisers with US Securities and Exchange Commission that ensures governmental oversight.

contributing to local economies, thus limiting their international exposure. It is evident that these pressures are relatively low in the markets of the Asia Pacific region when compared to markets in the Americas and Europe.

However, this radical change is not for all: Only hedge funds with vast wealth and not dependent on investor money for their survival, can successfully make this crossover. And why stop here? Single family offices have joined resources to form multi-family offices. The family office structure offers far more control than regulated hedge funds do.

By the end of 2014, the European Central Bank (ECB) will have become the primary banking watchdog, policing over 120 key banks within the European network. The ECB is currently conducting a comprehensive study of the Euro banking system with a view to adopting policies aimed at increasing consumer confidence.

However, there will certainly be draw backs as consumers will in all likelihood have more limited financing alternatives at their disposal once these policies are implemented.

Family offices are traditionally private and have the ability to play with money out of the public eye. Other enticements include full operational control and the ability to expand into an array of additional services that offer increased protection of assets, tax efficiency and philanthropy on a broad scale.

Many banks have reduced their international presence in retail and corporate banking and now show a strong distaste for overseas lending. Regulatory pressures and restrictions are increasing at a brisk pace. This impacts the worldwide economy negatively. It is critical a balance is struck that allows banks plenty of freedom within a controlled environment. If equilibrium is not reached, excessive regulation may well cripple the international economy.

A few of the most notable hedge funds that recently have taken this bold step include Steven Cohen’s SAC Capital Advisors LP which has become Point72 Asset Management. This firm will manage Mr Cohen’s individual multibillion dollar fortune. Similar transitions were made by George Soros, Carl Icahn and Stanley Druckenmiller. All have converted their hedge funds into family offices.

It can be argued that slapping on one regulation after the other will not solve the problems at hand. Banks’ corporate policies require drastic attention, to change their behavior and adjust ethical frameworks before we can witness healthy signs of restructuring.

ALTERNATIVE FUNDING FII’s unrivalled reputation and lender confidence led to the introduction of several prominent Family Offices, that had the ability to evidence their fund capacity and the willingness to invest worldwide.

FII identifies safe haven economies and brings these to the attention of both institutional lenders and private family offices for their investment consideration. In these secure economies the risk of default is minimal due to consistently high consumer demand. A notable and exemplary market is Saudi Arabia. The Saudi government is determined to invest heavily in the development of infrastructure and housing projects. This has resulted in the steady growth of local finance institutions with a notable lending appetite.

FII’s unconventional approach to financing gave the company a decisive edge and allowed it to better understand the many challenges posed by the changing economic dynamics of the last few years. This understanding has enabled FII to find a way to secure funding for borrowers via less conventional practises while simultaneously providing investors with maximum security.

Chairman: Korosh Farazad

In 2013 it was reported that many projects experienced great difficulties in securing financing even up to only 50% of the enterprise value. In 2006, the ratio of equity-to-debt was generally 65 to 70% and higher. Under the current market conditions, institutional lenders rarely venture to beyond an equity-to-debt ratio of around 40%. However, through family offices and private equity firms, FII is able to obtain ratios as high as 70%.

FII predicts that increased regulations in Europe will cause damaging effects to banking worldwide.

However, institutions in the Asia Pacific region will increase their international lending presence to fill the void. This will particularly be the case with banks from China and South Korea. As a result, we will see the lending environment as a whole change systematically with more family offices and private lenders coming onto the market. This in turn will not fail to be noticed by the ever watchful regulators. i

FUTURE ECONOMIC IMPACT Increased regulation will impact on further market reforms and lead to structural change.

The introduction of Basel 4 will increase the cost of doing business. Banks are required to fundamentally change their business culture, adapting both their risk profiles and corporate identity. This increased cost of underwriting will, in turn and inevitably, drive up the cost of lending. Banks will also experience increased societal pressure to concentrate efforts on CFI.co | Capital Finance International

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> Strategy&:

Meeting the Big Data Challenge

By Bahjat El-Darwiche and Dr. Walid Tohme

Recent research on Big Data should sound an alarm bell for companies. On the one hand, there is a link between usage of Big Data and the quality of corporate performance. On the other hand, very few companies are actually making use of Big Data. Companies therefore need to grasp the commercial advantages that Big Data can bring and how they can develop their capabilities and culture to exploit its potential.

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riting in the Harvard Business Review in 2012, Andrew McAfee and Erik Brynjolfsson revealed the extent of Big Data’s impact. They interviewed executives in 330 publicly traded companies in the United States and found that those organizations which believed most in the power of Big Data gained a marked advantage over their rivals. According to McAfee and Brynjolfsson, the enterprises that were in the top third of their industry in terms of using datadriven decision making were more productive and more profitable than competitor companies by average margins of 5% and 6% respectively.

[1] Despite such findings, companies have not broadly adopted Big Data practices. Indeed, a 2013 Gartner survey found that less than 8% of surveyed companies had actually deployed Big Data technology. Although this figure is set to rise substantially in coming years, companies will need to adapt considerably to thrive in a data-centric world. In 2012, the Aberdeen Group found that the proportion of executives that reported that their companies were unable to use unstructured data, and who complained that the volume of data was growing too rapidly, had increased by up to 25% during the previous year. [2] THE BIG MATURITY FRAMEWORK So while better technology will help to store and analyse the avalanche of data now being produced, what will make the difference is building the right capabilities and culture. To do this, companies will need to know where they stand in terms of a Big Maturity Framework.

The framework consists of three elements – environment readiness, organization-internal capabilities, and the ways in which Big Data can be used. It can help companies to see how far they have progressed, and identify what more needs to be done to get where they want to be.

The framework acknowledges that Big Data can be used in different, progressively more sophisticated, stages of maturity. It can have 124

“Over the next five years, Big Data will become the norm and will enable gamechanging opportunities in many industries.” a limited scope, serving merely to improve the efficiency of existing operations. Or in its most developed phase, it can radically reshape the business landscape, transforming individual companies, and paving the way for disruptive, entrepreneurial start-ups and the creation of wholly new industries.

The first maturity stage, performance management, allows executives to view their own business more clearly through, for example, userfriendly management information dashboards.

This would typically involve internally generated data.

The second maturity stage, functional area excellence, involves organizations using both internal and external data to improve selected areas of the business. This may lead to the enhancement of sales and marketing techniques, or to advancements in operational efficiency.

For example, one German car manufacturer used real-time performance monitoring of production machinery to achieve a 20% increase in productivity. Each machine was closely monitored to pinpoint downtime, enabling the company to optimize the effective usage of the overall plant.

The third maturity stage, value proposition enhancement, allows organizations to start to extract a new source of competitive advantage that goes beyond the incremental improvement of existing operations and services. This may entail real-time recommendations, or the personalization of services, to raise the quality of the customer experience.

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STRONGER BOTTOM LINE For example, a global mass merchant was able to increase its profit per customer by 37% by applying advanced customer analytics to identify its best customers and then present them with personalised offers. The frequency of those target customers’ purchases rose by approximately a quarter, and the average basket size grew by around 10%.

Another example of this third maturity stage comes from a leading European bank. This financial institution managed to increase sales by 12% through diversifying its website content.

When customers logged in, they were shown one of several alternative websites based on their individual transaction history and segment, and the company’s overall product portfolio. The content was adjusted according to the predicted needs of the customer in order to maximize potential sales.

The fourth and final stage, business model transformation, is when Big Data leads to fundamental change. Big Data practices become deeply entrenched within the organisation, shaping the nature of the business as well as the mode of executive decision-making.

Both product and services organizations are capable of reaching this stage. General Electric (GE) is a product organization that has made clear that it believes in the power of Big Data.

The company anticipates that machinery and equipment will soon be loaded with sensors which will display detailed service data in real time and across longer time periods. GE is therefore spending more than $1 billion on building up its data science capabilities to provide data and analytics services across business functions and regions.

The recent merger of the two advertising companies, Omnicom and Publicis, could lead to a data-driven transformation among service providers. The advertising industry is moving toward a more science-based, data-driven business that aims to deliver personalised

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advertising messages. This new world will be dominated by those major players that possess the most comprehensive data about individuals.

Omnicom and Publicis believe that their combined size will produce the desired volume of data.

We are a member of the PwC network of firms in 157 countries with more than 184,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand. pwc.com/me.

PITFALLS Yet despite widespread interest in Big Data, companies face many pitfalls. Many of these relate to their own internal systems and culture.

One prominent obstacle is the shortage of available data scientists with an advanced education in mathematics or statistics who can also translate raw material into actionable, commercial insights. Although many educational institutions have started to introduce relevant courses, the market demand for such people is already considerable.

ABOUT THE AUTHORS Bahjat El-Darwiche is a Partner with Strategy& and the leader of the firm’s Communications, Media, and Technology practice in the Middle East. He has around 20 years of experience in the telecommunications industry, acquired through various engagements in the Middle East, Europe, North America, and Asia.

Companies must also refashion their current decision-making culture. Senior executives should be making more judgements based on clear data insights, rather than simply resorting to their intuition as in the past.

Changing corporate culture in this way could well impinge on concerns relating to status, with executive instinct increasingly challenged by the facts of hard data. However, while data can be of great assistance in solving an actual problem, it nonetheless holds true that senior management has first of all to ask the questions that the data at their disposal could usefully answer, rather than process it with no clear strategic goal in mind. What this means is that the value of an insightful executive will not be diminished in this new era, but rather can be enhanced thanks to Big Data.

Over the next five years, Big Data will become the norm and will enable game-changing opportunities in many industries. Organizations must react in a timely manner to determine how they can deploy Big Data in the most effective way possible, and then lay the appropriate groundwork. Without the necessary senior-level enthusiasm and sponsorship to realize the huge potential of Big Data, savvier competitors are likely to gain a potentially decisive advantage. i

ABOUT STRATEGY& Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings—often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact.

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Bahjat El-Darwiche

Dr. Walid Tohme is a Beirut-based Partner with Strategy& and a member of the firm’s Health and Digital Business and Technology practices.

He works with major healthcare providers, payors, and ministries of health across the GCC. He specializes in strategic transformations, post-merger integrations, and joint ventures.

Additionally, he is one of Strategy&’s experts on digitization and Big Data, and leads the firm’s efforts in this area in the Middle East.

Dr. Walid Tohme

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Summer 2014 Issue

> CFI.co Meets the CEO of Qatar International Islamic Bank:

Abdulbasit Al-Shaibei

CEO: Abdulbasit Al-Shaibei

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atar International Islamic Bank (QIIB) CEO Abdulbasit Al-Shaibei is perhaps at heart a central banker. He plays by the rules, is exceptionally mindful of community needs, and came to QIIB via the Qatar Central Bank and a number of premier commercial banks. At the Qatar Central Bank, Mr Al-Shaibei was head of the Investment, Trading and Foreign Exchange Division between 1990 and 1994. Previous to that, he gained experience at the Banking Control Department carrying out periodic inspections at both Qatari and foreign-owned banks operating in the country.

Under Mr Al-Shaibei’s expert guidance, QIIB has managed to become widely known for offering comprehensive financial solutions that are fully compliant with Islamic Law. With his vast experience in the banking industry as both a regulator and a senior manager of a leading Islamic bank in Qatar, Mr Al-Shaibei is well poised to reap the benefits of the recent upsurge

in interest in Shariah-compliant banking and financial services. Mr Al-Shaibei said that the bank is continuously marching towards further progress and development by rendering excellent services without compromising on quality and Shariah compliance.

Mr Al-Shaibei has a Bachelor’s Degree of Science in Business Administration and Economics from Fayetteville University, North Carolina, USA. He also obtained a degree in executive management from the prestigious Wharton School of Business at the University of Pennsylvania.

His considerable leadership abilities and proven business management skills in achieving sound results and realizing maximum potential in a competitive business environment, have managed to propel QIIB to considerable heights.

The bank currently boasts QR 34.4bn in assets with an equity of QR 5.3bn. Part of this success is owed to Mr Al-Shaibei’s ability to skilfully motivate and invigorate people‘s talents and CFI.co | Capital Finance International

desire to excel and consistently triumph over significant challenges.

He has repeatedly praised his staff for raising the performance bar and helping QIIB successfully tackle the effects of the global economic meltdown of 2008. Throughout the challenging years that followed, QIIB kept its focus on risk management.

Outlining the measures taken by QIIB to improve the skills of its workforce, Mr AlShaibei said numerous training programmes are regularly held, both within and outside Qatar, in association with premier institutions in the field.

The focus on developing Qatari talent has also achieved the desired results with many Qataris joining the bank at various levels.

Mr Al-Shaibei further said QIIB remained committed to supporting community and nation building activities in sports, religious, charitable, educational and other fields. i 127

> INVESTBANK:

Innovation through Technology and Vision

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ince its establishment in 1982, INVESTBANK has been on a journey of constant development and innovation, positioning itself among the top financial institutions in the Hashemite Kingdom of Jordan.

The bank’s commitment to providing the latest services to its growing base of clients, coupled with its strategic investment in state-of-the-art technology to offer optimal solutions to clients, has earned it international accolades including the Most Innovative SME Bank-Middle East and Best Internet Bank Awards from Capital Finance International.

The awards stand testimony to – and offer recognition of – the bank’s solid strategy to fulfill the needs of its clients. As such, they also represent an acknowledgement of the development, pioneered by INVESTBANK in the Middle East, of financial services sector.

The latest win adds to the series of awards INVESTBANK has earned since its establishment, bringing it even closer to both its clients and investors and helping it expand the outreach of its smart banking services and solutions to new clients.

INVESTBANK, which started its activities as a financial services firm under the name Jordan Investment and Finance Company with an authorized capital of JOD 6 million, over the years faced several challenges that it was able to successfully overcome.

The year 1989 was a turning point when the company was transformed into an investment bank, thus realizing the vision of its founders.

The resulting bank was then able to increase its operations and presence as well as expand its line of products and services attracting current deposits and issuing cutomer cheque books for the first time.

GROWING NETWORK Positioning the bank as a boutique bank was one of the core changes foreseen over the past 5 years.

INVESTBANK’s vision entailed transforming its focus from being a pure corporate bank to a SME (mainly mid market) and affluent cutomer based institute. The strategy today is to create outreach leveraging the latest technologies and innovation as well as coupling slight branch expansion throughout the years. Today, INVESTBANK has expanded to eleven branches and plans to

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“The bank is also working on strengthening its risk management processes and increasing the competence of analysing, managing and addressing credit.” strategically, hand pick, its upcoming locations.

Throughout the year 2014, the bank will continue to implement its strategy that seeks to further enhance its position among Jordanian banks, making it the top bank in Jordan in terms of innovation and electronic banking services.

To achieve its objectives, the bank is working on drafting highly efficient credit policies, giving more decision-making powers to employees to ensure further flexibility and reduce the time needed for reaching a decision on extending credit facilities. This will help increase clients’ satisfaction.

The bank is also working on strengthening its risk management processes and increasing the competence of analysing, managing and addressing credit.

With over 30 years of expertise, the bank supports companies and individuals with foreign investment activities through comprehensive studies. It has now gained recognition as a pioneer in this sector.

Regarding INVESTBANK’s subsidiary strategy, it has reached the founding of its four subsidiaries.

Al MAWARED for Brokerage, wholly owned by the bank, operates through solid and well established departments; Financial Brokerage, Investments, Corporate Finance.

IMDAD was established in 2010 and is one of the most innovative financial services entities in the region. Offering an integrated supply chain financing services where it eases and facilitates trade, providing a means for SMEs and large corporations to grow and expand at unprecedented rates. Their unique business CFI.co | Capital Finance International

model allows for traders and manufacturers, importers and exporters, to benefit from IMDAD’s trade financing and supply chain logistics services.

TAMKEEN Leasing offers a full set of operational and financial leasing services with a sector specific approach, their leasing services are structured to comply with the company and operational seasonality as well as financing requirements. Entrepreneurs, retail outlets, SMEs and large institutions can also benefit from their services.

The fourth subsidiary is in its startup phase, TAKHSEEM, which will be providing factoring and financial services to a select target group.

NEW PRODUCTS & SERVICES Keen on widening its already impressive range of products, INVESTBANK recently launched a number of new services such as the Tip Your Kids and Travel Savings Account, both designed to offer automatic savings by topping of the amount of day-to-day purchases and transferring the difference to a savings account.

Another new product introduced is the Mortgage 5 loan which can save clients up to 40% of the payback period and interest paid. The Aramex partnership, with its Shop and Ship service, is designed to benefit clients shopping from around the world while innovative credit card features such as the Flexible Payment Plan, with zero interest on purchases from any merchant for the first six months and a cash rewards loyalty program, offer the highest cash value of any card currently available in Jordan. PRIME VISA Signature Cards are exclusive to INVESTBANK and PRIME members. Auto Safe Deposit boxes are also exclusive to INVESTBANK. The bank believes that key to its growth and expansion is the provision of highly advanced, flexible and cutomer-tailored solutions and services. Thus, the bank offers a wide array of services for businesses, especially small and medium sized enterprises.

At INVESTBANK, clients have access to the most prestigious global mutual funds and may explore investment opportunities in global markets through mutual funds managed by renowned international banks and investment managers.

The bank has mutual funds that invest in global and regional markets including USA, Japan and emerging markets in addition to sector-specific

Summer 2014 Issue

equities such as gold, technology and energy.

INVESTBANK was a pioneer in the launching the world of PRIME Banking, which is a world centred on clients’ banking convenience.

Out of its strong belief that relationships matter, the bank developed PRIME Banking - a highly personalized banking service exclusively reserved for its most valued clients.

The bank maintains a low number of clients per relationship manager at PRIME Banking. The managers provide dedicated and tailored services with a view to building long-term working relationships with clients, understand their financial goals, gauge their risk appetite, and provide advice on their financial positions.

Keeping in mind that the information age makes it necessary for business to reach beyond the old working hours and traditional methods, INVESTBANK heavily invested in providing e-Banking services to our clients, through iBank (www.ibank.jo), which gives their clients access to a vast array of services including: account management; card management; payment and fund transfer services; service center; account maintenance with 360 degrees of portfolio viewing and management.

And the bank will be introducing a state of the art mobile banking solution where their approach is based on multi-channel integration within the upcoming months.

New features will be witnessed that leverage the advanced technological capabilities of today’s smart phones (android and iPhone).

The bank’s commitment to develop the industry and drive economic growth by facilitating access to credit and providing latest services to clients in today’s world, has been strongly coupled to its investment in empowering local communities. These are key elements in the bank’s corporate social responsibility strategy.

Community involvement is evident through one of INVESTBANK’s strategic partnerships with the Royal Society for the Conservation of Nature (RSCN), which aims at supporting organic farmers in Jordan.

In addition to educating the work force on the latest technologies and other farming methods that turn them into unique farmers, the bank embarks on strategies and plans to help farmers provide the country with healthier fresh produce while optimizing their assets and trading in their local market.

One of those initiatives is the Al Shams Farmers’ Market, held every Friday, which is the best way for the public to be introduced to this organic produce and meet the educated farmers behind it. i CFI.co | Capital Finance International

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>

THE EDITOR’S HEROES

An Eclectic Selection of People Making a Difference

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he CFI.co Heroes of this year’s summer issue yet again span the gamut, from people who saw an issue and simply addressed it to folks who keep looking for answers to sometimes dangerous questions.

The quarterly CFI.co Heroes listing offers a most welcome opportunity to highlight the life and work of people who do not always grab the headlines but make a big difference anyway. Hamza Najeeb is such a person. He dares ask uncomfortable questions and expresses a great willingness, indeed eagerness, to listen to any and all of the answers offered. By just asking, Hamza Najeeb succeeds in establishing a dialogue and exposing dogmatists for what they are.

William Adams James, aka will.i.am and another CFI.co summer hero, may sow some uppercase / lowercase confusion, he is a model to an entire generation and one whose attitude is worth emulating.

Musician, entrepreneur and philanthropist rolled into one, William Adams James did not have much going for him other than a mother determined to keep her son on the straight and narrow – no mean task in the Los Angeles projects. However, young William bravely battled the odds, won, became will.i.am and an inspiration to those who followed him.

The current hero list includes two notable British television presenters: Mary Beard and Brian Cox. Both academics pursue solid careers at UK universities. Mrs Beard is a professor of classics at the University of Cambridge while Brian Cox

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is an advanced fellow at the University of Manchester. Their hero status comes from an apparently irrepressible drive to open academia to all and show it to be hugely interesting as well.

Mrs Beard has the special gift to make the classical world accessible by showing it to be not that much different from our contemporary one. The people of ancient Rome and Athens lived their lives much like we do: concerned about jobs, kids and making ends meet. Meanwhile, Mr Cox brings the world of science into comprehensible focus. He never ceases to be amazed at the many wonders of the universe and all in it. His youthful excitement infects viewers who cannot help but share in the amazement. Both Mrs Beard and Mr Cox use television to further broad access to the vast stores of knowledge usually locked away in universities and research centres. In this day and age of reality shows and other forms of voyeurism television, their programmes offer a refreshing alternative to those wishing to employ their minds.

The issue’s list is remarkable for the inclusion of an iffy hero. Former Illinois Governor George Ryan may have served time in prison for taking bribes while in public office, he also saved the lives of 167 death row inmates by abolishing capital punishment in his state. It takes the courage of strong conviction for a US politician to stand up against the death penalty. Governor Ryan did just that and, by doing so, started a national debate that still rages on. i

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> BORIS JOHNSON Fast and Furious, Reasoned and Smart

“He unfailingly gauges popular sentiment, governs his metropolis with great care, and tackles thorny political issues head-on.”

He did inhale. London mayor Boris Johnson did, being – in his own words – no stranger to cannabis.

He also argued, in one of many silly moments, that if gay marriage was ok, there should be no reason not to consecrate a union between three men and a dog. Mr Johnson since has become much more gayfriendly.

Boris Johnson thoroughly enjoys rocking the politically correct establishment with shocking statements. He is also a well-known flip-flopper.

Just after the 7/7 bombings, Mr Johnson declared Islam to be “the most viciously sectarian of all religions in its heartlessness to unbelievers.”

Three years later he boldly urged all people to study Islam, join Muslim neighbours in fasting, and visit the local mosque: “You’ll find Islam to be a religion of peace with which you may share many values.”

At times, Mr Johnson can also display his severe lack of sensibility to the plight of those less fortunate as when he commented that the £250,000 annual income he derives from his columns in The Daily Telegraph were “chicken feed.” Mayor Johnson went on to explain that he 132

writes his weekly columns “very fast” in between other Sunday morning activities. The income from his side job is roughly equal to ten times the annual take-home pay of an average British worker.

Still, Boris Johnson is nothing short of brilliant and very much in touch with the times.

He unfailingly gauges popular sentiment, governs his metropolis with great care, and tackles thorny political issues head-on. This mayor is not one to avoid the inevitable or, indeed, accept political impossibilities. He speaks his mind and voters across nearly all demographics appreciate the attitude re-electing him for a second term in 2012.

With his trademark unruly appearance, Mayor Johnson exudes a can-do spirit often found lacking in British politics where it sometimes seems that muddling-on has been elevated to an art form. He proved an exceptionally able public administrator hosting the 2012 Olympic Games, widely perceived to have been the most perfect of major events ever. He also reinvigorated London’s aging public transport network with countless outCFI.co | Capital Finance International

of-the-box initiatives that increased efficiency, reduced cost and improved service.

Fluent in Latin and well-versed in the classics, Mr Johnson has joyfully injected London city politics, and by extension national politics, with a phraseology previously unheard.

During a clash with the London Assembly over the city’s budget, in February 2013, the mayor ended up being expelled from the meeting over a technicality.

Realising that his political foes had made a rather dumb mistake since his budget could now not be questioned, he referred to his hapless political foes as “great supine protoplasmic invertebrate jellies.” It is well-neigh impossible not to like a guy who can instantly come up with such a description.

The last of Boris Johnson has not been heard yet. In fact, it doesn’t require the insight of a pundit to foresee a bright future for Boris Johnson. British politics could possibly benefit from a combination of administrative excellence and irreverence.

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> BRIAN COX Science for the Masses Amongst the remains of Kolmanskop, an old mining town in the Namib Desert, a scrawny metrosexual soliloquizes about the nature of the universe in a Lancastrian accent. After another minute of establishing shots, the presenter sits down on a dune and builds a sand castle. He then goes on to give an explanation of the second law of thermodynamics and why the wind tends to build dunes rather than castles. Behold a five minute segment of the 2011 BBC series Wonders of the Universe, and its presenter Brian Cox. Brian Cox, OBE, professor of physics at Manchester University and research fellow at the Royal Society, is the boyish face of science in Britain. Starting in the mid-2000s with a few spots as guest presenter on the popular science programme Horizon, Brian Cox has become the BBC resident physicist, presenting several documentary series and appearing in several talk shows.

His documentary series Wonders of the Solar System (2010), Wonders of the Universe (2011), and Wonders of Life (2013), among others, have an epic cinematic feel to them. The BBC has a tradition of setting aside a generous portion of its resources for such lavishly produced series.

Mr Cox’ shows are full of dramatic aerial shots of its protagonist walking about vast and dramatic landscapes, stopping occasionally to stare contemplatively into the distance. A firsttime viewer might be forgiven for thinking that the film crew was forced to take such a wide girth just to fit the presenter’s ego on the small screen.

That impression would thoroughly miss the point: Professor Cox seems just as much in awe of his surroundings as the viewer and his excitement is quite contagious.

Mr Cox’ explanations of the various subjects brought up are just simple enough to be grasped by most and enigmatic enough to be thoroughly thrilling. No TV show could possibly hope to deliver anything beyond a very basic understanding of scientific theories. However, Mr Cox succeeds wonderfully well in instilling an appreciation of scientific methods and in creating a compulsion to learn more.

His radio show The Infinite Monkey Cage is slightly more brazen in championing of scientific method and disdain for its detractors.

In 2013, on the occasion of the 50th anniversary of the BBC science fiction series Doctor Who – the longest running sci-fi series in the history of television – Professor Cox gave a lecture in The Faraday Theatre of the Royal Institution entitled the Science of Doctor Who. During the event, he gave an explanation of Time Dilation and the nature of black holes to an audience of school children and TV personalities.

The word innovative is often used to descriebe a hero, and rightly so. Heroes are, more often than not, those who tackle major problems and offer innovative approaches to any

“Sagan had his apple pie, Richard Feyman his elastic band, and Brian Cox a sandcastle.” given problem. There is little innovative about Brian Cox. That is not at all a slight on him rather he’s the poster child for tradition. Not only of the scientific method in general – which arguably constitutes humanities’ greatest tradition – but also that of the science populariser.

The Faraday Theatre in which Brian Cox gave his 2013 lecture was named after Michael Faraday who established the Christmas Day Lecture at the Royal Institution in 1825 – an annual event in which a leading scientist delivers a lecture to an audience of children. The event has been an annual fixture only interrupted briefly by the Second World War. It has been televised since 1966.

CFI.co | Capital Finance International

The Royal Institution was established in 1799. Its mission is to promote public engagement in the sciences. Brian Cox’ documentaries follow the well-beaten path previously navigated by the likes of David Attenborough’s Life and Carl Sagan’s Cosmos.

Sagan had his apple pie, Richard Feyman his elastic band, and Brian Cox a sandcastle.

These men are born storytellers. They are the giants that climb down the ever-growing tower of understanding in order to show the yet uninitiated the heights already attained and the challenges remaining. Brian Cox cites Carl Sagan as one of his major inspirations; just imagine who’ll say the same of Brian Cox. 133

> GEORGE RYAN A Flawed Man Taking on a Flawed System George Ryan is a hero tainted by scandal. As governor of Illinois, Mr Ryan followed in the wake of two of his three predecessors and was convicted, in 2006, to over six years in prison for taking bribes.

He was released last year and has since retired, in shame, from public view.

Though Mr Ryan’s misbehaviour as a public official and his betrayal of the public trust placed in him remains inexcusable, he is also responsible for saving almost two hundred lives.

While in office, Governor Ryan singlehandedly put a stop to all executions. Two days before leaving office, he commuted the sentences of 167 inmates on death row to life terms arguing that the death penalty could not be administered fairly. Under his governorship, thirteen people sentenced to die had their convictions overturned after Governor Ryan allowed new evidence to be presented to the courts. All were released.

Mr Ryan’s firm stance against the death penalty, a rarity in the United States even at the best of times, saw him nominated for the Nobel Peace Prize in 2005. His moratorium on the carrying out of the death penalty in Illinois also encouraged a national debate on the issue.

This debate, often akin to a dialogue between the hard of hearing, is raging to this day.

The death penalty is on the books in 32 of the 50 US States. Both the federal and military legal systems carry provisions for capital punishment.

In 2013, the country saw 39 people executed.

The total number of felons put to death since 1977, when capital punishment was reinstated after a five year reprieve, amounts to 1,379.

A significant number of innocent people have been executed as well. As a human endeavour, justice is subject to fallibility. The fatal consequences of inevitable miscarriages of justice are what motivated the then-Illinois governor to put a stop to the executions. A famous case was that of Anthony Porter, a Chicago gang member convicted for first-degree murder, who spent fifteen years on death row and came to within 50 hours of being executed.

Just two days before Mr Porter’s execution his lawyers obtained a stay on the grounds that their client may have been mentally retarded.

This argument kicked-in the Eight Amendment which, among other things, prohibits the execution of the mentally disabled. Anthony Porter was repeatedly tested and was found to have an IQ score of 51. He was unable to grasp the severity of his crime and the motivation of his punishment.

Alone among the western industrialised nations in carrying out the death penalty, the United States finds itself in the company

of China, Iran and other less democratically inclined nations when it comes to the number of executions and incarceration rates.

Governor George Ryan, though very much a failure as an administrator and quite unfit for public office, must nonetheless be credited with gathering the courage to not just question

a seriously flawed justice system, but to stop it from putting possibly innocent people to death.

Then as now, questioning the death penalty in the United States is no mean undertaking since most Americans do not take kindly to politicians who dare question cherished, but outdated, notions of frontier justice.

“Mr Ryan’s firm stance against the death penalty, a rarity in the United States even at the best of times, saw him nominated for the Nobel Peace Prize in 2005.”

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Summer 2014 Issue

> HAMZA NAJEEB Courageously Looking for Answers

“Mornings of hope... souls that live and never die. Thanks to God.” (Tweet from Hamza Najeeb upon his release from jail in Saudi Arabia 10/29/2013) Who breaks a butterfly on a wheel?

Hamza Kashgari Mohammad Najeeb is a poet in his mid-twenties. He was a columnist for al-Bilad newspaper until early 2012 when he expressed some concerns about the tenets of his inherited religion as part of a wish for more freedom of expression in his native country.

Mr Najeeb is a Saudi national but according to some of his fellow citizens not of pure enough blood because of his Turkmen family background.

A Saudi cleric urged that he be tried for apostasy and a Facebook group of some 26,000 called for his execution.

A smaller group begged that all charges be dropped. In the event, Mr Najeeb was deported to Saudi Arabia by Malaysia while en route to New Zealand where he had hopes of being granted political asylum. He was jailed for almost two years for “denigrating religious beliefs.”

Referring to that call for execution, the

Grand Mufti of Egypt said, “We don’t kill our sons. We talk to them.” Ali Gomaa’s first concern was to find out the precise wording of Mr Najeeb’s statements in order to determine if their significance: Was this a mere misconduct, an expression of doubt or even an insult?

It was indeed relevant that the young man had made an apology. The Association of British Muslims went further by saying that, “a state penalty for supposed blasphemy runs counter to the spirit of Islam. No one should suffer for expressing their opinions.” Islam is a religion of love, tolerance and peace. These are indisputable facts.

Could it be that Najeeb’s support of Arab Spring was germane to the prosecution and imprisonment of this young man? Perhaps his criticism of the Saudi Religious Police – aka the Committee for the Promotion of Virtue and the Prevention of Vice – had something to do with all this.

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Hamza Kashgari Mohammad Najeeb is a perhaps reluctant hero. He deserves praise for expressing honest doubt about both religious and secular affairs and thinking out loud about possible solutions and answers. He did so at great personal risk running afoul of stern dogmatists who sadly fail to realise that most people, even the devoutly religious, have a habit of using thought processes to analyse their surroundings and find answers that aim to make the world a better place.

As to the dogmatists, more often than not, their vain and misguided attempts to protect religion from detractors but serves to foment further dissent. Faith is by its very nature a liberating experience. Theologians of whatever religion who do not grasp this simple universal concept should probably find a more fitting line of work.

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> MAGATTE WADE An African Serial Entrepreneur with a Heart

“Mrs Wade is a serial entrepreneur with something of a Midas touch.”

She’s none too serious, loves joking around and utterly fails to get the point of forced sex. Meet Magatte Wade, a young outspoken entrepreneur from Senegal and one of the up-and-coming power women from an awakening continent. The Davos World Economic Forum named her a Young Global Leader. She is a regularly invited speaker at Harvard, Yale, Cornell, Brown and Columbia where she fills auditoria to capacity with students and faculty eager to hear het take on the African Renaissance.

Mrs Wade is a serial entrepreneur with 136

something of a Midas touch. Her first business venture, Adina World Beat Beverages, introduced a soft drink based on traditional Senegalese recipes to the US market and raised $30m of venture capital almost effortlessly. The drink latched on to the budding whole foods, slow food and organic food movements and immediately captured a significant market share of a growing demographic.

However, unhappy with the steady dilution and downplaying of the company’s African roots, Mrs Wade left the company in 2009 to focus on a CFI.co | Capital Finance International

new venture: Tiossan, a company manufacturing and marketing luxury skin-care products again based on indigenous Senegalese recipes. Tiossan offers a consumer experience based on what Mrs Wade calls contemporary African styling. She steers clear of “pity marketing” or stereotypical safari branding.

She is now also very careful in selecting outside investors who must agree to follow Mrs Wade’s lead on ensuring that Tiossan remains first and foremost a company rooted in both African culture and values. Half of any profits made is destined to be invested in Africa where Mrs Wade is building innovative schools that aim to unleash the creative powers of a new generation.

It is also her declared intention to relocate the manufacturing of all Tiossan products to Senegal as soon as the company has gained enough traction worldwide.

Mrs Wade is not at all reluctant to use her star-like status in the US to lash out at the government of Senegal and the restrictive policies it pursues that shackle local business and condemn the country to poverty. “The Senegalese are a very entrepreneurial people.

However, they are actively discouraged from deploying their business acumen by senseless policies. Senegal is one of the most difficult countries anywhere to start a company. The country’s labour laws make it almost impossible to fire someone. If I can’t fire anyone, I can’t hire anyone.”

This is not to say that Mrs Wade is the African Donald Trump who seems to derive pleasure from sending employees home in tatters. To the contrary, Mrs Wade argues that US business has a lot to learn from the more human touch African entrepreneurs often display when it comes to human resources. “The geek culture of Silicon Valley may be admirable across many dimensions but at times does seem out of touch with human needs and human dignity.”

Mrs Wade believes that technology does not offer an answer to all questions: “While most useful, it often overlooks the importance of the human connection and mutual respect.”

As Tiossan takes flight, Mrs Wade aims to prove that a company can attain success, growth and solid profits while run on a more compassionate footing. That should be a most welcome contribution to business economics.

Summer 2014 Issue

> ELON MUSK A Man on a Mission

Philanthropist, self-made multibillionaire, technological genius and indeed a dreamer: The list goes on. These are some of the marks and traits that best describe Elon Musk. According to Forbes Magazine, the 39-year Mr Musk has a net worth of $9.3bn.

Elon Musk is the co-founder of multibillion dollar companies such as PayPal, SpaceX, and Tesla Motors. The latter two also stand testimony to both his altruistic spirit and his thirst for innovation.

With Tesla, Mr Musk created a completely new technological platform for electric cars spearheading a greener era of transport by designing vehicles that drive almost solely on non-fossils such as solar and electrical power. Far ahead of other electric car alternatives, Mr Musk could have easily patented his technological breakthroughs, however he deliberately chose not to so that the whole industry might benefit and usher in a new era of mobility together.

Though ethically correct, the decision was not a wise one from a business perspective. Any larger corporation with resources to match its size could easily wipe Tesla off the market in an afternoon or so. The decision does confirm that Mr Musk is motivated not just by money and the process of multiplying it.

Mr Musk has taken one step in the direction of non-fossil powered mobility but that does not satisfy his curiosity or quench his thirst for innovation. His dreams and aspirations stretch far beyond what can be achieved on our tiny blue planet. This is what drove Mr Musk to create SpaceX – a company with the modest goal of enabling humans to live and inhabit other planets, or more specifically Mars.

Since its birth in 2002, the company has erected several historical milestones. In 2008, it became the first private company to successfully reach orbit with the spacecraft Falcon 1. Two years later, the spacecraft Dragon was the first privatelyCFI.co | Capital Finance International

owned vehicle to dock at the international space station (ISS), delivering a cargo of supplies.

SpaceX signed a $1.6bn contract with NASA to send a dozen shipments to the ISS. The company recently signed yet another deal with NASA. This $440m contract calls for modifications to be made to Dragon so that it can safely ferry crews to and from the space station.

SpaceX is now in the final stages of creating the world’s most powerful rocket. The magnitude of the technological breakthroughs SpaceX is nothing short of dazzling. Even more impressive is the fact that the company’s CEO is also its chief designer: Mr Musk does not only know how to make money in vast quantities, he has a vision to match.

Asked why he invests so much time, money, and effort in breaking down yesterday’s walls, he simply says: ‘’I can either watch it happen, or be a part of it’’. He went for the latter option.

Written by Sebastian Svensson 137

> PROFESSOR MARY BEARD Every Inch a Fascinating Woman “My mother took me to the British Museum aged 5 years. I had thought that people from the past weren’t as good as we were. Then I saw the Elgin Marbles. Suddenly the world seemed more complicated.”

Mary Beard, professor of Classics at Newham College, Cambridge, is quite unusual. She is one of very few academics to be highly regarded by their peers despite having taken a stroll down media lane. Her latest publication is entitled Laughter in Ancient Rome. She also presents the TV series Meet the Romans. Mary Beard is the Classics Editor of the Times Educational Supplement.

It is nice to hear people speaking their mind when the diplomats remain quiet. Mrs Beard became infamous at the time of 9/11 by suggesting that, “however tactfully you dress it up, the United States had it coming. Bullies, even if their hearts are in the right place will, in the end, pay the price.”

Predictably enough, she was promptly accused of supporting terrorists. This, however, was not the case. Indeed, Mrs Beard was as appalled by these tragic events as any one of us. Her words reflected but the unspoken views of many. There are bound to be consequences when a nation’s foreign policy is rightly or wrongly thought to be offensive.

Professor Beard was born in Shropshire and was the first in her family to obtain a university degree. At school she was very good at Latin and made her first visit to Pompeii when she was 18 year old. As a student she was a devotee of black feminist Angela Davis. During her career Mrs Beard has repeatedly taken a stand against elitism and authoritarianism. She is passionate in the belief that the classics are for everyone – not just the privileged few.

Controversy visited Mrs Beard once again when she was invited on to the panel of BBC Question Time in January of 2013. She was pilloried for suggesting that the town of Boston in Lincolnshire would be able to cope with, and indeed benefit from, continuing European migration. She based her argument on a specific document from Boston Council that made this very point. Her clear understanding of the extraordinary contribution made by newcomers to the comfort, culture and vitality of Britain is most refreshing. She pointed out that, “European migrants make little use of benefits, the healthcare system or social housing.”

Some of Mary Beard’s Question Time critics – collectively known as The Trolls – saw it fit to ridicule her appearance and even went on to utter death threats. All this just because Mrs Beard refused to toe the populists’ line and insisted on saying once again what she believes to be true.

Professor Beard pointed out that although someone on Twitter had threatened to blow 138

up her house, she had not been as severely abused as some other forthright women. She is absolutely comfortable with herself and has said, “I’m every inch the 57-year old wife, mum and academic, half proud of her wrinkles, her crow’s feet, even her hunched shoulders from all those CFI.co | Capital Finance International

misspent years poring over a library desk.”

Mrs Beard’s lack of pretence, her honesty and the boundless joy with which she makes the classics come alive are heart-warming and set her miles apart from the politically-correct, and thus utterly boring, crowd.

Summer 2014 Issue

> MATTEO RENZI Placing Italy on a New Footing

“Matteo Renzi makes few excuses and clearly sees himself as the first of a new generation taking over power.”

Italy is usually not the place to look for when searching for political novelties. For decades on end, indeed for pretty much of the country’s existence as a unified state, Italy has been ruled by older men intent onprotecting the status quo.

Power was distributed carefully and in manageable bits among often colluding stakeholders. Though outwardly a democracy composed of wildly divergent groups, inwardly Italy was governed by an old boys’ network.

Matteo Renzi, Italy’s decidedly nonflamboyant young prime minister, will have none of that. Dealing with the damning legacy of Silvio Berlusconi, Mr Renzi’s declared mission is to reinsert Italy into the European concert of nations. The country boasts, after all, the third largest economy of the European Union, with a GDP roughly equal to that of wannabe superpower Russia.

Mr Renzi is bent on doing away with the old. Last April he unveiled a new industrial

policy and replaced the top-tier management at nearly all large state-owned companies in one fell swoop. The directors never saw it coming.

Italy’s prime minister does not forget window dressing exercises either: Just weeks after taking power, he ordered the immediate sale of close to 1,500 luxury vehicles that were used to ferry assorted dignitaries across the country.

The sale included a number of Maseratis and was successfully conducted over the Internet auctioning site eBay.

Matteo Renzi makes few excuses and clearly sees himself as the first of a new generation taking over power. Political expediency is to be replaced by pragmatism. He often speaks about reducing the cost of politics. This not only entails replacing luxury vehicles with more sensible ones. Mr Renzi eventually would like to do away with public financing for political parties, the entire senate and lavish subsidies to newspapers. Between the lines it would seem CFI.co | Capital Finance International

that Mr Renzi also aims to ruthlessly combat long-established but rather shady practices that allow political parties and labour unions a say in society that goes well beyond their mandate.

As prime minister, Mr Renzi strongly believes in transparency. He insisted the talks and negotiations that lead to the formation of his government be broadcast in real-time over the Internet for all Italy to follow. This was his novel way of making sure that any deal making would remain strictly above-board.

Italy stands in dire need of some reasoned political flair coupled to pragmatism. The country has the potential of re-establishing itself as one of Europe’s industrial powerhouses.

Most of the challenges it currently faces can be attributed to a dysfunctional political system that has stood in the way of progress and modernity. Pushing through much-needed reforms requires not just a vision, but an iron will. Mr Renzi has both.

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> WILLIAM JAMES ADAMS Fame and Fortune Applied to Universal Good

This rather wacky character is way more than just a recording artist: He is also an entrepreneur of note, a philanthropist and an inventor. William Adams (39), aka will.i.am, reaches out to young and deprived people and to show there is more to life than drugs and gangs, inspiring today’s youth to become tomorrow’s leaders.

William James Adams was born in the Los Angeles projects. As such he was not destined for success. He never got to meet his father and was raised by his mother and grandmother. Young William was encouraged from a young age to be himself and to not get caught up in the gang culture prevalent at the time in that part of Los Angeles. His mother ran a very strict household in order to protect her hyperactive son from getting into trouble. She also worked long and hard to send him to the Palisades Charter High School – one of the highest ranked high schools of Los Angeles.

It was while attending “Pali” that William

was able to explore his love for music and learning. Upon leaving high school, he went on to the Fashion Institute of Design & Merchandising (FIDM). To this day, fashion remains one of Mr Adams’ passions. William has used his knowledge of fashion to work with the Coca-Cola Company to help create a fabric from recycled coke bottles branded EKOCYCLE. This fabric is all about recycling and helping create a sustainable future. will.i.am, the name he now goes by, is also one of the founding shareholders of Beats Electronics, a company about to be sold to Apple for a reported $3.2bn. Beats Electronics is the maker of high quality headphones that adorn the heads of all self-respecting football players and other assorted cool dudes. Mr Adams also launched a camera accessory for the iPhone which brings the worlds of fashion, photography and mobile technology together. This product was christened with the somewhat bewildering name i.am+ foto.sosho.

However, it was music that shot this man to fame. Will used one of Barack Obama’s speeches and set it to beats. “Yes WE Can” was used by the US president to encourage US youth to get behind him and come out to vote. The song went on to win the coveted Grammy Award for Best New Approaches in Daytime Entertainment. will.i.am is active in encouraging the youth of today to open their minds to knowledge. One of his initiatives, the television special i.am.mars: Reach For The Stars, documents the scientific elements required for sending a song to the red planet. He also produced and starred in a TV special that aims to get young people interested in maths and science – two of Will’s favourite subjects. The programme i.am FIRST: Science is Rock and Roll was shown on ABC network in 2011 and may now be found on YouTube.

Will is driven by his own educational experiences and now actively tries to inspire underprivileged kids the world over to stay in school, go to college and help make the world a better place by preparing to take over the reigns as tomorrow’s leaders. His i.am angel foundation offers financial assistance for post-secondary education. Mr Adams also has created i.am.

STEAM (Science, Technology, Engineering, Arts and Math) – an elementary and middle school initiative to provide underserved students with opportunities for learning and interacting beyond the classroom. The programme is run in close collaboration with Discovery Education.

Each year, Mr Adams hosts the TRANS4M Conference and Benefit Concert which aims to increase awareness of the importance of universal education. This conference is used to raise money and showcases the students that had their lives changed by the i.am college initiative.

In 2013, more than $2.5million was raised to fund future initiatives with. For US President Bill Clinton was the keynote speaker at the most recent conference where ways were discussed to leverage collaborative efforts among business, non-governmental organisations, volunteer groups and government institution to accelerate new thinking and find out-of-the-box solutions. will.i.am has the Midas touch. Whatever he turns to instantly becomes über-cool. It is most refreshing to see a young man like William emerge from the projects, gain fame and fortune through work and talent, and then apply this fame for the promotion of universal values.

Written by Hilary Hunt

“It is most refreshing to see a young man like William emerge from the projects, gain fame and fortune through work and talent, and then apply this fame for the promotion of universal values.”

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Summer 2014 Issue

> MIKKELSON BROTHERS Doing Good through a Chance Meeting “In a pioneering way, the innovators of Refugees United have used modern technology to alleviate the terrible pain that separation from, and uncertainty about, family members bring.”

Morten Kjærum - Director of Fundamental Rights Agency

Danes David and Christopher Mikkelson are solid heroes for the humble and conscientious work they have done in establishing Refugees United (REFUNITE) in 2008. This organisation helps family

members search online for refugees in order to connect and communicate with them.

The REFUNITE website is stark, very much to the point and offers anonymous and free-ofCFI.co | Capital Finance International

charge services. What could be more important than bridging the gap between a displaced individual and a loved one? This is a search engine that delivers hope.

The Mikkelsons estimate that there are 43 million displaced individuals globally. A large percentage of these displaced folks have lost contact with the very people they so desperately need to alleviate their suffering.

The Mikkelsons set up REFUNITE after experiencing first-hand the almost insurmountable difficulties they encountered when trying to reunite Mansour, a boy from Afghanistan, with his long-lost parents and siblings. The obstacles they faced at the time were so overwhelming that the brothers realised something radical had to be done to smoothen this path. Happily, one of Mansour’s brothers was eventually traced and the two were reunited in Moscow after six hard and long years apart.

The well-known actor Mads Mikkelen is a goodwill ambassador for REFUNITE and acts as its public face. Given his fame throughout Denmark, Mads is able to draw maximum attention to the plight of refugees and the people left behind, worrying and searching.

Visitors to the REFUNITE website are encouraged to spread the word - especially through the social networking sites. There is also an opportunity to make an online donation to this good cause. The organisation is completely independent, with headquarters in Copenhagen and an office in Nairobi that acts as a hub for activities in East Africa and elsewhere.

The Mikkelsons were members of the Clinton Global Initiative (2010/11) and have received accolades from Monocle and Daz magazines.

Major broadcasters such as the BBC, CNN and CNBC have reported on REFUNITE’s activities.

Their good work has drawn the attention of publications such as The Guardian, Der Spiegel and Newsweek. These news outlets reported very little about the founding brothers themselves and instead concentrated on the search efforts and the tools offered to friends and family of displaced persons.

The unassuming style of David and Christopher Mikkelson is both remarkable and appropriate. They stumbled into this undertaking quite by accident after meeting a bewildered young Afghan boy who had somehow found his way to Denmark. The Mikkelsons knew that they had to do something to help – not just the boy but the countless others just like him. They merely did what they had to and ended up making a profound difference in the lives of a great many people. That is the stuff heroes are made of.

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> Ernst & Young, Argentina:

The List from Black to White Argentina Redefines Income Tax Law

By Sergio Caveggia and Flavia Cimalando

INTRODUCTION To further our previous contribution – Tax Havens: The Argentine Government Issues a New Tax Regulation on Low or Nil Taxation countries (CFI Spring 2014) – we can now provide an update based on legislation published during the last months.

It is worth noting that the legislation introduced a significant change in how income tax is regulated 142

in relation to the so-called “low or nil taxation countries”. Previously, Argentine law adopted the black-list criterion when defining jurisdictions as low or nil taxation countries. The new regulations take the opposite criterion – the “white list” approach.

This means that the Income Tax Law’s administrative order empowers AFIP (Federal Public Revenue Agency) to create a list of CFI.co | Capital Finance International

countries, domains, jurisdictions, territories, associated states and special tax systems considered to be cooperative for fiscal transparency purposes. These are then deemed cooperative countries or jurisdictions.

In this regard, the decree established that countries with which Argentine Government has signed either a tax information exchange agreement or a double taxation avoidance treaty

Summer 2014 Issue

regarded as uncooperative. Therefore, the transactions carried out with parties domiciled in such countries are subject to a burdensome income tax treatment as opposed to the much more streamlined procedures befalling transactions carried out with parties domiciled in jurisdictions not classified as such.

NEW REGULATION The presidential decree was duly regulated by AFIP General Resolution No. 3576, published in the Official Bulletin on December 31, 2013. This resolution informs that the list of cooperative countries will be available on AFIP website (www.afip.gob.ar) as of January 1, 2014.

Schedule A lists the countries, dominions, jurisdictions, territories, associated states or special tax systems considered to be cooperative for tax transparency purposes.

Although the list was made available on the AFIP website only on January 7, 2014, a reasonable interpretation would lead us to believe that the list came into effect on January 1, 2014.

A comparison of both lists – the old Jurisdictions considered Tax Havens and the current Jurisdictions Considered Cooperative – shows that some jurisdictions were moved to the cooperative category. For instance, the Commonwealth of the Bahamas and the Cayman Islands were considered low or nil taxation countries before and are now classified as cooperative. This would seem to make sense since both countries signed tax information exchange agreements with the Argentine government on December 3, 2009, and October 18, 2011, respectively.

THE PUBLISHED LIST The new resolution establishes that to apply income tax transfer pricing provisions, the status of the country with which transactions take place should be considered based on the list published on the AFIP website. A given country’s status is in effect as of the beginning of the fiscal year to which the income (or losses) of such transactions are to be allocated.

Although the resolution only refers to transfer pricing provisions, it should be understood that the effective date of the list is applicable to all the provisions in laws related to “low or nil taxation countries”.

Argentina: Buenos Aires

“The significant tax consequences to transactions carried out between local taxpayers and uncooperative countries will highly depend on the tax authorities’ definition of cooperative and uncooperative countries.”

with a broad information exchange clause – provided the information exchange functions effectively – shall be considered cooperative for tax transparency purposes. Also, countries which have begun negotiations to establish such an agreement or treaty shall be regarded as cooperative jurisdictions.

According to the new legislation, all the countries or jurisdictions not included in this list are CFI.co | Capital Finance International

It should be recalled that income tax law sets forth particular provisions for transactions carried out by Argentine taxpayers with parties domiciled in tax havens (now “non cooperative countries for tax transparency purposes”): (i) CFC regulations; (ii) deductibility of certain expenses on a cash basis; (iii) increaded whitholding rates; (iv) transactions with “uncoperative” countries would not be considered to be carried out under arm´s length conditions; etc.

CLASSIFICATION OF COOPERATIVE COUNTRIES The resolution under analysis also provides that the countries considered as being cooperative for 143

tax transparency purposes are classified into 3 (three) categories: • Cooperative countries that have signed a double-taxation treaty or a tax information exchange agreement with a positive assessment of the effective compliance with information exchange clauses; • Cooperative countries that have signed a double-taxation treaty or a tax information exchange agreement, but without an assessment of the effective implementation of the information exchange; and • Cooperative countries with which a negotiating process has started or that are about to ratify a double-taxation treaty or tax information exchange agreement.

It should be highlighted that the list would be subjected to changes and that tax authorities are empowered to provide ongoing updates of the list. In the near future, tax authorities may classify the different jurisdictions based on the oversight of the agreements signed and the actual compliance with the exchange of information provisions.

Moreover, new income tax regulations could be issued on a particular tax treatment for each category. All of these are possible future scenarios since the resolution was only recently introduced and there are still some issues that need clarification.

In short, the significant tax consequences to transactions carried out between local taxpayers and uncooperative countries will highly depend on the tax authorities’ definition of cooperative and uncooperative countries. In other words, the tax agency is also the one that establishes which countries may be included or excluded from the white list. Tax payers will have to carefully analyse treaty network and public information about compliance when evaluating or anticipating cross-border transactions with certain jurisdictions. i ABOUT THE AUTHORS Sergio Caveggia is a tax partner currently in charge of the Transaction Tax Area in Argentina. He joined the tax division of E&Y Argentina in 1994, and has developed strong expertise over twenty years in international taxation and mergers and acquisition matters. He is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side and restructuring services within the transaction tax area.

Mr Caveggia has served numerous clients across a

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Sergio Caveggia

Flavia Cimalando

wide range of industrial sectors. He has also been involved in practically all buy-side and sell-side due diligence procedures performed by our firm over the last fifteen years.

He has given lectures at national universities and is a frequent speaker at tax seminars. He has also written several articles dealing with Argentine tax issues.

Mr Caveggia is a certified public accountant graduated from University of Belgrano in Argentina. He also obtained a tax specialist’s degree at the University of Belgrano and obtained a postgraduate certificate in business and management from Universidad Católica Argentina (UCA). He is a member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association.

Flavia Cimalando is a manager of the Transaction Tax Area in Argentina. She joined the tax division of E&Y Argentina in 2000. Flavia has developed strong expertise over thirteen years in tax advisory services, tax planning and due diligence for local and international companies. She specialises in international and local business acquisitions and M&A consulting.

Flavia is a certified public accountant and bachelor in business Administration graduated from University of Buenos Aires, Argentina. She worked as an assistant professor of Tax Theory and Technique I at the School of Economics of the University of Buenos Aires during the last seven years. She is fluent in English.

Schedule A: Countries, dominions, jurisdictions, territories, associated states or special tax systems considered to be cooperative for tax transparency purposes.

Albania Germany Andorra Angola Anguilla Saudi Arabia Armenia Aruba Australia Austria Azerbaijan The Bahamas Belgium Belize Bermuda Bolivia Brazil Cayman Islands Canada Czech Republic Chile China Vatican City Colombia South Korea Costa Rica Croatia

Cuba Curaçao Denmark Ecuador El Salvador United Arab Emirates Slovakia Slovenia Spain United States Estonia Faroe Islands Philippines Finland France Georgia Ghana Greece Greenland Guatemala Guernsey Haiti Honduras Hungary India Indonesia Ireland

CFI.co | Capital Finance International

Isle of Man Iceland Israel Italy Jamaica Japan Jersey Kazakhstan Kenya Kuwait Latvia Liechtenstein Lithuania Luxembourg Macau Macedonia Malta Morocco Mauritius Mexico Moldavia Monaco Montenegro Monserrat Nicaragua Nigeria Norway

New Zealand Netherlands Panama Paraguay Peru Poland Portugal Qatar United Kingdom Dominican Republic Romania Russia San Marino Singapore Saint Martin South Africa Sweden Switzerland Tunisia Turks & Caicos Islands Turkmenistan Turkey Ukraine Uruguay Venezuela Vietnam British Virgin Islands

Summer 2014 Issue

> CFI.co Meets the CEO of Banco del País:

María del Rosario Selman-Housein For the past six years, María del Rosario Selam-Housein has stood at the helm of the Banco del País, expertly leading the bank to its prominent present position in Honduras. However, Mrs Selman-Housein has not just engineered the bank’s remarkable growth since 2008; she has also made Banco del País into a fixture of Honduran society through a pro-active approach to corporate social responsibility policies. Banco del País underwrites a growing number of community initiatives that aim to support education and healthcare programmes.

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Married and a mother to three kids, María del Rosario SelmanHousein was born in San Pedro Sula, the business hub in the western part of Honduras where she attended Sampedrana International School all the way through high school.

Academically gifted, Mrs Selman-Housein proceeded to the National Autonomous University of Honduras in Tegucigalpa where she read social and judicial sciences with an emphasis on mercantile law.

After obtaining her bachelor’s degree with honours, Mrs Selman-Housein switched to the Universidad Tecnológica Centroamericana where she took a master’s degree in marketing and international business. She also enrolled in a number of graduate courses outside the country. At the Monterrey Institute of Technology and Higher Education in Mexico, Mrs Selman-Housein obtained a degree in financial and banking administration.

Starting her career in an administrative position at the Banco Cuscatlan of El Salvador, Mrs Selman-Housein soon moved to jobs at Aval Card SA and the Cuscatlan bank and insurance company in her native Honduras.

In her early years as a law professional, Mrs Selman-Housein worked at the law offices of Batres y Asociados and later at Matamoros, Batson y Asociados. She went on to become the regional manager of the Honduran-American Chamber of Commerce (HAMCHAM) and barely a year later saw herself installed as the general manager of Asesores Administrativos.

Since 2008, Mrs Selman-Housein is the CEO of Grupo Financiero del País. As such she directs not just the Banco del País but also the Seguros del País insurance company. i

CEO: María del Rosario Selman-Housein

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> Gabriel García Márquez (1927-2014):

A Farewell to the Patriarch of Literature

By John Marinus

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t is a rare genius who can encapsulate in writing the soul of a country. One who does so with an entire continent is rarer still.

Those attributed with such virtuosity tend to be long dead, and most had the good sense not to be born in South America. That did not stop Gabriel García Márquez from leaving an indelible mark on literature.

To condense into novel form all the tempers, colours, and rhythms of such a vast place where every individual component feels somehow ancient yet transplanted, smuggled, stolen even, and haphazardly reassembled on the other side of the world. A continent with a deceptive

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familiarity, an unrelenting heat, and the tranquil disposition you’d expect from a place founded by men who thought they had found paradise, only to immediately start tearing it apart looking for gold and other riches. Such a literary feat would require a mind as vibrant, as blunt, as melancholic, as magical as the continent itself.

It’s that vibrant, blunt, melancholic mind that won Gabriel Márquez the 1982 Nobel Prize for Literature.

Mr Marquez launched his writing career in the early 1950s, after quitting his studies at the National University of Colombia. His first job at El Heraldo in Barranquilla earned him three pesos CFI.co | Capital Finance International

per article. He went on to become a contributor and film critic for El Espectador in Bogotá. In December of 1957 he accepted a position at El Momento in Caracas just in time for the 1958 Venezuelan coup. That same year he married Mercedes Barcha Pardo who would accompany him for the rest of his life. The following year their first son Rodrigo was born.

Mr Márquez’ literary debut, The Story of a Shipwrecked Sailor, was a journalistic expose of a marooned sailor, Alejandro Velasco, from a Colombian naval vessel carrying contraband goods.

The following controversy forced him to accept a post as a foreign correspondent in Europe.

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the superstitious with the sensible, and the magical with the mundane, all delivered in the same matter-of-fact tone.

“Many years later, as he faced the firing squad, Colonel Aureliano Buendía was to remember that distant afternoon when his father took him to discover ice.” That opening line finally came to Marquez while driving his family on a vacation to Acapulco. Marquez later tells how he immediately turned the car around, got home and locked himself in a room with four packs of cigarettes, and worked on the book every day for 18 months. The result was A Hundred Years of Solitude; an epic novel telling the story of several generations of the Buendía family from the time they founded the village of Macondo. The book became an instant bestseller going on to sell over 25 million copies worldwide.

The success of A Hundred Years of Solitude was followed by a string of best-selling novels such as Autumn of the Patriarch which recounts the thoughts of a dictator of a fictional Caribbean country who is simply referred to as the General and who serves as an amalgamation of several Latin American and European dictators. He also penned Love in the Time of Cholera, a love story based on his parents’ courtship, as well a number of nonfiction books and short stories.

Upon receiving his Nobel Prize in 1982, Marquez gave a speech entitled The Solitude of Latin America concerning the colonial legacy of the continent and its relationship with the rest of the world.

PUBLIC DUTY Márquez held strongly that the writer had a public duty to speak out on political issues, and put his fame to good use. He was a particularly vocal critic of US imperialism, which resulted in him being labelled a subversive and banned from entering the US. In 1975, Gabriel Márquez pledged not to publish again until the Chilean Dictator Augusto Pinochet was deposed, a pledge, as it turned out, he could not fulfil.

After this sojourn, the family settled in Mexico City in 1961, where a few years later Gonzalo, their second son, was born.

BACK TO THE ROOTS Since starting out as a writer, Mr Márquez knew he wanted to write a novel based on his childhood in Aracataca, a town near the Colombian Caribbean coast, and the grandparents who raised him.

This was to be a novel based on the stories of his grandfather Nicolás Márquez Mejía, a veteran of the Thousand Days’ War and a hero among Colombian liberals, who had shaped Marquez’ political outlook. The novel was also to be rooted in the stories of his grandmother, who conflated

His socialist views led him to consistently back the regime in Cuba, and he became a close personal friend of Fidel Castro. His faithfulness to the Cuban revolution led to him falling out with many of his own generation of Latin American writers, who were increasingly critical of the lack of intellectual freedom on the island.

Tale which was intended to be the first part of a three volume autobiography. Volumes two and three were never published. In 1999, Gabriel García Márquez was diagnosed with lymphatic cancer. Three years later, his brother Jaime announced that Márquez was suffering from dementia. He was hospitalised in Mexico City for lung and other infections.

Mr Márquez died of pneumonia at the age of 87.

This decade marks the bicentennial of independence in many Latin American countries, including Marquez’s own Colombia.

Those 200 years have brought revolution, civil war, and military coups. The decolonisation process was also reverted with large swaths of the continent bought up by foreign interests.

As Marquez himself pointed out in his Nobel Prize acceptance speech; the metaphorical nation populated by her forced migrants rivals Norway in size. It is the continent of the Amazon River, of the United Fruit Company and El Dorado, of drug cartels, carnival, and the Andes Mountains. A continent of ancient devotion and superstitions - both indigenous and imported - and of fervent rationalism and ideological dogma (mostly imported).

It is also home to 99 billionaires and counting and host of the 2014 World Cup and the 2016 Olympics. It is the continent of Fidel Castro, Pablo Escobar, Christiana Figueres, Pope Francis, José Mujica, Augusto Pinochet, Carlos Slim, and Diego Rivera. It is the continent of Gabriel García Márquez. This very well may be the century that the region finally finds stability and prospers, but that hope could just as easily be the naïve optimism of the contemporary. If we are to have a hope of understanding that future we must discover the place and its people by its own terms.

These are the terms of Gabo himself. i

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

Despite the occasional controversy, Marquez was seen as a man respected by all parties in the region where he is affectionately known as Gabo, even acting as a facilitator in several negotiations between the Colombian government and the guerrillas, including the former 19th of April Movement (M-19), and the current FARC and ELN organizations.

In 2002, Marquez published Living to Tell the CFI.co | Capital Finance International

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> Banco del País:

Reaching for the Top with Innovation and Excellence

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ince opening for business, in July 1992, Banco del País has maintained a solid asset base, closely adhering to a traditional approach to financial services with an emphasis on reliability and professionalism. The bank’s policies and strategies are guided by its corporate government framework.

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In terms of return on assets and profitability, Banco del País has become one of the most successful banks in Honduras. In 2007 the bank became part of Guatemala-based Banco Industrial Corporation – the largest financial group in Central America. This allowed BANPAÍS access to an innovative organizational culture and boosted its investments in technology.

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The Banco del País network currently extends to 16 of Honduras’ 18 departments. Here, the bank is present at more than 250 locations with 80 agencies, 80 branches, 14 drive-throughs, and more than 100 ATM’s. These are placed at strategic locations across the departments to maximize both customer satisfaction and convenience.

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At Banco del País the further development of Honduras in both economical and societal sense has been the priority for many years. The bank tries to actively contribute to the nation’s well-being in a dynamic and sustainable way. With this vision, the bank sponsors a number of projects as part of its extensive Corporate Social Responsibility policy. As such, Banco del País provides aid to different Honduran communities and organizations with the aim of improving the overall quality of life.

accomplishments was its recognition as a Socially Responsible Institution for the second year running from the Honduran Foundation for Social Responsibility (FUNDAHRSE).

BANPAÍS has been associated with this foundation since 2011.

As part of the financial industry, BANPAÍS has financed and supported projects focused on renewable energy and agriculture. Farmers received help to improve the production of coffee and of African palm trees. The common denominator for many projects is an aim to disseminate environmentally beneficial and sound agricultural practices through reductions in both water and energy usage.

2013 was not only a year of many challenges but also of immense satisfaction: BANPAÍS managed to take a step up in the national ranking of Honduran banks and positioned itself in fourth place, with a portfolio of above US$ 965m.

In 2012 the bank’s small business unit – tailored to satisfy the requirements of Honduran entrepreneurs – launched its BP Confía (BP Trusts) Campaign.

This on-going promotion emphasizes the support BANPAÍS offers small business owners. Now, more than a year after its launch, the campaign has surpassed every paradigm traditionally applied to the financial market. It has also exceeded all expectations of the bank’s management. Lastly, BP Confía has now surpassed every standard set by similar programmes previously.

Among the most important projects of the past year, BANPAÍS became an acquiring bank for VISA. The institution also obtained recertification under the international standard ISO 9001:2008, which BANPAÍS received for the first time in 2009 and has maintained ever since. ISO 9001:2008 has standardised the virtual assistance services, face-toface services and credit approval processes.

After a new audit process, BANPAÍS was also approved once again for the PCI DSS certification – a credit card data security standard. The bank first received this certification in 2010.

“In terms of return on assets and profitability, Banco del País has become one of the most successful banks in Honduras.”

2013 was a great year that included the award of an AA (HND) and F1+ (HND) rating for the short and long term (respectively) from the global rating agency Fitch.

Another of the bank’s noteworthy

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Among other recognitions received, it is worth mentioning the Bio Award given by the Central American Bank for Economic Integration, (BCIE); and the USD Payment Excellence Award from Bank of America.

BANPAÍS has worked hard to reengineer its main processes, seeking both efficiency and cost reduction.

The competitive environment the bank operates in provides for a strong motivation to excel in innovation. It also encourages the bank to keep a constant lookout for new and improved ways to serve its clients – taking full advantage of all available resources.

As a leader in the highly competitive Honduran financial market, BANPAÍS has developed a broad range of products and services that bring aggregated value to the institution by offering both passive and active operations in personal and business banking.

BANPAÍS offers credit services to many sectors of the Honduran economy through personal banking, commercial banking, microfinance and credit cards.

The bank’s portfolio of products and services include savings accounts, checking accounts, international banking services for foreign commerce and wire transfers, lines of credit, home loans, financing, leasing, direct deposits, electronic services, credit and debit cards, and other ancillary services.

To stay in tune with the ever-changing dynamics of the market, BANPAÍS has invested in the implementation of cutting-edge technologies and the training of its personnel. With its policies, the bank strives at all times for excellence in customer service, thus guaranteeing customers tailormade, specialised services and prompt assistance. i 149

> XacBank:

Taking Aim at Sustained Growth

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acBank is one of Mongolia’s largest banks, serving micro customers, small and medium-sized businesses as well as large corporations with a range of inclusive banking, fair investment and other financial products and services. XacBank is present in all 21 provinces of the country, serving more than a half million customers through its 107 retail and business branches, including four specialized business service centres.

The bank is pursuing a triple-bottom-line vision of a full pledged financial services corporation,

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providing equitable access to inclusive financial services to customers. Our financial results are evidence that, in this pursuit, we are at the competitive edge and winning in the marketplace.

XacBank has focused on growing SME and corporate business operations in order to make these segments as strong as the bank’s traditional retail business. This drive followed a detailed business plan. As a result, the bank was able to more than double its SME loan book. It has now started to draw the public’s attention as a rapidly emerging SME and corporate banking service provider. Furthermore, trade

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financing and foreign exchange trading volume have increased to provide essential services in supporting growing SMEs. XacBank has effectively managed the funds entrusted by our clients and shareholders and made significant progress in the scope and quality of our financial intermediation. The past year saw a clear decline in demand for major mining products on the international markets.

This in turn affected the Mongolian economy.

It was also a challenging year with many

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negative developments in both the economic and investment environments. Although an unfavourable external environment presented difficulties in identifying trends in 2013, XacBank has actively participated in the programmes put forth by the Bank of Mongolia and the government.

Expanding international relationships, intensifying client-focused activities and optimizing the bank’s business activities, XacBank has increased total assets by 70%, its lending business by 65% while maintaining the quality of its loans. Non-performing loans stood at 1.4 percent of the loan portfolio; three times lower than that of the overall banking sector.

The bank was one of the industry’s leaders in terms of public deposit and loan portfolio growth. Simultaneously, XacBank achieved the strategic goals and targets set before its shareholders and clients. The bank also successfully expanded its business network and market share.

“Expanding international relationships, intensifying client-focused activities and optimizing the bank’s business activities, XacBank has increased total assets by 70%.”

CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY XacBank recognizes corporate governance as essential to its operation and management.

The bank is committed to the implementation of a corporate governance system that will consist of structures and procedures adding to the long-term sustainability of the bank aligning the interests of shareholders, board, management, and a wide range of stakeholders, while ensuring effective and transparent decision-making in the interests of all.

Enhancement of corporate governance contributes to the sustainable economic development of the bank by transparently showcasing its corporate performance, further increasing access to external sources of required capital, and assuring efficient and effective use of resources.

The bank’s orientation training program for new employee includes sections on the Code of Ethics and Corporate Culture. These are the management’s priority.

TRANSFORMATION XacBank has not only reached its quantitative goals for 2013, but also implemented a number of projects with good results that are targeted to build capacity for effective and sustainable development as is reflected in the bank’s strategic business plan. XacBank has modified its strategy to adjust to the changes in the domestic market and has been worked on improving its service as well as enhancing its electronic channels.

XacBank is also an undisputed leader in corporate social responsibility. XacBank believes in creating, or doing something, worthwhile in the wider society. It implemented the Aflatoun and Aspire Programmes to provide children with financial and social education.

The two programs involved over 32,000 children. As a result, more than 191,600 children now have child deposit accounts. This represents 20.1 percent of the total number of children of Mongolia.

The main challenges over the past year were advancing institutional transformation in our business processes, IT infrastructure and delivery channels. In 2013 the bank has started its Business Transformation Project, that aims to adjust the traditional model based on banking products into a customeroriented one geared to building up life-long relationship with customers by providing fast, reliable and high-quality banking services. The bank also aims to build scalable and efficient institutional capacity to expand in the SME, corporate and retail segments.

The bank also adheres to international best practices, and supports community projects such as the Kiva micro-lending, the Rural Agribusiness Support Programme, the Organic Mongolia Project, the Employment Generation Fund Project, and many more. These programmes are actively supported as a means of ensuring that owners of micro businesses and low-income families can gain access to financial services. The bank’s flexible term and its project loans with reduced interests have been conceived to support the creation of jobs and thus ultimately to reduce unemployment in Mongolia.

Within thus framework of transformation, XacBank’s policy of providing customertailored banking services to each and every client segment has been accomplished successfully. By creating and offering optimal bundles of financial products to clients, the bank organised its processes in efficient and cost-saving ways. These product bundles are not limited to the conventional banking services, but also include other products and services that are offered by the affiliated companies of Tenger Financial Group. These additional products and services now offered to our clients include investment banking, insurance services and financial leasing.

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XacBank also became the first bank to have an ecological department and the first - and to date only - Mongolian company to join the United Nation’s Clean Development Mechanism. This is the world’s largest carbon offset market. i

For more information, pelase visit www.xacbank.mn

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> The IT Scene in China:

Alibaba’s New ‘Open Sesame’ Financing

By Ivan Chapman

Alibaba is China’s largest e-commerce company. It is a privately owned Hangzhoubased group of Internet-based e-commerce businesses which, amazingly enough, began in 1999 with only a website.

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oday, Alibaba is one of the twenty most-visited websites globally, featuring nearly a billion products. It alone accounts for over 60% of the parcels delivered in China. Bigger than eBay and Amazon.com combined, Alibaba in 2012 controlled 1.1 trillion yuan ($170 billion) in sales.

Alibaba has interests in a number of ventures.

Its latest, launched in March this year, is Yu Le Bao – an investment vehicle similar to the crowd funding style of Kickstarter. It allows thousands of ordinary Chinese to become micro financiers for movies and games using smartphone apps via Alibaba’s mobile Taobao platform.

Yu Le Bao, or Entertainment Treasure in English,

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gives anyone with a smartphone the opportunity to pledge anywhere from a minimum of a hundred yuan (about $16) up to a thousand yuan. The pledges are made to support the development and production of a bewildering range of high-profile games, movies, and TV shows. Investors are enticed by “expected annualized returns” of 7% - investments in gaming projects can go as low as 50 yuan. Each user may only make two investments in any given project.

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“Yu Le Bao aims to provide a grassroots investment platform to bring the public closer to the cultural industry,” said Liu Chunning, president of Alibaba’s digital entertainment business group. The funds raised are invested in films, mobile games, television programmes and online game projects through the insurance and wealth management services offered by Guohua Life, a Shanghai-based life insurance company.

Customers who invest in Yu Le Bao may also get to meet the actors of the films and TV shows they supported and may even be granted a say in who is to direct their chosen project and which actors will land the lead roles.

The Yu Le Bao funding drive opened at 10 a.m. on March 31 and closed at 5 p.m. on April 4.

During that time, 223,800 investors snapped up 785,500 shares in hot upcoming Chinese television and movie projects and socialnetworking games. Alibaba met its 73 million yuan (US$11.77 million) target in less than a week and could have raised tens of millions more if it hadn’t closed the funding early.

The first fully funded project was a socialnetworking game featuring China’s leading actress Fan Bingbing. The most popular projects, with over 100,000 investors, were the next two instalments of the Tiny Times franchise – movies following on from the smash 2010 romance drama film based on the best-selling novel of the same name.

Alibaba is now also exploring incursions into existing television and sports programmes in addition to film and games. The company recently struck a deal with state-run Shanghai Media Group’s Dragon TV station to produce hit shows – including the talent shows “China’s Got Talent” and “Chinese Idol”. In June, the company purchased a 50% stake in Guangzhou Evergrande Football Club for a reported 1.2 billion yuan (US$192m).

“Today, Alibaba is one of the twenty mostvisited websites globally, featuring nearly a billion products. It alone accounts for over 60% of the parcels delivered in China.”

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Jack Ma

Alibaba, founded by Internet tycoon Jack Ma, is currently valued at between US$150 billion and US$200 billion. The company is widely expected to go for an IPO (Initial Public Offering) on a New York stock exchange and has the potential to eclipse Facebook in size. i 155

> Chollywood:

Chinese Film Industry Set to Expand Rapidly

By Ivan Chapman

The French Lumière Brothers are credited with enabling the birth of modern cinema but since the 1920s this is indisputably an American art form, primarily the domain of Hollywood which soon became the dominant force in an emerging industry.

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ince taking the lead, the American film industry has grossed more money yearon-year than that of any other country in the world: At least three times the dollar volume than generated by its nearest competition.

The international film market has grown a staggering 33% over the past five years with the global box office for all films released around the world totalling $35.9 billion in 2013, up 4% over the 2012 revenue.

Estimates vary from four to ten years, but things are destined to change in the film business as a new heavyweight player has walked onto the set. Asian superpower-in-waiting China is soon expected to boast the world’s largest box office.

Much like Godzilla, the country is set to leave Hollywood in its path of destruction as China marches to global dominance in yet another market.

A report by Ernst & Young speculated that, at the current rate of expansion, the Chinese box office is set to pass the US seven years from now and double it by the middle of the next decade.

MEGA STUDIOS The Chinese are also fostering their homegrown version of Hollywood – Chollywood – on a massive scale. China already boasts the largest outdoor film production company in the world the Hengdian World Studios at nearly 500,000 square metres - which is set to be superseded by Qingdao Oriental Movie Metropolis - a 20-studio complex with the world’s largest recording pavilion measuring 10,000 square metres and a unique permanent underwater stage. It is the brainchild of property entrepreneur and leisure tycoon Wang Jianlin who plans to pump 50 billion yuan ($8.2 billion) of his own money into the venture.

The increased demand for entertainment in Asia has led China to break the international box office receipts of US$3billion for the first time more than a billion dollars more than its closest rival Japan. The 36% jump to a total revenue of $3.6 billion last year propelled China to the second slot of worldwide ticket sales behind the United States.

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“Asian superpower-in-waiting China is soon expected to boast the world’s largest box office.”

This year, forecasts by the research group Entgroup place the Chinese box office well on track to reach a staggering $4.6 billion which puts revenues at 42% of those generated by the US film industry. The growth rates attained are impressive: Chinese box office takings hit $520 million in February 2014 which equals to the full year of revenue the country’s film industry generated in 2007.

The rise in the Chinese box office – already far bigger than Britain (3rd globally with $1.7bn) and India (5th globally with $1.5bn) combined now makes it a vital market the US film industry cannot ignore any longer. Hollywood stands to make vast gains by tailoring its products to the Chinese market.

STILL LAGGING Although China currently still lags behind India and the US in total film productions - with India producing over 1,000 feature films and 1,500 shorts and the US some 750 to China’s average of 432 - it is only a matter of time before the Chinese state-of-the-art studios now gearing up for production begin to churn out both domestic and international hits.

There have already been some notable Chinese international successes. The controversial 2010 disaster movie Aftershock - not to be confused with Eli Roth’s 2012 horror flick of the same name - and the Fish out of Water and Lost in Thailand movies are just three examples of Chinese mega hits. However, it was Crouching Tiger, Hidden Dragon which kicked it all off back in 2000, taking US$128 million in total ticket sales over a 31-week theatrical run in North America alone. The movie eventually generated of US$213 million, ranking it 19th in that year’s worldwide box office successes.

Aftershock - original title Tang Shan da di Zhen - became the highest-grossing film in Chinese history and paved the way for up to fifteen foreign titles - as part of an exclusive deal between AMC Entertainment and China Lion Film Distribution CFI.co | Capital Finance International

to have national releases on the same day in both China and the US at multiplex cinemas where normally subtitled movies are not appreciated.

Little known outside Asia, the sleeper hit Lost in Thailand became the first Chinese film to cross the domestic 1 billion yuan ($160 million) mark since its release. To date, this movie has grossed some $208 million in China alone - not bad for a production with a $2 million budget. Only James Cameron’s Avatar managed to beat it with $223 million.

The success and growth of its domestic movie industry has led many to question whether China needs go through the trouble of distributing internationally at all, if only a marginal extra income is generated.

A MULTIPLEX A DAY The domestic market is set to skyrocket as more multiplexes are built in China - each one housing at least half a dozen cinema screens. Digital cinema is the biggest growth sector. After a slight blip, it grew by 25% last year. Asian multiplexes now have almost 2,000 more digital screens than North American ones.

Back in 2007, there were just slightly over 3,000 movie screens in operation in China. Today there are almost 18,200 screens. That translates into one screen for every 72,000 or so people. In the US that ratio is one screen to every 8,000 inhabitants. To reach the US level of screen density, China would have to build an additional 150,000 screens.

It is getting there: According to the MPAA (Motion Picture Association of America) on average thirteen new multiplexes are built in China every single day. The Dalian Wanda Group, owner of the world’s largest cinema chain, is now building what it claims will be the world’s biggest film and television centre – the Qingdao Oriental Movie Metropolis, combining film and television production and a theme park covering 376 hectares. The massive studio is set to open in June 2017.

“Once China reaches the threshold of, say, 20,000 screens, there will be films that are specifically targeted to certain cinemas,” says

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Le Vision Pictures CEO Zhang Zhao who was a co-investor in, and Chinese distributor of, The Expendables 2 which grossed $53.1 million in the country during its September-October 2013 run.

Mr Zhao added that soon Hollywood productions will have to confront the challenge of local productions released in select cinemas with shorter runs and which cater to local tastes, “China has its own domestic productions, and they must now find a way to be competitive. A Hollywood blockbuster will be like an elephant attacked by fifty monkeys.

MARKET RESTRICTIONS Chinese state regulators, determined to foster the growth of domestic industry, maintain a quota of only 34 international films a year (up from twenty last year). US studios aim to get round the quota by co-producing films with China. This system requires that at least one-third of a film’s funding must come from Chinese sources and onethird of its main cast must be Chinese. Such a production must also have scenes shot in China.

The last two instalments of Michael Bay’s megahit franchise Transformers were partially filmed in China. A third film, Dark of the Moon (2011), earned $165 million in China. Paramount Studios has partnered with China Movie Channel and Jiaflix Enterprises in a production agreement that would create a major presence for Transformers 4 in the booming nation.

According to a press release, the partnership has the two Chinese companies helping director Michael Bay with the “selection of filming sites within China, theatrical promotion and possible postproduction activities in China as well as casting of Chinese actors and actresses.”

Another Hollywood movie which has seen tailoring for the Chinese market is the mega-hit franchise Iron Man. The third edition of this franchise was partially shot in Beijing. It was also financed in part by Beijing-based DMG Entertainment. Iron Man 3 released a special cut for the country which included “significant Chinese elements” and “specially prepared bonus footage” as well as an appearance by one of the country’s biggest 158

acting stars, Fan Bingbing.

Other movies have received the same treatment: World War Z removed a discussion over whether the zombie apocalypse originated in China; James Bond film Skyfall deleted a scene where a Chinese security guard was shot; Men in Black 3 removed all scenes set in Chinatown while 40 minutes were cut from Cloud Atlas.

When Django Unchained was released in China, as one of a select few foreign films, it was immediately pulled from cinemas by censors, reportedly due to background images of nudity.

Brad Pitt has only this year entered the Chinese mainland again – with his partner Angelina Jolie and family to promote her new film Maleficent - since reportedly being banned for life after starring in the 1997 movie Seven Years in Tibet, which includes a sympathetic portrait of the Dalai Lama.

Another 1997 movie, the Disney-backed and Martin Scorsese directed Kundun about the early life of the Dalai Lama and the brutal Chinese invasion of Tibet in 1950, was hotly objected to by the Chinese government resulting in a ban for life for the director. Harrison Ford, Richard Gere and Bjork are all also banned from China for their support of Tibet.

Sharon Stone is also on the black list for her ill-advised comments regarding the 2008 earthquake. The actress said the quake might have been caused by bad karma resulting from the mistreatment meted out to Tibetans by the Chinese. Asked for her thoughts on the earthquake, the actress said, “You know, it was very interesting because at first I am not happy about the way the Chinese are treating the Tibetans, because I don’t think anyone should be unkind to anyone else, and so I have been very concerned about how to think and what to do about that because I don’t like that.”

POPCORN RISING Finally, a price hike will surely hit the cinema staple snack popcorn in the coming years as the Chinese cinema goers develop a taste for it.

Although North Americans devour popcorn by the CFI.co | Capital Finance International

bucket-load while enjoying a movie, the Chinese are yet to properly discover an appreciation for the tasty offerings of concession stands.

Concessions (popcorn, sweets, drinks) account for just 20% of a cinema’s revenue, but generate 40% of the profits. Fully 85% of the price of a bucket of popcorn represents profit to the cinema.

North American cinema chains are often estimated to make as much as 70% to 85% of their profits from concessions sales. In China’s budding cinema sector, income is usually and mainly generated from the shared returns of ticket sales.

The importance of popcorn to the growing Chinese cinema sector is underlined by the Dalian Wanda Group showing nationwide popcorn sales totalled 390 million yuan ($62.8 million) last year alone.

This amounted to 72% of total concession sales and 9.5% of total earnings of 4.1 billion yuan ($6.5million). By way of comparison Wanda’s American chain AMC in 2013 earned $1.8 billion from ticket sales and $787 million from food and beverage. Concessions thus represent over 28% of total revenue.

Zhao Minran, manager of a Wanda cinema in the eastern Chinese city of Zhenjiang, said his business had sold 150% more popcorn than it expected to last February. Even so, just an estimated 30% of movie goers bought the snack. Mrs Minran added that his cinema is now considering adding new flavours of popcorn other than plain and caramel.

Overall, the Chinese movie industry is geared for growth and seems to have dodged the financial crisis, the VHS/DVD craze and illegal downloading. Producing quality entertainment to an eager worldwide public remains key to lasting success. That’s really all there is to show business. i ABOUT THE AUTHOR Ivan Chapman is the producer/screenwriter of the found footage horror movie ‘The Last Diary of Nikita Rose’ and upcoming psychological thriller ‘Container’. He is based in the UK.

Summer 2014 Issue

> CFI.co Meets the CEO of Makhtag:

Muhammad Halim Fidai

CEO: Muhammad Halim Fidai

F

ormer governor Muhammad Halim Fidai of the Wardak Province in Afghanistan is not impressed with the way his country is usually portrayed by the international media. In fact, Mr Fidai finds it incomprehensible that the media consistently downplays the significant progress made since the ousting of the Taliban regime in November of 2001.

Six years ago, Mr Fidai, then 38, became the youngest governor of one of the country’s 34 provinces. Mr Fidai governed Wardak province, gateway to the capital city Kabul, successfully for five years. As an independent politician not affiliated to any party, Mr Fidai has made it a point of honour to dedicate his efforts in the public sphere to the betterment of his country.

As such, he is a man of ideas rather than of raw power as it befits a journalist, editor and writer of no less than seventeen books.

Mr Fidai’s most recently published work –

The Roots of Leadership and Democracy in Afghanistan – deals with the country’s valiant attempts to find a sustainable way of introducing a stable and representative form of government that includes all sectors of Afghan society – even the ones now engaged in armed struggle.

The questions addressed in the book are of singular importance. With the impending withdrawal of foreign troops from the country, Afghanistan stands in urgent need of a homegrown solution to its governance issue. Mr Fidai argues, quite convincingly, that only an allinclusive government headed by a non-partisan president has any chance of bringing the lasting peace that is required in order for Afghanistan to prosper and overcome strife.

Mr Fidai has long been involved with international aid organisations and is considered an expert on the delivery and execution of projects. For the past fourteen years Mr Fidai has assisted mostly CFI.co | Capital Finance International

American non-governmental organisations (NGOs) with the implementation of education, human rights, public-administration and women empowerment projects throughout the country.

Currently, Mr Fidai is an active member of the Fikr & Amal Jirga (Thought & Action Assembly) – an Afghan think tank. He is also the founder and CEO of Makhtag (Progress) Consultancy – a firm providing services in governance, research, public diplomacy, and leadership.

Mr Fidai is a founding member of the Afghan chapter of the South Asian Free Media Association. He is also a member of the Central Eurasia Leadership Academy. Mr Fidai holds an MBA from a university in India with a specialization in leadership and change management. He is widely travelled both inside Afghanistan and outside the country, attending seminars and other events in South East and Central Asia, Europe and the Middle East. i 159

> CFI.co Meets the CEO of XacBank:

Bat-Ochir Dugersuren Mongolia’s economy has been undergoing changes in recent years, and one of the challenges for its domestic banks is keeping up with the pace of growth. In line with this trend, XacBank has modified its strategy to adjust to the changes in the domestic market and has been working on improving its service as well as enhancing its electronic channels.

X

acBank had additional challenges in the context of the slowdown in the global economy and weak investor confidence.

However, the bank was able to maintain its market share in challenging conditions and maintain a higher growth in its retail deposits when compared to the rest of the market in Mongolia, says Mr Bat-Ochir.

He says of XacBank’s plans for the coming year: “The bank wants to build scalable and efficient institutional capacity to expand both in the small and medium enterprise [SME] and corporate and retail segments:’ He foresees that there will be high growth potential in the SME and corporate segment once a stable investment environment in Mongolia has been established and confidence has returned to the market. The SME sector is expected to expand alongside Mongolia’s mining boom, as it is hoped that smaller companies will benefit in the supply chain of the mining industry. In recent months, XacBank has increased its SME loan book as well as its foreign exchange trading volume.

The bank is also notable for its emphasis on corporate governance and has a three pronged philosophy of ‘planet, people and profit’ as well as a focus on financial inclusion.

Mr.Bat-Ochir Dugersuren has been CEO of XacBank since January, 2011. He started his career as financial officer for the MicroStart project in 1998, the project which later became the foundation of the current XacBank. He obtained degree of Master of Business Administration from International Business School, Brandeis University, Boston in 2008. Since then he held numerous top executive positions such as Chief Investment Officer at TenGer Financial Group and First Deputy CEO of XacBank. He contributed to the development of the bank and growing with it to become a capable and talented leader. i 160

CEO: Bat-Ochir Dugersuren

CFI.co | Capital Finance International

Summer 2014 Issue

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> Green Delta Securities:

Maximizing Growth through Intelligence

C

apital market deal with the trade in stocks and shares. When banking system falls short of meeting the demand for funds to the market economy, capital markets step in. As a concept, capital markets include the stock market, the bond market, and the primary market. The trading of securities on organized capital markets is monitored by the government; new issues are approved by supervisory authorities and monitored by participating banks. This way, organized capital markets can assure sound investment opportunities. Capital markets, being an essential element of any contemporary economy, demand close attention. Stock markets are a place where one can capitalise on financial expertise, knowledge and experience.

Green Delta Securities Limited (GDSL), one of the most renowned brokerage houses of Bangladesh, set foot in the capitalized brokerage business in 2006. Within a short period of time, GDSL has succeeded to join the league of stateof-the-art securities companies in Bangladesh.

Green Delta Securities is a 100% subsidiary of the Green Delta Insurance Company and offers full-fledged global standard brokerage services to both retail and institutional clients. Currently, the company is being skilfully managed by Mr Wafi S M Khan who is Green Delta Securities’ CEO. The long-term business vision of board members and the management team have taken the company to great heights. Their thorough understanding and vast experience in the financial sector of Bangladesh have been crucial to GDSL’s success.

Green Delta Securities is operating its business through branch offices in the strategically most important locations of the country. The stock brokerage industry still lacks proper glamour in Bangladesh. This sector is not yet the first pick of students as they emerge from universities.

Green Delta Securities has gained a reputation

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“Green Delta Securities aims to become the preferred brokerage house for high net worth individuals and institutional clients.” as an agent of change when it comes to the brokerage business. The company is taking up initiatives to change the negative impression some people hold of capital markets. GDSL is actively engaged in programmes that educate and motivate potential investors with a view to investing wisely and timely. As the industry will not flourish without the presence of qualified and experienced professionals, Green Delta Securities is recruiting the very best professionals from the industry.

Green Delta Securities aims to become the preferred brokerage house for high net worth individuals and institutional clients. The company has ensured that the service offered to its clients is of peerless quality with full compliance.

Green Delta Securities also keeps its prices at competitive levels across all investment services offered. The services featured are comprehensive in nature, and include brokerage, CDBL (Central Depository Bangladesh Limited), Tele trading and custodian services. The company provides all types of brokerage services through Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), starting from Beneficiary Account (BO) opening to CDBL related services, notification of corporate announcements like AGM (Annual General Meeting), cash dividend, rights bonus etc.

The key factors that can be considered as Green Delta Securities’ strengths are: • Guidance of the expert management and board members; • Young, enthusiastic, and dedicated employees; CFI.co | Capital Finance International

• Extensive day-to-day research reports to support investment decisions; • Customer service of superior standard; • Strong high net worth and institutional client base; • Brand value of the parent company; Understanding the significance of a well-built IT infrastructure for smoother business operation, GDSL has installed state-of-the-art back office software, uninterrupted data links across all branches and the stock exchanges, the latest hardware and a plethora of other accessories.

The company also has an Online Share Order (OSO) software platform through which the clients - both local and international - can place their buy/sell orders which are executed in the shortest possible time. Order confirmations are sent online as well.

In 2013, GDSL succeeded in increasing its trade volume by 174%. Considering the bearish market trend, this was a most remarkable result.

Since 2010, GDSL has significantly increased its market share and today stands at the very apex holding fully 2% of the total market share.

Striving to provide the best financial services with new and innovative investment products for capital market investors, Green Delta Securities is committed to recruit the best staff and gather the best resources in order to ensure peak performance at all times. With investments in IT infrastructure, efficient customer service, innovative products aimed at improving customer convenience, Green Delta Securities is set to achieve its goal to become the finest brokerage house of the country.

Green Delta believes in intelligence at work to maximize growth and profitability both for the clients and the organization itself. The company will not cease to inspire clients to be more focused on their trading and have a clearer vision while investing. i

Summer 2014 Issue

> CFI.co Meets the CEO of Green Delta Securities:

Wafi S M Khan

S

tock brokerage in Bangladesh is not the most obvious of career choices ambitious students mull in Bangladesh. The few people who have been successful in portraying the brokerage industry as a glamorous one are definitely key players in the market. The CEO of Green Delta Securities Limited, Wafi S M Khan, is one of them. Mr Khan has been running his organization successful, displaying unique leadership skills centered on a customer centric approach and keen risk management abilities.

Mr Khan has not just led his business to greater heights; he has also contributed significantly towards the strengthening of the sector’s overall appeal.

Green Delta Securities is one of the best known brokerage houses in Bangladesh and is a direct subsidiary of the Green Delta Insurance Company.

Mr Khan took over as CEO in 2011 and promptly unleashed his pioneering attitude toward business generation and other core activities.

Prior to joining Green Delta Securities, Mr Khan worked at The City Bank as vice-president and head of non-funded business. Here, he gathered extensive experience in the banking industry and set benchmarks for others to attain.

Mr Khan started his remarkable career at ANZ Grindlays Bank and proceeded to positions at BRAC Bank, and American Express Bank before arriving at The City Bank. His skills and innovative approach were greatly influenced by his work in retail banking. Mr Khan was directly involved with the launch of numerous retail, card and loan products.

For Green Delta Securities Mr Khan envisions a future as Bangladesh’ preferred brokerage house for both individual and institutional clients. He initiated programmes aimed at making sure that clients get access to the highest level of service with exceptional compliance levels. Green Delta Securities is now able to consistently offer topquality services at competitive prices for all the capital market needs. Moreover, the range of products offered is comprehensive and includes brokerage, CDBL (Central Depository Bangladesh Limited), telephone-trading and custodian services.

However, the Bangladesh brokerage industry has a long way to go to change its overall perception.

Mr Khan has taken a number of initiatives with a view to changing the rather negative aura that surrounds the sector in the eyes of many in the country.

“Being a stockbroker can lead to a career full

CEO: Wafi S M Khan

of growth and potential. For a stockbroker every day brings a new challenge. He is offered a rare inside view of the capital and share markets.

Sadly, the overall capital market is something most people of our country don’t care much about. We see people of modest financial means invest recklessly in the capital market with the proceeds of land sales or other one-off sources of income. When faced with tremendous loss, these people will often blame the system or the government. They fail to realise the nature of the markets.”

need it the most. Mr Khan can be regularly seen on business talk shows explaining the dynamics of the brokerage industry to audiences.

“Capital markets are for the people who have idle money to spend. If you lack the required ‘capital’, stocks and other risk-bearing investment products are not for you. The lack of knowledge about capital markets is the prime reason why this industry has a less than stellar reputation.

This in turn discourages fresh university graduates from joining brokerage houses.”

Mr Khan’s achievements, dedication, skills, and his strong commitment to the brokerage industry have been recognized through awards and other honours by a number of trade organisations and associations.

Mr Khan has formed his team at Green Delta Securities with a mix of young talent and more experienced professionals. His visionary approach is gradually helping to change the mind-set of local investors and the general public. He is organising workshops and training seminars on a regular basis for the people who CFI.co | Capital Finance International

Throughout his career, Mr Khan has made a name as a result-oriented team player, innovator and initiator. He has taken up several successful training and workshops, both locally and globally, on career management and leadership. He has also attended various international conferences which took him to Dubai, Singapore, Thailand, UK and China.

Mr Khan is the former President of the Dhaka North Junior Chamber International (JCI). He was the secretary of Rotary Club of Metropolitan Dhaka. He is currently a member of Metropolitan Chamber of Commerce and Industry (MCCI) and Bangladesh Malaysia Chamber of Commerce and Industry. He is also a member of many prestigious local and international social clubs and board member of non-profit business organizations. i

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> Mongolian Mortgage Corporation:

Housing and Mortgage Markets as Development Drivers in Mongolia Since the middle of the last century, the development of the Mongolian housing market has been one of the main goals of the government’s social policy and part of its industrialisation drive moving the country forward from its nomadic-style agrarian economy. During the second half of the last century, Ulaanbaatar, the capital grew slowly but steadily in size to become a modern cultural urban centre with a population of well over 1.3 million inhabitants. The city’s growth took off in the early 1990s – when the capital’s population was less than 500,000 – when both governments and parliament approved and implemented a new economic policy aimed at providing a sustainable and smooth transition to democracy and a market economy.

REFORMS Similar to former socialist countries, Mongolia undertook a series of policy and structural reforms which initially had a stagnating impact on the development of the financial and real estate sectors. The adoption of a broad scale privatisation programme removed this bottleneck and made freed the way to growth. Since 1996, and thanks to the privatisation legislation introduced, publically-owned housing was transferred to private ownership. Tenants were granted the right to sell, purchase, and collateralise freely their now privatised condominium apartments.

By tracing the historical milestones of the existing legal framework for housing and market-based housing finance – such as the Housing Privatization Law (1996), Housing Law (1999), Condominium Law (2003), Mortgage Law (2009), and more recently, the Law on Mortgage Backed Securities (2010) – we can draw the conclusion that the government’s policy framework for housing development is one of crucial importance to the overall development of the country. However, this framework is still in its early stages.

Backed by a fast-growing emerging economy, underwritten by vast mineral resources, Mongolia’s housing market offers excellent opportunities for capitalisation and equitable growth.

According to statistical data from the Ministry of Urban Development and Construction and the Central Bank of Mongolia, the urban population of Ulaanbaatar City today stands at over 1.3 million inhabitants. Commercial banks have seen 164

“The Mongolian Mortgage Corporation is now one of the fastest growing companies in the country as measured by both financial assets and profitability.” their mortgage lending portfolios increase ten-fold during the last decade. After the implementation of the Affordable Housing government programme in 2013, the construction and housings sectors experienced a veritable boom. The programme was launched with support from the Central Bank of Mongolia which supplied unconventional, short term liquidity finance to commercial banks in the country. This initiative dovetailed almost perfectly with the Economic Growth Stabilization Programme which boosted the construction sector’s output by an astonishing 173 % since June 2013. The demand for affordable housing mortgage loans has doubled and reached 1.6 Trillion MNT (Tögrög) by June, 2014.

DOUBLE DIGIT GROWTH The Mongolian government’s policy for reaching sustainable double digit GDP growth rates over the coming years - of between 10 % and 14 % until 2017 - is expected to be realised in part by attracting foreign direct investment in the mining sector, which is currently responsible for around 80 % of the country’s export earnings.

The budgetary and monetary policies conducted by the government of Mongolia in conjunction with the central bank require finely tuned co-ordination in order to provide the macroeconomic stability and balance needed to avoid any additional inflationary pressure from building CFI.co | Capital Finance International

up in both the broader consumer markets and the housing sector.

Government policy for the development of a sustainable mortgage market is still in the exploration phase. An important number of capital market and institutional reforms has been implemented in a relatively short period of time.

However, further work is being carried out on policy instruments that regulate the practical application of laws already put in place. For example, the Mongolian parliament last year approved a newly revised law for the securities markets. It also sanctioned a law regulating investment funds which came into force on January 1, 2014.

Securities firms and investment funds are now being registered by the relevant authorities and their business strategies are being set up and examined.

This process will determine the exact shape, size, and – more importantly – the structure of Mongolia’s capital market. Presently, the securities market capitalization constitutes less than 5% of the domestic financial market and beyond that tiny slice the financial market is mostly dominated by the commercial banking sector.

The Mongolian Mortgage Corporation was established in 2006 as a securitisation company with its stock held by the privately-owned commercial banks of the country. Since March 2014, the company welcomed the Development Bank of Mongolia as a new shareholder with a 14.88% stake. The government, meanwhile, has a vested interest in the fully state-owned Mortgage Agency which falls under the direct auspice of the Prime Minister’s cabinet. The Mortgage Agency is in charge of developing socially responsible and

Summer 2014 Issue Ulaanbaatar, Mongolia: The Mausoleum of Sukhbaatar

affordable housing, mostly condo apartments, for targeted demographic groups.

However, most construction is undertaken by private developers and financed by commercial banks. At the present stage of the government’s economic growth strategy, the final selection of a single mature structure for the long-term development of the mortgage market is still open. This provides excellent possibilities for institutional collaboration aimed at meeting the strong demand for housing finance from both the urban and provincial communities.

HISTORY An overview of historical development in the Mongolian housing and mortgage markets must refer to a number of detailed, and now duly archived, studies conducted by the then-socialist government between the 1950s and the 1990s.

More modern studies are conducted on a rather random basis and mainly via different technical assistance projects funded by bilateral specialised grant programmes.

The history of housing market is very closely related to the social and economic development taking place in Mongolia over the past century or so. Before, when the state owned the full housing stock of the country, government policy was simply directed at providing all citizens with adequate housing. Private initiative had absolutely no role to play and a market, as such, did not exist. Excessive public involvement in housing matters may have had a slowing effect on the adoption of legislative reforms needed for the development of mortgage and housing policies for both risky and risk averse investments. Policies based on the availability of housing subsidies are now limited to very low income groups; peripherally-served demographic groups; and other unable to meet the minimum requirements for accessing mortgages extended through commercial banks.

Even after a full decade of massive and rapid

expansion and a construction boom, Mongolia’s housing sector is still unable to meet the demand for affordable housing across the different segments of the market.

LOW POPULATION DENSITY Mongolia is a country with a relatively low population density. Around 40 % of the population is concentrated in three major urban centres, developed in the late 1960. The cities have expanded hugely over the past ten years. Current challenges faced by the housing market are the reduced availability of land for residential development (especially in Ulaanbaatar City), the depreciated and overused urban infrastructure, and continued shortfalls in energy and heat generation capacities. An electrical grid rapidly becoming obsolete and unable to meet demand adds an extra layer of problems.

These deficiencies are addressed by a number of initiatives of the Development Bank of Mongolia as well as by well the government working jointly with international financial institutions in a concentrated effort to initiate the implementation of large scale infrastructure development projects aimed at clearing the existing bottlenecks.

However, adverse effects of the current policy of accelerated development, such as an overheating economy and the resulting inflationary pressure, and decreasing foreign direct investment levels, are dragging down Mongolia’s sovereign credit rating, thus lowering the economic growth prospects.

This, in turn, may lead to even larger gaps in the short term funding base and increase the cost of funding for the commercial banking sector. These macroeconomic structural challenges are already reducing the volume of long term mortgages available to the market. This development is cause for concern as the ongoing rapid urbanisation generates a persistently strong demand for housing, mostly from young and upwardly mobile Mongolians. The construction sector’s expansion may be hampered by a possible lack of mortgages.

CFI.co | Capital Finance International

At this point of GDP growth, the introduction of effective capital market regulation – complete with a framework for structured market driven financial instruments – is a most appropriate approach to tackle the economic growth policy issues that have now appeared.

THE MONGOLIAN MORTGAGE CORPORATION The Mongolian Mortgage Corporation recently attained a milestone by becoming the first company to launch a RMBS (Residential Mortgage Backed Security) in the country. It managed to do so thanks to the technical expertise and investment advisory guidance from the more advanced Malaysian and other markets which are now slowly awakening to the opportunities in Mongolia.

Companies dealing with real estate development processes, asset valuation, insurance, and finance are increasingly exploring the business climate in Mongolia. Information and technology is being made available that empowers and broadens the Mongolian domestic capital markets. This process of growth and development generates, in turn, even more interest from outside players.

There are exceedingly good prospects for the Mongolian Mortgage Corporation to lead further issuances not only in the area of the government’s Affordable Housing Programme but also with regard to commercially rated residential and commercial property. This long-term corporate vision entails both business planning and the implementation of mechanisms to make the most of opportunities as they come along in this most dynamic of markets.

The Mongolian Mortgage Corporation is now one of the fastest growing companies in the country as measured by both financial assets and profitability.

Ulaanbaatar City’s recent history of accelerated urban development, leads the corporation to believe that the coming stage in the development of the country’s capital markets will contribute decisively to Mongolia’s economic growth over the coming years. i 165

> World Bank Group:

“Customer is King” – Toward More Effective Development?

By Jeff Thindwa

“Customer is King” is an old business saying that accentuates the importance of customers in every business. The private sector generally knows that satisfied customers are cheaper to serve and easier to deal with while unhappy customers will result in reduced sales and profits. They know that success is based on understanding their customers’ needs, adapting to their feed-back and placing them at the heart of service design and delivery. This may seem like a pretty straight-forward market-based approach. However, for customers of public services the situation is often very different with communication largely flowing one-way.

E

ngaging customers of public services (citizens) to provide feedback on the quality of services is not a new concept in the development community, however, it is far from widespread. Every year enormous amounts of public funds are spent by governments and international organizations on public services in a wide range of sectors (e.g. water, health and education). But, due to weak performance incentives, misallocations, corruption and a lack of citizen pressure, services are often of low quality or fail to reach intended beneficiaries – especially the poor.

IMPROVING PUBLIC SERVICES GOES BEYOND THE SUPPLY SIDE Although there are no easy solutions when it comes to improving the service delivery chain, it is clear that efforts must go beyond conventional mechanisms of accountability. Political checks and balances, audit requirements, administrative rules, and the judicial system will only have limited success unless direct attention is also paid to the views and needs of the citizen beneficiaries.

A Kenyan journalist used budget data to link primary schools’ record low grades, high dropout rates (particularly among girls) and high

Experience has demonstrated that citizens can be empowered to hold governments, service providers and international organizations to account. When citizens engage with public officials in an informed and skilful manner they can provide the demand-side pressure needed for responsive governance, efficient public spending and the stemming of corruption. This can in turn complement and reinforce the conventional mechanisms of accountability. It is therefore important that citizens are aware of their rights and responsibilities and how to exercise them.

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levels of disease – to a lack of toilets – igniting a chain reaction which led to improved health and education outcomes.

Photo: Arne Hoel/World Bank

BRIDGING THE ACCOUNTABILITY GAP Through our social accountability work around the world we have learnt that it is possible to engage broader segments of civil society and strengthen their voice and capacity. Citizens can be empowered to directly influence policies, which is as important as building the capacity of governments to become more responsive and transparent. In fact, these two capacities CFI.co | Capital Finance International

reinforce each other and enhance development outcomes.

To help foster citizen-state collaboration and bridge the “accountability gap,” we have developed tools and mechanisms that allow for information exchange, negotiation and trustbuilding. For example, our Open Budgeting programme helps governments open up budget

Summer 2014 Issue

A Nepalese community-based organization discovered (through expenditure tracking) that village women were unaware of their social security entitlements. The CSO informed the women and helped them claim the funds. Photo: World Bank.

and expenditure data to users. Some countries have made admirable progress in participatory budgeting, proactively engaging citizens and stakeholders to influence budget priorities and allocations. Another work stream helps partner countries develop Access to Information legislation and train governments and citizens on how to use the information to strengthen public accountability. Our programmes and tools have been applied at local, regional and global levels – below are a few selected examples.

“Experience has demonstrated that citizens can be empowered to hold governments, service providers and international organizations to account.”

In order to raise awareness, Ms. Choge produced several news stories which eventually led the government to act. Resources were re-allocated and an investigation was put in place to explain the budget misallocations.

An effective parliament is vital in ensuring that resource allocations are in the citizens’ best interest, and that services are effectively delivered. The Parliamentary Strengthening Programme seeks to enhance the capacity of parliaments to effectively perform their functions by strengthening different institutions and stakeholders within parliament, such as budget/ oversight committees, secretariats and budget offices through support to regional and global learning networks.

In Tanzania participation in regional parliamentary learning networks contributed to a closer collaboration between the Public Accounts Committee and the National Audit Office; particularly pertaining to information sharing on the misuse of public funds. These exchanges led members of the Committee to take action and present corruption allegations in the National Assembly – which in turn resulted in the President dismissing the ministers of Finance, Energy, Tourism, Trade, Transport, and Health.

ARMING CITIZENS WITH FACTS THROUGH MEDIA Media can play a critical role when it comes to affecting development outcome (which was also one of the themes for this year’s World Press Freedom Day). Media can provide an accountability check on public spending, expose misdeeds and corruption and create a platform for public debate. In this regard, our Global Media Development programme trains media and civic leaders on how to access, interpret and “demystify” budget and public spending data.

CIVIL SOCIETY PARTICIPATION IN BUDGET PROCESS Our Public Participation in the Budget & Audit programme builds institutional capacity to help civil society organizations (CSOs) analyse budgets, track money flows and compare funds allocated to services delivered. Moreover, the programme is fostering a dynamic collaboration between audit institutions and CSOs aimed at strengthening the audit process and accountability of government.

Kenya In Kenya a journalist for NTV, Irene Choge, used budget data to link poor primary school performance to a lack of toilets – igniting a chain reaction which led to improved health and education outcomes. After participating in an Open Data Bootcamp, (a crash course in practical techniques to harness open data for storytelling) she used her newly acquired skills to investigate performance data for two primary schools.

Kushahawa, Nepal Several CSOs in Nepal were trained on simplified expenditure tracking as well as budget literacy.

As a result, one of the CSOs applied the newly acquired knowledge and tools toward monitoring of social security allowances and discovered that the women of the Kushahawa village were unaware of budget allocations intended for them.

The CSO informed the women and helped them claim their entitlements. Moreover, mechanisms were put in place for continued future monitoring.

A PLATFORM LINKING GOVERNMENTS & CITIZENS In order to help governments become more transparent by publicly sharing budget data and facilitating citizen access, the BOOST initiative provides user-friendly platforms in forty countries where budget and expenditure data can be easily accessed and monitored. In addition, 12 governments and two states have posted their data on an Open Budgets Portal, which is a onestop shop for global budget data.

She uncovered that the schools’ record low grades and high dropout rates (particularly among pubescent girls) as well as high levels of disease were linked to a lack of sanitation facilities.

PARLIAMENTS SAFEGUARDING CITIZENS’ INTERESTS Ideally, parliaments provide the main forum for articulating public concern, influencing policy and overseeing governance processes, such as the formulation and oversight of the national budget.

Moldova published its entire expenditure dataset in one public Excel file. This contributed to ministerial analytical work and investigations on linkages between expenditure and performance – which ultimately contributed to the Ministry of

CFI.co | Capital Finance International

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Education’s decision to launch a comprehensive school reform programme.

DIGITAL ENGAGEMENT: FACILITATING CITIZEN PARTICIPATION & FEEDBACK Information and Communications Technologies (ICT) are penetrating even the most remote villages across the globe, offering huge potential for changing the dynamics of how citizens engage with governments and service providers. Handheld devices can empower citizens to make their voices heard and allow governments to create opportunities for participatory decision making, and to solicit, or respond to, citizen feedback.

In the Democratic Republic of Congo, citizens used mobile phones to influence budget priorities. Even though many are unable to access even basic public services in the DRC, close to half the population has access to mobile phones.

The ICT4Gov programme used this opportunity to engage citizens in voting on community priorities (for which the local government devotes a percentage of its budget). For the first time, communities such as Ibanda have gone from having no investment budget at all to having 40 percent of their budget devoted to community investments. Similarly, 120,000 citizens used ICTs to vote on health priorities in the Brazilian state of Rio Grande do Sul – which led to new and improved services.

In an effort to improve education services in 125 schools across Malawi, parents and students will soon be able to use mobile phones to report teacher absenteeism. An education sector accountability programme is developing the feedback tools that will be used to monitor and report absenteeism. This will help the government better understand and find solutions to the challenge.

DELIVERING ON THE CUSTOMER PROMISE More effective and sustainable development outcomes require good governance and this is rarely achieved without meaningful citizen engagement.

Our experiences with social accountability and citizen engagement from around the world have highlighted the need to fundamentally redesign governance models in ways that place citizens at the heart of the service delivery chain - as in the private sector. This means that also in public sector service delivery the customer has to be king.

Citizens need to be able to demand improvements in public services and receive a satisfying response. The private sectors’ customer feedback systems and customer responsive processes are already helping to shape development practice, however, we still have a long way to go to mainstream these principles in the public sectors and “deliver on the customer promise.”

In the Democratic Republic of Congo, citizens used mobile phones to influence budget priorities. Photo: World Bank.

more than pay lip service in their commitments, citizens must be empowered to actively hold them to account. Our experiences on the ground are a testament to the fact that this can be achieved.

ABOUT THE AUTHOR Jeff Thindwa, a Malawi national, will be transitioning into the World Bank’s Governance Global Practice being created from July 1st, as part of a comprehensive World Bank reform. He is currently Manager of the World Bank Institute’s Social Accountability Practice.

Mr. Thindwa joined the World Bank in 2000 and has served the bank in a range of capacities in the social development sectors, including as Sr. Social Development Specialist and Team Leader of the Participation & Civic Engagement Cluster and Team Leader of the Global Civil Society Team. Prior to joining the bank, he worked in international development for 17 years, with Civil Society Organizations, and prior to that as a Legal Aid lawyer for the Government of Malawi, and in the private sector. Mr. Thindwa went to Law School at the University of Malawi and University of London King’s College.

To ensure that governments, public service providers and international organizations do 168

As Margaret Mead said: “Never doubt that a small group of thoughtful and committed citizens can change the world. Indeed, it’s the only thing that ever has.” i

CFI.co | Capital Finance International

Jeff Thindwa

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Jiye Hu

Josef Pilger

Head of the Pensions Supervisory Authority & Chair IOPS TechCom | Santiago de Chile

Professor of Law and Finance, Center for Law and Economics, China University of Political Science and Law | Beijing

FINANCING PENSIONS NEW ROLES NEW RESPONSIBILITIES

Asia Pacific Pension Practice Leader EY | Sydney

> UNCDF:

Connecting Poor People to Formal Financial Services

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he adoption of the Millennium Development Goals (MDGs) in 2000 established a form of partnership that was unique in two significant ways.

Second, taken together, the eight goals formed a vision for development that reflected the complex nature of the challenges people face in the real world.

First, the MDGs were an acknowledgement of the interconnectedness of people and of places – inspiring a coordinated effort to improve the lives of hundreds of millions of people around the world.

Thirteen years later, progress towards the MDGs has been made on many fronts since 2000.

Large groups of people have risen from extreme poverty. Primary school enrolment has soared.

More women and girls are able to participate

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more fully in civic life, and more people worldwide are reaping the benefits of improved sanitary conditions and better health.

However, progress towards the MDGs is highly uneven across and within regions and countries and there is reason to believe that this is part of a trend of increasing global inequality.

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Summer 2014 Issue In Pictures - Haiti: The Better Than Cash Alliance is an alliance of governments, private sector and development organizations committed to accelerating the shift from cash to electronic payments. Haitians like Ketteline Pierre now use their mobile phones to make their payments. Thanks to the use of mobile money, incidents of theft of cash transfers fell by more than 50 percent [1] during the 2010 Haiti earthquake emergency. The Better Than Cash Alliance is funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, USAID and Visa Inc. The UN Capital Development Fund serves as the secretariat.

[1] World Economic Forum, 2012 © Bill & Melinda Gates Foundation/Natasha Fillion

inequality leading to widening individual and territorial disparities: Often only a small part of the population has been able to take advantage of economic growth. As a result of these development dynamics, the economies of many developing countries remain concentrated in few urban centres, characterized by a narrow base and highly vulnerable to external shocks.

The impact of the recent financial crises has been severe on this system, especially in the Least Developed Countries (LDCs): In many regions delocalised factories have started to close, construction shrank, tourisms flows declined, exports became less competitive, and remittances dwindled. What was working for only a part of the system before the crisis was even less effective after these shocks.

The post-2015 development agenda aims to reinforce the international community’s commitment to poverty eradication recognising the intrinsic linkage between poverty eradication and the promotion of sustainable development in its four dimensions - economic stability, sustained growth, the promotion of social equity and the protection of the environment.

ACCESS TO OPPORTUNITY Rising global fortunes and expanding choices are presenting new opportunities to make development more sustainable and access to capital more inclusive. But accessing those opportunities takes the collective leverage of like-minded partners, who share a sense of both the transformative potential of the moment and the urgency to act upon it.

“Rising global fortunes and expanding choices are presenting new opportunities to make development more sustainable and access to capital more inclusive.”

By its mandate and approach, the United Nations Capital Development Fund (UNCDF), the UN’s capital investment agency for the world’s 48 least developed countries, is committed to keeping pace with change as it affects the world’s poorest. Nimbleness and adaptability are central to its operational structure, with a built-in capacity to leverage global innovation for local need wherever it may arise. Its proven ability to work from the ground up continues to earn UNCDF the confidence of a growing cohort of partners – and with it, the resources to support in increasingly reliable and comprehensive ways the development goals of the countries where it serves.

The rise of mobile technology and social media, coupled to the massive concentration of an increasingly younger population in urban CFI.co | Capital Finance International

areas, and changes in the flow of money and labour around the world, has ushered in an era of unprecedented possibility.

DIGITAL FINANCIAL SERVICES Recognizing that innovation plays a critical role in fostering progress towards the Millennium Development Goals, since 2008 UNCDF started its work in digital financial services.

One of first UNCDF initiatives in this area has been the Pacific Financial Inclusion Programme (PFIP), a joint programme with the United Nations Development Programme (UNDP), which receives tremendous support from the Australian Government and the European Union.

In a region full of island nations with small populations and only a handful of viable microfinance institutions (MFIs), it opted to catalyse the development of branchless banking and mobile money by technically and financially supporting the launch of five mobile money services and two branchless banking services.

Its Mobile Network Operators and bank partners reached over 550,000 clients with mobile money, of which 41% were previously unbanked, and nearly 390,000 with low–cost bank accounts served through branchless means. This included 21,500 of Fiji’s poorest people who are beneficiaries of social welfare payments. The key lesson learned in the Pacific is that supporting Digital Financial Services works best and can reach the poor when done as part of a broader financial inclusion strategy that considers the policy and regulatory environment and client financial capabilities.

UNCDF also remains concerned that the Least Developed Countries (LDCs) are receiving less attention, investment and support than the larger, emerging markets despite the great need. LDCs are often perceived to offer a poor business case for providers. Reaching scale is particularly difficult to achieve in LDCs, which on average have smaller populations, lower economic activity levels and disposable incomes, poorer infrastructure and overburdened regulators with few resources to do their work.

Adults in LDCs are also less likely to be literate, own a phone or have formal employment with a regular income. It is clear that building a sustainable digital financial 171

In Pictures - Haiti: The Better Than Cash Alliance is an alliance of governments, private sector and development organizations committed to accelerating the shift from cash to electronic payments. Thanks to the use of mobile money, incidents of theft of cash transfers fell by more than 50 percent [1] during the 2010 Haiti earthquake emergency. The Better Than Cash Alliance is funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, USAID and Visa Inc. The UN Capital Development Fund serves as the secretariat.

[1] World Economic Forum, 2012 © Bill & Melinda Gates Foundation/Natasha Fillion

services business is actually much harder and costly than previously thought and providers in LDCs will need more time, financing and assistance to achieve success and break-even.

Therefore UNCDF has deepened its engagement in the digital financial future to address these and other challenges through two efforts.

MOBILE MONEY FOR THE POOR For this reason, the Mobile Money for the Poor (MM4P) programme was launched in partnership with the Australian government and the Swedish International Development Agency, with additional support coming from the Bill & Melinda Gates Foundation.

MM4P is working in a select group of LDCs with specific challenges – some have yet to introduce digital financial services while others are stuck in the subscale trap. It diagnoses each market and puts together a set of interventions designed to remove obstacles and build partnerships that can help lead to a massive uptake of DFS. What is clear is that technology is only a small part of the solution; going digital also requires designing a service and delivery method that is adapted to the local market. UNCDF works closely with central banks, helping them develop enabling policies, guidelines and meaningful monitoring tools to oversee these services. It also supports the providers in improving their

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agent network and developing products that suit their environment. The programme is beginning to see early signs of success, with changes to regulations moving forward in Liberia and the number of active users moving from tens of thousands to hundreds of thousands in Malawi.

BETTER THAN CASH ALLIANCE UNCDF’s work in digital financial services includes the support to the Better than Cash Alliance, one of the most innovative advocacy initiatives that promotes the shift from cash to electronic payments. The Better than Cash Alliance, funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, USAID and Visa Inc., and with UNCDF as its Secretariat, was launched in September 2012.

The project is a response to public and private sector demand for more strategic advocacy, research and guidance on digitizing these cash payments to catalyse the shift on a global scale, ensuring that the benefits are maximized. It brings together governments, private sector companies and development organisations and provides them with the expertise and resources they need to make the transition from cash to electronic payments and achieve the shared goals of empowering people and growing emerging economies.

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Every year, billions of dollars in cash payments are made by governments, the private sector and development organizations to people in emerging economies, including millions of poor people, such as disbursements of salaries, payments to suppliers, pensions, social welfare stipends, cash-for-work programmes, emergency relief payments and others. A growing body of evidence shows that these cash payments represent a missed opportunity and that digitizing them can create lasting benefits for people, communities and economies.

Distributing these payments electronically can bring huge benefits to governments and donors by improving transparency, lowering costs, and increasing efficiency.

A recent study showed that the Mexican government’s shift to digital payments trimmed its spending on wages, pensions, and social welfare by 3.3 percent annually, or nearly $1.3 billion. Another study highlighted that electronic payments were more cost efficient for the World Food Program (WFP) to deliver relief support to remote communities in Northern Kenya than traditional in-kind support.

WFP compared in-kind versus e-payments distribution models and found that delivering aid - in this case - through e-payments was approximately 15% more cost efficient.

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“Distributing these payments electronically can bring huge benefits to governments and donors by improving transparency, lowering costs, and increasing efficiency.”

Concretely, a 15% cost-efficiency meant that WFP could assist the same number of people for US$2.5 million dollars less than if it was providing in-kind food or from another angle, it meant that WFP could feed 56,000 more people each year in the programme for the same amount of money.

CASH INEFFICIENT Cash is also an inefficient, expensive and unsafe way to transfer funds from business-to-business.

The private sector makes cash payments to small producers, farmers or people working in their factories and the cost of cash across the value chains is huge.

Electronic payments have an opportunity to eliminate the handling, transportation and distribution fees associated with cash-based payments. They also unlock new business opportunities to reach more suppliers and customers. They can add to the business intelligence by tracking financial flows in realtime, which increases transparency and reduces leakage but also by gathering customers’ data to improve product design and distribution.

Experience also indicates that low income people - especially women - value ease of access, privacy and control over their finances and electronic money channels bring these features to financial transfers.

Speed, safety and lower costs are also important features of electronic payments. For instance, recipients of the conditional cash transfer programme in the Philippines, before receiving their allowance electronically, could wait nine to twelve months to receive the pay out or loose part of their productive time to travel to the disbursement point, without mentioning the transportation cost they had to withdraw from their allowance.

Households that benefit from electronic transfers - and that more broadly are included in the formal financial system - can better access added-value services like health insurance, make productive investments and take advantage of new business opportunities.

IMPROVED TRANSPARENCY While delivering payments electronically improves transparency, lowers costs, and increases efficiency and speed, governments, development organizations and private sector still heavily rely on cash. According a study from the World Bank, only 25 percent of developing countries processed in 2012 their transactions and social benefits electronically.

The Better than Cash Alliance is privileged to play a catalytic role in this rapidly growing movement toward electronic payments. It will continue to challenge the status quo and encourage marketbased electronic payment solutions of all forms that will help communities — together with governments, private sector and development

ABOUT UNCDF UNCDF is the UN’s capital investment agency for the world’s 48 least developed countries. It creates new opportunities for poor people and their small businesses by increasing access to microfinance and investment capital. UNCDF focuses on Africa and the poorest countries of Asia, with a special commitment to countries emerging from conflict or crisis. It provides seed capital – grants and loans – and technical support to help microfinance institutions reach more poor households and small businesses, and local governments finance the capital investments – water systems, feeder roads, schools, irrigation schemes – that will improve poor peoples’ lives.

UNCDF programmes help to empower women, and are designed to catalyze larger capital flows from the private sector, national governments and development partners, for maximum impact toward the Millennium Development Goals. For more information, please visit www.uncdf.org and subscribe for news, follow @UNCDF on Twitter and UN Capital Development Fund on Facebook.

ABOUT PFIP The Pacific Financial Inclusion Programme (PFIP) was developed to bring new energy and ideas on financial inclusion and financial literacy to the Pacific. Its strategy is to seek out and introduce new ways of serving hard-to-reach populations, and to foster greater commitment and cooperation among regional stakeholders to building inclusive financial systems throughout the Pacific. PFIP is a programme supported by the UN Capital Development Fund (UNCDF), the United Nations Development Programme (UNDP), the European Union, the Australian Government and the New Zealand Aid Programme. For more information, please visit www.pfip.org ABOUT MM4P Mobile Money for the Poor (MM4P) is a global programme funded by UN Capital Development

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partners — achieve successful adoption of digital payments. The lessons and insights it has uncovered throughout the year are just a beginning, so it will continue to work with our members and stakeholders to digitize payments in a manner that empowers people and nurtures economies. i

Fund (UNCDF), the Swedish International Development Cooperation Agency (SIDA) and the Australian Agency for International Development (AusAID). The programme provides support to branchless and mobile financial services in a select group of LDCs where UNCDF currently operates to demonstrate how the correct mix of financial, technical and policy support can build a robust branchless and mobile financial services ecosystem in LDCs. The programme hopes to develop scalable models that can be replicated in other challenging markets. For more information, please visit uncdf.org/en/MM4P and follow @MM4P1.

ABOUT BETTER THAN CASH ALLIANCE The Better Than Cash Alliance partners with governments, the development community and the private sector to empower people by shifting from cash to electronic payments. The Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, USAID and Visa Inc. are funders and the U.N. Capital Development Fund serves as the secretariat. To learn more, visit www.betterthancash.org, follow @BetterThan_Cash and subscribe for news.

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The European Conundrum

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he European Union is an interesting project that – once logic is duly applied – must end up with the foundation of a United States of Europe (USE).

Strangely enough, very few of the union’s citizens actually want to live in such a sovereign construct. Opinion polls time and again attest to the plain fact that most inhabitants of European nation states cling to their national identities and see their neighbours as, well, utterly foreign, strange and even incomprehensible.

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While we all get along jolly well in Europe since the conclusion of our last spat some 69 ago, scratch the surface a little and a xenophobe – mostly of the moderate and thus fairly innocuous kind – will invariably appear incanting the many stereotypical deficiencies of other nations: The Spanish talk too loud; the Italians talk too much and employ arms and hands while doing so; the Finns and Swedes talk too little; the French talk with too much pomp; the Germans talk with too much authority; the Dutch talk a lingo that is neither here nor there, while the Belgians talk in too many tongues altogether.

Until a few years ago, a Dutch family driving towards the sun for its annual four week vacation would not cross the border without a few sacks of Bintje potatoes and other home-grown culinary delights and necessities. The cuisine south of the border was not to be trusted and any sampling would surely result in rather embarrassing emergencies.

Now that the EU has expanded from its humble beginning as the European Coal and Steel Community (1951) to include all of 28 members, covering a geographical area of well over 4.3 million km2, there is more foreignness than ever before. Vastly increased intra-union travel, instant 174

“Without some form of integration and mutual dependency, Europe will, before long, revisit its turbulent past.” communications, and common legislation have taken the edge off the nationalists’ objections but have not succeeded in moulding a European identity. In fact, there simply is no “European feeling”, nor is there likely to ever be one.

Once cooperation was set in motion in 1951, there was no stopping it. In fact, the process is self-perpetuating: Increased cooperation between nations inevitably gives rise to the need for further integration and, eventually, the full merger of sovereign countries.

Take free trade: The disappearance of tariff walls promptly lead countries to further selfish national interests via cumbersome regulations. This, in turn, necessitated a streamlining of codes and rules. Once product and safety guidelines were harmonised, governments started to manipulate their currencies in order to gain a competitive advantage.

The distortions to free trade thus caused, eventually brought the much-maligned euro into existence. The common currency has now given rise to a call for fiscal integration which, given time, will impose a shared economic and financial policy. Once that is in place, states will have little left to do and may very well wither away.

However, while these processes are taking place, the cacophony of national identities will CFI.co | Capital Finance International

not disappear. It doesn’t demand exceptional powers of prescience to predict that at some point nations will want to slam on the brakes and reassert their sovereign powers. This is already happening now in the UK, The Netherlands, Hungary, and France.

The trouble with this is that European integration is a process that either moves forward or breaks.

At best, the pace of integration can be slowed down a bit. It cannot be stopped altogether without falling apart into 28 national bits and pieces.

So, it’s either the United States of Europe or nothing at all. The latter option is fraught with dangers, as much as the former is: A conundrum if ever there was one.

European nations are not very skilled at living together in peaceful harmony. In fact, Europeans are a warring bunch. Without some form of integration and mutual dependency, Europe will, before long, revisit its turbulent past. However, the alternative – a United States of Europe – is a pipedream. Europe lacks a shared history other than one tainted by violence and lacks a common identity. The European Union speaks in 24 languages and its many administrative and legislative organs are stages where 28 different mentalities clash on a daily basis resulting in policy compromises that satisfy no one.

The European conundrum has no real outcome.

Still the countries of the continent are condemned to get along one way or the other.

The European project may be doomed to failure as national identities reclaim their primacy. The only hope is that when they do, as they eventually must, we have all become too civilised to wage war. There is always hope, right? i

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