Winter 2012-2013

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Capital Finance International

Winter 2012 - 2013

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Brazil’s Dilma Rousseff:

Powerful leadership also In this issue // epc: jobs now // world bank: innovation imperative desertec: sustainable energy // eurogroup: grounds for optimism OECD on state enterprises // SMEs in latin america

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Winter 2012 - 2013 Issue | Capital Finance International


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Winter 2012 - 2013 Issue

Letter from the Chairman Dear Reader, You are a leader who can make a difference. Otherwise you would not be holding this magazine and reading this letter to you! At the World Economic Forum Annual Meeting at Davos in January, world leaders come together to discuss the major issues and tasks ahead. And there are indeed some grave challenges facing the world, such as the sustainability of the earth as an ecosystem, energy policies and the state of the global financial system (see articles about all these topics herein). There is unemployment and underemployment all over the world, including in the emerging economies in Asia, Africa and the Gulf. Job creation via the promotion of SMEs should be a major part of the solution to this problem. In Europe, the financial system has been dysfunctional in providing finance for SMEs. One issue of key importance to is unemployment in the “western” or “developed” world. Many emerging economies are creating jobs (e.g. in Asia and Latin America through low taxes) but there is interdependency as they are still partly relying on “old” world prosperity. In Europe in particular, unemployment should be of grave concern. Critical human assets are seriously underutilised. Future generations are being lost to the labour markets. Not only is this a human tragedy, but it is also the case that Europe is losing its competitiveness. Instead of there being resources available to help Europe counter global competition these folks (unwanted as employees) will burden their welfare states – along with the greying population. Youth unemployment in particular is so gravely unfair to new generations who are not themselves at fault but still suffer the consequences of policies of intergenerational selfishness. Also, this idleness threatens the social fabric and undermines trust in democracy and capitalism. And the dangerous sentiments of nationalism (Scotland), fascism (Greece) and secessionism (Catalonia) are stimulated. The socialist and centrist governments’ response has been that of increasing taxation and touting income and wealth equality and redistribution. Unfortunately such fiscal policies only perpetuate the unemployment problem and export jobs East and South. The divergence between growth in advanced and emerging economies is thus very likely to persist. As world economies converge there are new generations that are losing out. Jobs are lost as European governments call for higher taxation and further regulation. The populist policies of soaking the rich by increasing marginal income tax rates have delivered lower revenues to the state (and thus created a greater need to tax labour income). These policies have also resulted in fewer millionaires in certain tax jurisdictions (think of the UK where 10,000 disappeared in a recent reporting year). HNW individuals are also part of the job creation equation. The lack of job creation is not god given but a result of the low priority given to it by politicians. Income and wealth distribution and equality are for some objectives in their own right even if the pie shrinks and jobs are lost (consider France’s planned 75% tax rate and the attitude of the Liberal Democrats in the UK). When labour is taxed, fewer jobs are created. It is plain then, that in order to create jobs taxation on labour must be reduced. Of course the older generation (critical voters) see no need for this as they are running down their meter of retirement. The solution lies in stimulating risk finance for entrepreneurship and innovation. Private capital is available but is not being deployed. In Europe, the system must be simplified with lower taxation on labour (flat maximum 25%-35% rates) but moving higher on consumption (VAT), energy and green taxes. The taxation system must also be seen to be predictable and fair to capital and business (with less populist rhetoric against the rich - or private capital will remain on the side lines). believes strongly in free enterprise but when new generations are denied job opportunities they are losing out, they are not free to compete and they are denied their right to self-fulfilment.


Tor Svensson Chairman Capital Finance International | Capital Finance International


Editor Chris North


Assistant Editor Sarah Worthington


Executive Editor George Kingsley Production Editor David Graham

Editorial William Adam David Gough-Price Diana French Jim Pearson Ellen Roland

Powerful Leadership (Page 42 – Page 46)

EPC: Jobs Now (Page 24 – Page 25)

Distribution Manager Len Collingwood

Subscriptions Maggie Arts

World Bank: Innovation Imperative (Page 12 – Page 14)

Commercial Director Jon Gerben

Publisher Mark Harrison

Desertec: Sustainable Energy (Page 32 – Page 37)

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

Eurogroup: Grounds For Optimism (Page 18 – Page 20)

OECD on State Enterprises (Page 98 – Page 101)

SMEs in Latin America (Page 86 – Page 87) Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers

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Winter 2012 - 2013 Issue

ALSO FEATURED As World Economies Converge

Pages 16 – 27

38 – 39

Nouriel Roubini

Hans Martens

Thomas Wieser

Martin Feldstein

A Major Investor’s View

Mohamed El-Erian, PIMCO

54 – 56

Taxing Questions

Sergio Caveggia, Ernst & Young

68 – 72

74 – 83

Managing the Transition Pier Carlo Padoan, OECD Awards: Rewarding Global Excellence

108 – 109

124 – 130

Maybe More People Should Listen to Ross Jackson

140 – 142

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

Some Final Thoughts Nataly Marchbank, Hasinah Essop, PwC | Capital Finance International



Letters to the Editor

From the founder/director of Women4NonViolence: I was very pleased to read the article, “Dr. Nawal El Saadawi – An Honourable Life” in your Autumn 2012 edition. I had the great pleasure and honour of meeting Dr. El Saadawi last year at the University of Oslo’s Human Rights / Lisl & Leo Eitinger Prize ceremony. Dr. El Saadawi exuded quiet dignity during her acceptance speech at the University of Oslo and I noticed several of my MiddleEastern activist women colleagues listening intently to her every word. After hearing of her personal struggles and unwillingness to acquiesce to the Egyptian government, it became quite clear to me that this quiet dignity had helped her win support from the ordinary and wiser citizens of Egypt and the international community. During the reception I mentioned to Dr El Saadawi that I was a childhood survivor of gender based violence in Far East Asia, and came to experience further violence in Europe. We then had a short discussion on the contrasts and similarities of gender violence and the societal positions of women in Japan and Egypt. Recently, I discovered that she had won another coveted award, this time from the International Peace Bureau (Nobel Peace Laureate 1910). The Sean MacBride Peace Prize from the IPB was presented to Lina Ben Mhenni and Dr. El Saadawi by Michael D. Higgins, the President of Ireland. I hope serendipity will bring Dr. El Saadawi and myself to one location again, to continue our discourse on the role of women in political engagement and to exchange experiences of Far East Asian and Middle Eastern women in government. I agree with your statement that, ‘if the voices and talents of women are ignored the capacity and output of a country is reduced by more than half’ and wish to remind society of the financial power that women can contribute to society. Thank you again for posting this valuable news about Dr. El Saadawi, and I hope that via women’s voices in the international community, more good news can come of this wonderful woman B.Kawamura Oslo

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I didn’t notice any falling leaves drifting by the window when the Autumn issue of your magazine was delivered to my home. OK, so maybe autumn is a second spring when every leaf’s a flower but we will be enjoying an Australian summer when your winter issue arrives. magazine is distributed throughout the world so why not consider numbering the quarterly issues rather than referring to northern hemisphere seasons? And how about including some reports from this country? J.Beresford Melbourne It’s a sign of the times when a new magazine takes the name of its internet address. I am not sure that I fully approve of this innovation but I did enjoy the content. Malala Yousafzai is a splendid choice as one of your ‘Emerging Market Heroes’ and as you say, ‘Her diaries are as important to us as those of Anne Frank’. On visiting your web site I came to know of the Young Journalist Programme and would like to congratulate you on this important initiative which involves a prize for the most promising writer. Surely Marlala should be considered for such an award? J. Adams Cambridge


Winter 2012 - 2013 Issue

Shanghai Skyline

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I would like to commend Desertec’s proposal for massive MENA/European collaboration in solar and wind power generation (Clean Power from the Deserts, Michael Duren in the Autumn Issue). There needs to be stronger economic interdependence between the regions post Arab Spring, the benefits to both sides would be enormous and the technology is there to turn these ideas into reality (which could result in Desertec supplying fifteen per cent of Europe’s electricity requirements). Is there a will where there is a way? The recent news that both Siemens and Bosch have pulled the plug on this important project is very disappointing. J. Orchard Canterbury As a Nigerian, I was very proud to see Zenith Bank declared ‘Best Commercial Bank in Africa’ (Cover Story, Autumn Issue). Credit is due to the present management of course, but one should never forget the pioneering role of Jim Ovia, founder of Zenith and for decades the leading light of the Nigerian Banking Industry. Your article mentioned that Mr Ovia’s is the champion of the ‘Youth ICT Revolution’ in our country and a great philanthropist. This is so true. Your readers may also be interested to know that Jim was recently appointed Chairman of the Nigeria Polio Immunisation Action Group. Northern Nigeria is the only part of the world where cases of polio are on the increase. Jim has his work cut out but the good news is that attitudes towards immunisation are now far more positive in Nigeria and we have strong support from the Gates Foundation. This is a fight we must win. P. Adewale Lagos The International Finance Corporation (Banking on Women – Changing the Face of the Global Community, Autumn issue) is clearly doing its best to allow women in emerging markets to gain proper access to finance. The article makes the important point that, ‘women are the largest emerging market - representing thirty per cent of businesses registered worldwide’. But, as your excellent reporting shows, there are other more serious problems of discrimination against women: I note that the majority of your Emerging Market Heroes (same issue) are women and that four of their number have been either falsely jailed, otherwise persecuted by government or the victim of an assassination attempt. (Rousseff, Suu Kyi, El Saadawi and Yousafzai). The incidence of discrimination against women in Mexico is of great concern to me. A recent independent study – by seven authors – presented to the United Nations Committee on the Elimination of Discrimination against Women concluded that the Mexican government is not complying with their guidelines and requirements. I call on the Mexican government to do more now. R. Lopez Mexico City In Tor Svensson’s introduction to the Autumn issue of CFI. co, he promises to deliver messages from important multilaterals, ‘without mute, filter or undue interpretation by our editorial team’. I consider this to be a laudable objective. The current issue of the magazine lives up to this promise and I would like to make the further point that when speaks with its own voice is does so elegantly, intelligently and with compassion. M.Lee Singapore


> World Bank Group:

The Innovation Imperative By Janamitra Devan

Overcoming the Myths and Recognizing the Realities of Innovation, Job Creation and Prosperity.


nnovation drives competitiveness, and maximizing competitiveness is indispensable to achieving sustainable job creation. Any economy with a weak innovation capacity will see its competitiveness erode, and will thus be doomed to weak job creation. Those are simply basic laws of economics, shaping the destiny of countries at every stage of development. Business leaders and policymakers are wisely eyeing the innovation imperative – a focus on continuously strengthening every economy’s capacity to create new products, processes and techniques – at the center of their economic agenda. Focusing on innovation is a necessity rather than a luxury: It is the only way to prosper in the relentlessly competitive global economy, in which every country is buffeted by forces that economist Joseph Schumpeter called perpetual “gales of creative destruction.” As World Economic Forum participants will learn as they explore this year’s Davos theme of “resilient dynamism,” empirical evidence suggests that as much as half of the difference among countries’ long-term growth rates is driven by increases in productivity due to innovation and technology enhancements. Innovation is therefore a pivotal factor in ensuring the success of every economy, large or small: The most productive firms, industrial sectors and countries are destined to reap the greatest rewards – and any laggard in innovative capacity is likely to stagnate in low value addition. The good news, however, is that the world’s knowledge-base about building economies’ innovation capacity has been steadily growing. Innovation occurs locally, but knowledge is transferable globally: Promising pro-growth approaches can be adapted to fit countries’ specific circumstances, even if there is no “one size fits all” strategy that can guarantee stronger innovation and competitiveness. Focusing on developing countries, the development community and the World


“Myths and misperceptions, however, continue to cloud some policymakers’ thinking about innovation.” Bank – along with its private-sector arm, the International Finance Corporation – have recently intensified their efforts to help client countries build their innovative capacity. The lessons learned about promoting innovation and strengthening competitiveness are now spurring many countries’ performance. The World Bank is helping countries encourage entrepreneurship; promote technology adoption; make R&D more targeted, effective and relevant to what the real economy needs; enhance collaboration among universities and industry; channel investment toward innovative industries; and incubate new technologies. Myths and misperceptions, however, continue to cloud some policymakers’ thinking about innovation. Six dangerous misperceptions must be dispelled, if economies are to maximize the upside of innovation. Myth # 1: Innovation – especially game-changing “disruptive” innovation – kills jobs through increased productivity, which reduces the need for human labor. Displacements may occur in the short run, but job losses do not necessarily persist over the long run. Granted, the creation of Automatic Teller Machines has eliminated the jobs of many bank tellers, and the ability to book your own airplane tickets online has reduced the need for travel agents. Yet technological improvements liberate human capital from routine tasks and allow workers to move into higher-value jobs – with the help of job-retraining programs and safety-net safeguards that help the displaced prepare for the higher-skilled jobs of the future. Myth #2: The quest for stronger productivity growth requires every economy to focus on creating glitzy new high-tech inventions. Pursuing prosperity | Capital Finance International

does not require every country to try to leapfrog the Apple iPad or the Samsung smartphone, or to come up with a game that’s even more addictive than “Angry Birds.” Innovation can involve better processes as well as higher-technology products. Higher-yielding soybean production has helped Brazil and Argentina win a stronger share of new export markets. Higher-quality wine production has helped Chile and New Zealand increase their share of a high-value category. Decades of agricultural research, quality upgrading and training of small-scale farmers in advanced farming practices have led Colombia to develop a world-leading coffee industry. Consistent investment in the agriculture value chain, in the transportation infrastructure and in efficient distribution networks has helped Ethiopia expand its exports from the flower industry to a broader range of higher-value agricultural products. Higher-technology mining techniques have helped Australia and South Africa prosper by building their minerals and mining sector – and have allowed them to export their know-how to other nations that need more efficient mining. Myth #3: Innovation is a one-off effort. Once a company or a country has achieved success in a chosen sector, it will easily dominate that sector for years or decades to come. Getting the startup process right is important, but the constant upgrading of industries and entire innovation ecosystems is essential. For business leaders as well as policymakers, the challenge requires keeping your eye on the ball – all the time, not just every now and then – to ensure continuous adaptation. Is an industry (say, in shoes or in apparel) investing to make sure its designs are moving with the times? When should an industry (for example, in advanced technologies) upgrade its systems, reinvent itself and thus “creatively destroy” its current products? Are an industry’s skills (for instance, in food processing) adapting to ever-higher levels of technology? History is filled with examples of former market leaders – from America’s Oldsmobiles to Canada’s BlackBerries to France’s Minitel computers – that faltered when they decided to rest on their laurels. Complacency or hubris can doom any

Winter 2012 - 2013 Issue

In Pictures: The World Bank Building, Washington, D.C.

firm, sector or country that fails to continuously adapt. Myth #4: Every country needs to create its own version of Silicon Valley in order to achieve success. Continuous innovation is essential for economic survival – yet not every country can or should attempt to recreate the conditions that gave rise to Silicon Valley. In fact, simply imitating the economic growth models that have succeeded in other innovative economies – without taking account of each region’s unique conditions – is a recipe for disappointment. Many countries have dreamed of achieving the high-tech successes of Israel and California, or the financial-services prosperity of Singapore and Hong Kong, but have found that other nations’ blueprints cannot be simply “taken off the shelf” and duplicated. Instead, any country that aspires to longterm wealth should envision building a local economic ecosystem that builds on its particular local areas of strength. That calls for business and government leaders to shape a holistic approach, making a candid assessment of each local economy’s ability to support innovation and entrepreneurship. It requires each country to adopt modern legal frameworks; to strengthen institutions that help ideas thrive and allow “spillover effects” to spread; and to create supportive environments that promote

technology transfer, spur networking among entrepreneurs and encourage the mentoring of innovators. It also requires each country to identify opportunities, and create agile financial mechanisms, that allow private investment to flow efficiently to small and medium-sized enterprises (SMEs) whose growth will create the jobs of the future. Myth #5: Government should simply stay out of the way, leaving growth strategies to be designed by the private sector alone. Sure, the private sector drives economic growth and job creation, yet public policy has a vital and constructive role to play in helping shape stronger innovation ecosystems. The public sector can stimulate investment in R&D and is indispensable in providing such public goods as education, knowledge- and technology-building institutions and hard infrastructure. When the private sector is unwilling or unable to invest – because, for example, a market still seems too risky to justify a large investment (for instance, in alternative energy technologies) – governments can step in and accelerate the process. Time and again, history has shown that wisely targeted government intervention – if it is effectively managed to avoid regulatory capture and rentseeking – is an important tool that can help ignite innovation, transform faltering industries and develop new industrial sectors. | Capital Finance International

“Many countries have dreamed of achieving the high-tech successes of Israel and California, or the financial-services prosperity of Singapore and Hong Kong, but have found that other nations’ blueprints cannot be simply “taken off the shelf” and duplicated.” Janamitra Devan


If aspiring countries seek role models, two nations offer instructive examples of how investing in innovation ecosystems can produce strong results. Consider Finland, which has long committed exceptionally strong resources to investment in human capital through its worldleading education system. In addition, through TEKES – the National Technology Agency, founded in the 1980s – Finland has guided “applied R&D” investment toward commercial applications, emphasizing collaboration between academic researchers and private firms. With a highly integrated innovation ecosystem, Finland invests Europe’s highest percentage of GDP in R&D. Consider, also, the Republic of Korea. Since emerging from a war that left its economy in ruins, the Korean government has devoted enormous resources to building a “knowledge economy.” Education, advanced job-skills training and innovation-focused R&D have helped Korea climb from postwar poverty to wealthy-country status. One critical element has been the country’s commitment to a robust information infrastructure linked to industry. In both of these success stories, targeted publicsector interventions have been critical in driving private-sector innovation. Governments must also strike the right balance at the macro level. In addition to maintaining a sound fiscal and monetary policy and a strong education system, wise public policy must create an investment climate conducive to the needs of the specific industries in which a country has (or can achieve) a comparative advantage; promote workforce skills that are well-matched with the needs of those specific industries; ensure access to finance for the SMEs within its industrial ecology; maintain a strong infrastructure matched to the needs of the players in the industrial ecosystem; and encourage the creators of innovative technologies. Recognizing that innovation is critical in improving competitiveness and growth, the development community and the World Bank are increasingly helping clients focus on their innovative capacity. Facilitating early-stage investment in innovative firms in Lebanon is helping encourage start-up industries (notably, in such sectors as IT and design) and promote a more entrepreneurial, risk-taking culture.


A promising innovation program is getting under way in the Western Balkans, bringing together seven countries to explore sharing R&D capabilities and university research facilities, aiming to make the most of regional synergies. Myth #6: Innovation inevitably favors those who are already wealthy, overlooking the needs of the excluded or the interests of the environment. This is indeed a short-sighted and destructive myth. “Green innovation” and “inclusive innovation” are significant trends that will shape the world we live in. In the “green innovation” field, technological enhancements are developing rapidly. The World Bank recently worked with our development partners to locate our first “climate innovation center” in Kenya, and six other countries are poised to welcome additional centers – which will seek solutions that may, in turn, trigger entirely new industries in such sectors as energy and agribusiness. Efforts for green solutions are also under way in Indonesia, where the World Bank is piloting a new approach to spark innovation in clean energy technologies. As it explores exciting approaches to open innovation and humancentered design, that program is developing commercially viable clean-energy solutions that are tailored to the needs of low-income rural communities. In the “inclusive innovation” realm, innovators are pursuing ways to create a more broadly shared prosperity – a priority that is inspiring a new mindset about inclusion. The World Bank’s goal of eradicating poverty is not only about increasing incomes: It is also about providing equal opportunities. Innovative thinking is imagining new ways to help increase the number of people at “the base of the pyramid” who can gain affordable access to basic services. Development institutions and NGOs – along with more and more for-profit corporations – are focused on serving lower-income people who, collectively, represent a vast and untapped market. Investments in innovative microirrigation systems in rural India are helping save water, produce stronger crop yields and build a diversifying manufacturing industry. Supporting the manufacture of low-cost limb prostheses | Capital Finance International

in India is helping aid the injured, strengthen a specialized medical-device industry and develop advanced medical knowledge. Support for mobile money-transfer systems in Kenya is revolutionizing the financial-services industry while broadening financial inclusion. The movement for inclusive innovation as a driver of sustainable growth is poised to take a strong step forward in April 2013 at a Global Inclusive Innovation Summit at Harvard University. The World Bank is now collaborating with Harvard, the Omidyar Network and Growth Dialogue on the summit, which will convene leaders from poor and emerging countries – along with policymakers, entrepreneurs, foundations executives and NGO leaders – to shape the direction of innovation-led growth and the inclusion agenda. The challenges involved in strengthening economies’ innovative capacity and competitiveness are certainly daunting. If we dispel the misconceptions that now mar the debate, then cooperative efforts by business leaders, policymakers and entrepreneurs will promote stronger innovation ecosystems and broader social inclusion. This month’s Davos discussion on the economy’s “resilient dynamism” – and this spring’s Harvard conference on inclusive innovation – will reinforce the World Bank in our commitment to tailoring pro-growth programs that meet the specific needs of our client countries. By surmounting the myths and misconceptions about innovation, more vibrant private-sector growth will strengthen competitiveness and lead the way toward broadly shared prosperity. i about the author Janamitra Devan is a Vice President of the World Bank and International Finance Corporation, leading its network on Financial and Private Sector Development.

> Nouriel Roubini:

The Economic Fundamentals of 2013: Perfect Storm


he global economy this year will exhibit some similarities with the conditions that prevailed in 2012. No surprise there: we face another year in which global growth will average about 3%, but with a multi-speed recovery – a sub-par, below-trend annual rate of 1% in the advanced economies, and close-to-trend rates of 5%


in emerging markets. But there will be some important differences as well. Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies | Capital Finance International

this year, rather than just the eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.

Winter 2012 - 2013 Issue

With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will reemerge with full force in the second half of the year. After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits.

“Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.”

Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption. By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate. And, because the country’s new leadership – which is conservative, gradualist, and consensus-driven – is | Capital Finance International

unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate. So the risk of a hard landing will rise by the end of this year. Fourth, many emerging markets – including the BRICs (Brazil, Russia, India, and China), but also many others – are now experiencing decelerating growth. Their “state capitalism” – a large role for stateowned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment – is the heart of the problem. Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen. Finally, serious geopolitical risks loom large. The entire greater Middle East – from the Maghreb to Afghanistan and Pakistan – is socially, economically, and politically unstable. Indeed, the Arab Spring is turning into an Arab Winter. While an outright military conflict between Israel and the US on one side and Iran on the other side remains unlikely, it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons. With Israel refusing to accept a nuclear-armed Iran, and its patience wearing thin, the drums of actual war will beat harder. The fear premium in oil markets may significantly rise and increase oil prices by 20%, leading to negative growth effects in the US, Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers. While the chance of a perfect storm – with all of these risks materializing in their most virulent form – is low, any one of them alone would be enough to stall the global economy and tip it into recession. And while they may not all emerge in the most extreme way, each is or will be appearing in some form. As 2013 begins, the downside risks to the global economy are gathering force. i

About the Author Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.



> Thomas Wieser, President of the Eurogroup Working Group:

The Euro Crisis - Proper Grounds for Optimism


he 1990s saw the signature of the Maastricht Treaty and the formal entry into being of Europe’s single currency. Notes and coins went into circulation in 2002, and Europe’s economic landscape had been transformed in less than a decade. There was political transformation on the continent as well, as the Cold War ended and our continent, divided for half a century, was opened up and brought together once again. There was economic optimism, too. The buzz was all about the “World Wide Web” and how developments in communications promised us a new industrial revolution and an open global marketplace. Industrialised economies (and not just in Europe) would prosper by moving up the value chain, rather than competing on price with emerging industrial producers.

“When the financial crisis hit in 2008, imbalances were laid bare in a brutally abrupt fashion, as credit markets froze.“ First and foremost, the EMU framework overestimated the appetite and capacity of governments to deliver the structural reforms needed to compete in a globalised marketplace. A formal process for addressing unsustainable budgetary policies was put in place; but the monitoring of structural policies was weak to the point of being quasi-voluntary. Member States were adjusting to the seismic jolt of fixed exchange rates, a single monetary policy and constrained budgets - they weren’t ready to be lectured and cajoled on the full range of economic policies as well.

The European Union was already an economic powerhouse and was busily consolidating that position with the completion of the Single Market. It fully expected, with good reason, to be a beacon for the newly outward-looking economies of Central and Eastern Europe. Their revolution would become our revolution, and our prosperity would become theirs.

This resulted in the build-up of significant imbalances within the euro area, manifesting themselves in divergent wage and asset price developments, persistent inflation differentials and external trade balances heading off in opposite directions.

The next great economic and political project, and the logical enhancement of a Single Market that was still a bit short on financial integration, was the single currency. Member States would do the hard work of economic convergence and then embrace a “destiny in common”, with a shared currency and a single interest rate.

When the financial crisis hit in 2008, imbalances were laid bare in a brutally abrupt fashion, as credit markets froze. Those who had been most reliant on easy financing, and who had allowed asset bubbles or wage developments out of line with productivity, were suddenly in trouble. Those with very large financial sectors, holding assets whose value was rapidly shrinking, would soon follow.

The euro itself would impose sensible constraints on economic management and lock in the need for responsible economic and budgetary management. The era of competitive devaluation and financial instability would come to an end. That at least was the plan. We now know that, in the age of optimism, the plan overestimated a number of positives and underestimated some serious negatives. But that does not mean it was entirely wrong, nor that it can not be built upon to deliver at least something similar to what was so keenly hoped for. We can get there, but first we need a hard and honest assessment of what went wrong, and of how to put it right.

This was when it became clear that the impact of political optimism had not been entirely benign. Of course, without it, the euro would never have come into being. But over time, an optimism that economic and political actors would adjust quickly to the new constraints and always to do the right thing - this was not matched by the reality on the ground and in the marketplace. Economic optimism had perhaps been overdone - the move up the value chain had not been smoothly realised. The new equilibrium seemed to involve a great deal of leverage in the old industrialised economies, resting in many cases

on large volumes of newly valuable assets. The fundamental adjustment of the structure of the economy had not kept pace with the financial shift. It was too tempting for governments to react to the political and electoral cycle. Saving for the costs of retirement of a generation that hasn’t yet been educated - this isn’t a vote-winner. Dampening down growth at the top of the cycle is also a tough sell at the ballot box, especially when the whole world is excited about the “paradigm shift” of the communications revolution. And when global financial markets will lend to heavily indebted economies for only a tiny premium over the cost for economic powerhouses - well, that takes the pressure off the need to cut debt. It takes the pressure off all need for budgetary rigour, as lower debt servicing costs are already a huge saving. The irony of the single currency is that the expectation that it would impose economic and budgetary discipline on its less robust economies has indeed been realised. But this has come only after a decade of cheap money masking the problems, while the constraints of EMU made a smooth adjustment more difficult to achieve. That delay has made the crash much harder, and the criticism of the euro area much harsher. The three years since Greece first requested financial support have not been easy - three years is a long time for anyone to be in perpetual “crisis”. But here we are, still standing. We now have more countries in the euro area than we had at the start of that period. We have created permanent institutions to manage crises and endowed them with enviable resources. We will be integrating our financial sector yet further over the coming year as the single supervisory structure takes shape. Above all, we have the hard experience of managing this drawn-out crisis. We understand much better how to take the hard decisions and where the balance between differing national perspectives can be found. Imbalances are being unwound. Building on this experience, and making sure we don’t step back from the hard-won stabilisation of the situation that we are seeing,

“The irony of the single currency is that the expectation that it would impose economic and budgetary discipline on its less robust economies has indeed been realised.” 18 | Capital Finance International

Winter 2012 - 2013 Issue | Capital Finance International


we have developed a number of tools that give us confidence for the future. First of all, we have real solidarity among Member States. Greece was first helped through a coordinated series of bilateral loans from euro area Member States. Then Greece, Portugal and Ireland were supported by the temporary European Financial Stability Facility. This evolved into a permanent structure: the European Stability Mechanism (ESM), with a capacity of €500 billion, very strongly capitalised and managed in the interests of the euro area as a whole. Its first operation was to fund bank recapitalisation and restructuring in Spain. There was a time of serious speculation as to the future of some Member States within the euro area, even some doubt over the future of the euro itself. Well, the euro area has truly put its money where its mouth is - Greece remains, the euro endures, solidarity works. Our eternal optimism has won through in the remarkable resolve of our Member States and institutions to do what it takes to secure the euro’s future. The second element, the counterpart to solidarity, is a much more responsible attitude to economic policy constraints within the single currency. This works on two levels - not just policies that deliver sound management of the domestic economy in each Member State, but proper consideration of the impact of those policies on others within the Monetary Union. The array of names and numbers may be somewhat overwhelming - the European Semester, the six-pack, the two-pack, Stability and Growth Pact, Macroeconomic Imbalances Procedure, National Reform Plans, Stability Programmes and Country-Specific Recommendations. But the idea is simple and convincing - discuss in advance with the rest of the euro area all aspects of economic policy. On that basis, each Member State, as well as the euro area as a whole, should be able to prepare and implement a sensible, coherent strategy, that works in everyone’s interest. We are not naïve about this - there will always be differences of view, as well as political constraints. This is not a purely technical exercise and it never will be. What it is, though, is a clear indication of where we have gone wrong, and how we can avoid repeating those mistakes. It is a declaration of intent to take a common view of the euro area’s interests and how these play out in individual Member States. We will take a view for the euro area and expect individual Member States to play their part. The third element, very much along these lines, is the single supervisory mechanism agreed in December 2012, to become operational in Spring 2014. Common supervision is a very


big deal. Harmonised deposit guarantee and resolution frameworks, followed by discussions on a common resolution fund, will complement a single rulebook for financial institutions to give us a functional banking union - an extremely big deal. This really is our destiny in common, as delivered by the integrated financial system.

The Eurogroup Working Group The Committee also meets in a euro area configuration, the so called Eurogroup Working Group (EWG), in which only the Euro Area Member States, the Commission and the European Central Bank are represented. In this configuration, the Committee prepares the work of the Eurogroup.

Of course, these elements do not of themselves deliver the end of the crisis. There is still some way to go. But they should open up the possibility of moving away from acute crisis management to more fundamental, structural action to address underlying problems. From there, we might be able to move towards longerterm recovery planning, perhaps even optimising the performance of the euro area as a whole. There remains a great deal of deleveraging to get through, both public and private, before this crisis is played out. Asset values might still need to adjust. The new equilibrium state of the European economy won’t be the one we used to believe in, so we won’t be counting on the single currency premium to cover up a multitude of economic sins. At the very least, we now know the scale of the challenge, the level of our responsibilities to one another in a single currency and the gravity of the consequences if we fail to take the hard decisions. In short, we know the dangers of excessive optimism, and we won’t make that mistake again. That, strangely enough, gives grounds for some cautious optimism that the euro area can emerge stronger from the crisis and better adapted to the challenges that lie ahead. i

The Eurogroup The Eurogroup is a meeting of the finance ministers of the eurozone, i.e. those member states of the European Union (EU) which have adopted the euro as their official currency. It is the political control over the euro currency and related aspects of the EU’s monetary union such as the Stability and Growth Pact. The EFC The Economic and Financial Committee is a committee of the European Union set up to promote policy coordination among the Member States. It provides opinions at the request of the Council of the European Union or the European Commission. Its preparatory work for the Council includes assessments of the economic and financial situation, the coordination of economic and fiscal policies, contributions on financial market matters, exchange rate polices and relations with third countries and international institutions. This Committee also provides the framework for preparing and pursuing the dialogue between the Council and the European Central Bank. | Capital Finance International

about the author Thomas Wieser is the Brussels-based President of the Euro Working Group, and Chairman of the EFC. Prior to that he was Director General for Economic Policy and Financial Markets of the Austrian Ministry of Finance, Vienna. He studied economics in Innsbruck and the US (University of Colorado) and went on to the Institute of Advanced Studies in Vienna, working mainly in the field of mathematical economics. After working in the banking sector in Austria he was an economist for EFTA in Geneva from 1986 onward. From 1989 he worked in a variety of positions in the Ministry of Finance with responsibilities for economic policy, financial markets, international and development issues. He has held a number of international functions, for example as Chair of the OECD Committee on Financial Markets, and as Chairman of the European Union’s Economic and Financial Committee from 2009 to 2011.

Winter 2012 - 2013 Issue

State Bank of Mauritius Group (SBM) is a leading financial services group in Mauritius with presence also in India and Madagascar. Set up in 1973 and listed on the Stock Exchange of Mauritius since 1995, SBM is owned by some 16,500 domestic and international shareholders. It provides all services of a universal bank within a diversified business model. The lines of business include: Personal Banking, SME Banking, Corporate Banking, Cross Border Banking and Financial Institutions. Innovation, f lexibility, accessibility and reliability are the key attributes that have contributed to the Group’s reputation and trustworthiness.

SBM aims to pursue its strategy of diversifying its income streams. The Group aims at significantly expanding its India business taking into consideration the excellent prospects that this market offers and building on the experience and expertise garnered in Mauritius. SBM, which currently operates two branches in Madagascar, also aims at further penetrating Africa, building on the close links of the continent with Mauritius. SBM is currently embarked on a major upgrade of its technology infrastructure that is intended to extensively improve customer service and operational efficiency.

STATE BANK OF MAURITIUS LTD SBM Tower, 1 Queen Elizabeth II Avenue, Port Louis, Republic of Mauritius T: (230) 202 1111 – F: (230) 202 1234 – Swift: STCBMUMU – E: – | Capital Finance International


> European Policy Centre:

Europe Needs Growth and Jobs Now By Hans Martens


uch has been said and written about the ”Euro-crises” over the last couple of years, and much political energy and resources have been spent to addresses the issues. Most of all these resources have been focussed on “saving the Euro” in a combination of austerity measures (focussed on bringing down public deficits and debt) and additions to the governance mechanism of the Euro. Actually the patchwork of Euro-plus pacts, sixpacks, European semester, etc. is now a bit complicated and not immediately clear to the general public and possibly not even to those responsible for enforcing the agreements. Has all of this been unnecessary? Probably not, for although it all more or less goes in the same direction that already was laid down in the Growth and Stability Pact, that governess the Euro, it is good to have a reminder that prolonged financing via debt is not a good idea. And obviously some improvements to the Euro governance and some elements of structural reforms have resulted. But has it all contributed to addressing Europe’s real issues? Not really. Firstly when it comes to deficit and debt, the US and UK in particular have been pointing at Europe, demanding that the Euro-zone gets its house in order. OK, point taken, but why not bring the US and UK house in order as well, because both the deficit and debt problems are worse there than in the Euro-zone, and this points to a crisis that is more universal than just the Euro-area.

0 2005










-4 -6 -8 -10 -12 -14 Euro



Government Deficit: % of GDP (Source: OECD - Economic Outlook, December 2012)

100 90 80 70 60 50 40 30

20 10 0 2005



2008 Euro

2009 US


Government Net Debt: % of GDP (Source: OECD - Economic Outlook, December 2012)

Secondly the Euro itself has not really reacted to the rumours about its immediate collapse. It has been rather stable since the crises started in 2008, and has more or less constantly been 2530% higher in value than the US Dollar.

apparently enough to calm down markets. Some people see the next steps in solving Europe’s problems through a new Treaty – a Treaty with more economic, financial and political integration. Certainly the ambitions for the future should be more Europe, not less Europe, but is the timing right?

Thirdly the “hysteria” in financial markets about borrowing rates in Southern Euro was calmed down – not by the Euro-governance initiatives – but by the brilliant idea from the ECB Governor of using the European Stability Fund (ESF) to intervene in markets – the Draghi bazooka. That brought down borrowing costs for governments, even for Spain that has actually never qualified – or never wanted to qualify – for support from the ESF, so the mere threat of intervention was

Persistent high unemployment a threat to political stability The most immediate problems will not be solved by spending a lot of political energy and resources conceiving a new Treaty now. The resources and energy should be transformed into solving what is Europe’s real problem: The lack of growth and therefore creation of new jobs. In this context it is certainly possible that the austerity packages have done more harm than good. Don’t be



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mistaken, the austerity measures are necessary, but too much over a short period of time can be poison for the economies. The idea that cutting down the public sector rapidly immediately leads to growth in the private sector, offsetting the loss of public jobs, is a fallacy. Things just don’t work that way, as also experience form the UK has demonstrated. It is also interesting to see that the European Commission now seems to have come to the same conclusion, and actually argues against the IMF’s pressure for quick and substantial cuts in public sectors. The growth and jobs issue has several dimensions. One is the uneven distribution in particular between North and South in Europe, but there is also a long-term and a short-term issue in it.

Winter 2012 - 2013 Issue

Berlin | Capital Finance International


Protests: United Kingdom

On the longer term there are clearly problems with Europe’s competitiveness, not least in view of global competition and the demographic issues waiting for Europe. But these issues are not addressed by austerity (alone), they need to be addressed by structural reforms that require long-term planning and action over several years. On the short term, the rapid growth in unemployment is a threat to stability in Europe. If people in countries such as Greece and Spain are increasingly at risk to be hit by unemployment and at the same time see their unemployment benefits and other welfare services being cut dramatically it is not difficult to see why they are angry and react on the streets. Unemployment is a tragedy for the individual, for the families, for society and indeed also contains a political risk. The political risk lies in people becoming nationalistic, xenophobic and perhaps looking for alternatives to the established system of democracy and rule of law. If our system can not deliver, then alternatives could be worth considering, many could think. This has happened before in Europe and although most of us would consider it unthinkable that it could

happen again, look at the growth of nationalistic, anti-European parties and sentiments, and consider again! Many ordinary Europeans sees their governments as failing, but many also have difficulties in seeing the benefit of European cooperation – not to speak about European solidarity. Europe must show its value now Thus it is time for Europe to show it can deliver, and deliver on the issues that are real for people, and that is very concretely economic growth and a lot of new jobs. Let it be clear: If Europe should demonstrate its value now, it is not just a question of institutions in Brussels, it is also very much about political courage in EU Member States and first of all a willingness to work together on finding solutions that individual countries clearly cannot solve alone. The way forward now should be the functionalist one. This is the way Europe has renewed itself after the Second World War: Finding solutions to practical problems and making integration

happen via cooperation on such solutions. We have seen this happening since the cooperation on coal and steel, via the customs union and the Single Market and the project for now should be kick starting the European economy. Resources are limited, but it is important not to underestimate the psychological dimension here: If a growth bazooka is to be fired it is almost certainly too small to work alone, and thus it has to be wrapped into a positive spin, a belief that “yes we can”, and a long-term plan on restoring Europe’s competitiveness. One of the means that could be used is the Project Bonds. A small pilot project has been launched, but it is very modest, because the guarantee capital comes form the EU budget, and as that is small, the project bonds initiative must accordingly be small. We know there is plenty of liquidity in our financial systems, so make it work! Launch an ambitious programme for improving Europe’s’ infrastructure in energy, transport and the digital economy with an ambitious project bond scheme guaranteed directly by the EU member states. It will create the jobs we need most now (in particular in the

“The resources and energy should be transformed into solving what is Europe’s real problem: The lack of growth and therefore creation of new jobs.” Hans Martens

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Protests: Greece

construction sector) and it will give Europe a much improved infrastructure for the future. And as the project are supposed to be bankable and of high quality, there will in reality be no costs for EU member states. In addition there are other elements to work on: We all envy the growth economies around in the world, so shy not rapidly go into comprehensive free trade agreements with these growth economies as EU did with South Korea in 2012. That agreement has already boosted European exports, and countries like Japan, Mexico and many others, including the US, are waiting. Brussels wants to go ahead. The barrier lies with member states where different strains of protectionism now threaten to block progress.

Study after study has demonstrated the growth and job potential in deepening and modernising the Single Market. Go ahead, and forget about your national petty interests and protectionism that is the biggest barrier to make quick progress. There are many more examples, but what is required is focus on creating new jobs in Europe, and if the available resources and intellect in Europe is dedicated to this task and if a political will is created, we can do it. Of course we can. And we should before all the progress on freedom and solidarity between European countries that we have built up over the last 50 years is lost because Europe’s lost faith in Europe and in their own political systems.

easier to deal with the debt and deficits. It is much more comfortable to get out of debt via growth than through austerity. One word about growth as many people continue to see this as old fashioned. It may be old fashioned, but probably not for any of the over 40% unemployed youth in Spain. Furthermore, if done intelligently there is no reason why growth cannot and should not contribute to better societies. By focussing for example on energy, transport and digital infrastructures, Europe can take the opportunity to do this in a sustainable way. Growth does not necessarily mean fuelling industrial development by coal! i

If growth rates are restored, it will also be much

The European Policy Centre (EPC) is an independent, not-for-profit think tank, committed to making European integration work. The EPC works at the “cutting edge” of European and global policy-making providing its members and the wider public with rapid, high-quality information and analysis on the EU and global policy agenda. It aims to promote a balanced dialogue between the different constituencies of its membership, spanning all aspects of economic and social life. In line with its multi-constituency approach, members of the EPC comprise companies, professional and business federations, trade unions, diplomatic missions, regional and local bodies, as well as NGOs representing a broad range of civil society interests, foundations, international and religious organisations. About the Author Hans Martens has been Chief Executive of the European Policy Centre since 2002. Born in Denmark, Hans studied Political Science at Aarhus University and went on to become Associate Professor in international political and economic relations. In 1979, he joined the Danish Savings Bank Association as Editor-in-Chief and Head of Information. From 1982 to 1985, he was Head of the International Department of the Salaried Employees Federation, a Danish trade union, where he took charge of the organisation’s international relations, including with the OECD and the ILO. In 1985, he joined the Copenhagen Handelsbank, initially in charge of the Economic Department and later as Head of the International Private Banking Department. There, he was responsible for economic analysis and forecasting, and for developing the bank’s investment and capital market products. In 1989 he set up Martens International Consulting. Hans is a regular lecturer at Universities and Business Schools in Europe and in the US. He is an expert on European competitiveness issues, monetary and macroeconomic issues, demographics and the Digital Economy, including eGovernment. | Capital Finance International


> Martin Feldstein:

An Optimistic Case for the Euro


he prospects for the euro and the eurozone remain uncertain. But recent events at the European Central Bank, in Germany, and in global financial markets, make it worthwhile to consider a favorable scenario for the common currency’s future. The ECB has promised to buy Italian and Spanish sovereign bonds to keep their interest rates down, provided these countries ask for lines of credit from the European Stability Mechanism and adhere to agreed fiscal reforms. Germany’s Constitutional Court has approved the country’s participation in the ESM, and Chancellor Angela


Merkel has given her blessing to the ECB’s bondbuying plan, despite strong public objections from the Bundesbank. And the international bond market has expressed its approval by cutting interest rates on Italy’s ten-year bonds to 4.8%, and on Spain’s to 5.5%. Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond-buying plans. That reflected the substantial progress Italian Prime Minister Mario Monti’s government had already made. New legislation will slow the growth of pension benefits substantially, and the Monti government’s increase in taxes on owner- | Capital Finance International

occupied real estate will raise significant revenue without the adverse incentive effects that would occur if rates for personal-income, payroll, or value-added taxes were raised. Reflecting these reforms, the International Monetary Fund recently projected that Italy will have a cyclically adjusted budget surplus of nearly 1% of GDP in 2013. Unfortunately, because Italy will still be in recession next year, its actual deficit is expected to be 1.8% of GDP, adding to the national debt. But economic recovery will come to Italy, moving the budget into surplus.

Winter 2012 - 2013 Issue

When the markets see that coming, they will drive Italy’s sovereign interest rates even lower. Given Italy’s very large national debt, interest payments add more than 5% of GDP to the fiscal deficit. The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing. The situation in Spain is not as good. Despite cuts in government spending and increases in taxes, the IMF still projects the cyclically adjusted fiscal deficit to exceed 3.2% of GDP in 2013 and 2.3% of GDP in 2015. The key to solving Spain’s fiscal problem lies in the semi-autonomous regions that generate spending and shift the financing burden to Madrid. Perhaps Italy’s success will help to convince Spain to adopt the tough measures that reduce projected future deficits without more current austerity. If Italy and Spain have budget surpluses and declining debt/GDP ratios, financial markets will reduce the interest rates on their bonds without the proposed ECB purchases. That would remove the serious risk that the ECB could start buying bonds on the basis of agreed fiscal packages, and then be forced to react if governments fall short on implementing them. None of this would be enough to save Greece, where the fiscal deficit is 7.5% of GDP, or Portugal, where it is 5% of GDP. But if Italy and Spain are no longer at risk of default, or of abandoning the euro, Germany and other eurozone leaders will have room to decide whether to continue funding these very small states or politely invite them to leave the euro and return to national currencies.

Dresden, Germany

“German exports would also benefit from a weaker euro, boosting overall economic demand in Germany.”

Moreover, even under this optimistic scenario, the problem of the current-account deficits of Italy, Spain, and the other peripheral countries will remain. Differences among the eurozone countries in growth rates of productivity and wages will continue to cause disparities in international competitiveness, resulting in trade and current-account imbalances. Germany now has a current-account surplus of about $215 billion a year, while the rest of the eurozone is running a current-account deficit of about $140 billion. Italy, Spain, and France all have current-account deficits equal to 2% or more of their GDP. As they come out of their cyclical recessions, incomes will rise, leading to increased imports and even larger current-account deficits. Those deficits must be financed by net inflows of funds from other countries.

If Italy, Spain, and France were not part of the eurozone, they could allow their currencies to devalue; weaker exchange rates would increase exports and reduce imports, eliminating their current-account deficits. Moreover, the increase in exports and the shift from imports to domestically produced goods and services would strengthen their economies, thereby reducing their fiscal deficits as tax revenues rose and transfers declined. And a stronger economy would help domestic banks by reducing potential bad debt and mortgage defaults. But, of course, Italy, Spain, and France are part of the eurozone and therefore cannot devalue. That is why I believe that these countries – and the eurozone more generally – would benefit from euro depreciation. Although a weaker euro would not increase their competitiveness relative to Germany and other eurozone countries, it would improve their competitiveness relative to all noneurozone countries. If the euro falls by 20-25%, bringing it close to parity with the dollar and weakening it to a similar extent against other currencies, the currentaccount deficits in Italy, Spain, and France would shrink and their economies would strengthen. German exports would also benefit from a weaker euro, boosting overall economic demand in Germany. It is ironic that the ECB’s offer to buy Italian and Spanish debt has exacerbated external imbalances by raising the value of the euro. Perhaps that is just a temporary effect and the euro will decline when global financial markets recognize that a weaker exchange rate is needed to reduce current-account deficits in the eurozone’s three major Latin countries. If not, the ECB’s next challenge will be to find a way to talk the euro down. i

About the author Martin Feldstein is Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He chaired President Ronald Reagan’s Council of Economic Advisers from 1982-1984, and is currently a member of the President’s Council on Jobs and Competitiveness, as well as a member of the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the National Committee on United States-China Relations.

Source: | Capital Finance International


> IMF | Gulf Cooperation Council:

Economic Prospects and Policy Challenges for the GCC Countries Prepared by May Khamis, Tobias Rasmussen, and Niklas Westelius

Executive Summary The already sluggish global recovery has suffered new setbacks and uncertainty weighs heavily on prospects. The euro area crisis intensified in the first half of 2012 and growth has slowed across the globe, reflecting financial market tensions, extensive fiscal tightening in many countries, and high uncertainty about medium-term prospects. Activity is forecast to remain tepid and bumpy, with a further escalation of the euro-area crisis or a failure to avoid the “fiscal cliff” in the United States entailing significant downside risk.

Riyadh, Saudi Arabia: Al-Faisaliah Tower

In the MENA region, many countries are going through difficult transitions. Changes of government in Egypt, Libya, Tunisia and Yemen were accompanied by varying degrees of social unrest and associated disruptions to economic activity, and the conflict in Syria has continued to intensify. Social instability and political uncertainties—although in several cases having receded in recent months—remain substantial, and the near-term growth outlook for the countries in transition is generally subdued. The medium-term reform agenda necessary to lay the basis for inclusive private sector led growth has yet to be tackled. The IMF is engaging closely with these countries—including through financing programs in Yemen, Jordan and Morocco—but additional financing needs remain large. Stronger cooperation with GCC countries who are major financiers for these countries could be of great benefit. The GCC economies are enjoying high growth. The combination of historically high oil prices, expanded oil production, expansionary fiscal policies, and low interest rates is supporting buoyant economic activity. Fiscal and external surpluses are large, inflation is moderate, and prospects for growth remain positive. At the same time, however, the economies remain dependent on hydrocarbon extraction and rising government spending has raised breakeven oil prices, implying heightened vulnerabilities. Risks to the GCC stemming from exposure to Europe are limited, but the impact via oil demand and prices could be substantial. A rapid deterioration in the global economy could bring about developments similar to what the region experienced in 2009, including a sharp fall in oil prices and disruptions

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Figure 1: Recent Economic Indicatiors, 2007-12. Source: DataStream; Haer; and IMF staff estimates.

to capital flows. Although most GCC countries have sufficient savings to cushion even a sizeable shock, a prolonged drop in oil prices could test available buffers. The strong baseline outlook for the GCC economies implies diminishing need for near-term policy stimulus. Most GCC countries can plan to reduce the growth rate in government spending in the period ahead, which would help prevent any prospect of overheating and also improve longterm fiscal positions. With low inflation, the accommodative monetary stance as implied by the region’s currency pegs remains appropriate. Given the uncertain global outlook, however, continued emphasis on reducing vulnerabilities will be important alongside greater focus on strengthening the foundations for longer-term growth and diversification. This includes: (i) reducing fiscal risks and improving the fiscal outlook by containing increases in spending on

entitlements that are hard to reverse and instead prioritizing growth-enhancing investments in infrastructure; (ii) strengthening fiscal frameworks and institutions; (iii) bolstering the financial sector, including through continuing to enhance supervision and macropudential policy frameworks and by deepening domestic debt markets; and (iv) advancing private sector job creation for nationals. International Context Economic activity showed widespread weakness over the past year. The downturn has been most pronounced in the euro area periphery where most countries are now in recession. The slowdown has been observed in all regions, however, reflecting financial market tensions, extensive fiscal tightening in many countries, and cross-country spillovers. As demand for durables | Capital Finance International

flagged, global manufacturing was particularly hard hit and global trade stagnated. The euro area crisis deepened in the first half of the year but financial tensions have recently moderated. The euro area periphery has been at the center of several bouts of intense financial market stress, triggered by political and financial uncertainty in Greece, banking sector problems in Spain, and doubts about governments’ ability to deliver on fiscal adjustment and the extent of partner countries’ willingness to help. As the crisis intensified, periphery bond yields rose, stocks fell—in particular those of banks and peripheral economies—and the euro depreciated. This culminated in Spanish spreads reaching a euroera record in late July. Since then, a new bond-buying program announced by the European Central Bank and further monetary easing by U.S. Federal Reserve have led to a marked improvement in market sentiment.


Figure 2: Total Real GDP Growth, 2008-11 (per cent). Source: Sources: Country

Figure 3: Break-even Oil Prices, 2012. Source: Country authoroties; and IMF staff estimates.

authorities; Bloomberg; and IMF staff calculations.

Growth in advanced economies has slowed noticeably. In Europe, as the downturn in the euro area periphery deepened, growth also slowed considerably in the core, and real GDP contracted in the United Kingdom. In the United States, employment and output growth was lower than expected even as the housing market is showing tentative signs of improvement. In Japan, growth fell sharply as the boost from reconstruction activity following last year’s earthquake and tsunami started to wane. Emerging markets—especially those in Asia— continue to outperform advanced economies but they too have seen the momentum fade. Although still strong at an annual rate of almost 8 percent in the second quarter, the pace of real GDP growth in China has continued to decline following earlier policy tightening aimed at reducing price pressures and as a result of weak external demand. A partial reversal of this earlier policy tightening has yet to gain traction, and slowing growth in China has affected activity throughout the region. The pace of expansion in India’s economy has also moderated significantly, with weaker business sentiment weighing in. Along with slower growth, many emerging markets have been hit by investor risk aversion, which have led to equity price declines and in some cases capital outflows and currency depreciation. Developments in the Middle East and North Africa (MENA) Region Overall real economic growth for MENA fell from 5 percent in 2010 to 3.3 percent in 2011 and is projected to pick up to 5.3 percent in 2012. Much of this movement in region-wide growth has, however, been driven by the 2011 collapse and 2012 rebound of Libya’s oil production. Several MENA economies have been severely affected by ongoing political transitions and associated disruptions to economic activity.


“The GCC economies are enjoying high growth. The combination of historically high oil prices, expanded oil production, expansionary fiscal policies, and low interest rates is supporting buoyant economic activity. ” Changes of governments in Egypt, Libya, Tunisia, and Yemen were accompanied by varying degrees of social unrest, and the political transition continues. Moreover, the conflict in Syria continues to intensify and is affecting its neighbors. The countries in transition have all seen interruptions to production, and unrest also led to wider declines in tourism and foreign direct investment, which have not been able to rebound strongly due to weak conditions in Europe and elsewhere in the world. Management of popular expectations will remain a challenge. Developments in GCC Countries The GCC economies are growing at a strong pace. Output growth has in most countries been steadily increasing since hitting a low in 2009 in the wake of the global financial crisis (Figure 4). In 2011, overall real GDP growth for the GCC reached 7.5 percent—the highest since 2003. This occurred as oil production rose by over 10 percent and as non-hydrocarbon growth increased in all countries, except Bahrain where social unrest has taken a toll. Fiscal policies have provided significant stimulus. In 2011, as governments responded to social pressures and took advantage of surging oil revenues, overall spending grew by some 20 percent in U.S. dollar terms, about double the pace of the previous two years. Much of the higher spending was in current expenditure, including from larger wage bills (all countries) | Capital Finance International

and introduction of new benefits for job-seekers (Oman and Saudi Arabia). Capital expenditure also increased sharply in Saudi Arabia. Fiscal and external surpluses remain large, but higher government spending has raised breakeven oil prices. Driven by the surge in oil revenue, the GCC’s fiscal surplus is estimated to have reached about 13 percent of GDP in 2011 and the external current account about 24 percent of GDP. Both these balances are projected to remain broadly stable in 2012 as oil prices have leveled off. Along with rising government spending, however, the underlying breakeven oil prices have continued to increase. Although mostly remaining well below actual oil prices, breakeven oil prices are at a historical high, implying heightened vulnerabilities. i

Excerpts of report from Annual Meeting of Ministers of Finance and Central Bank Governors, October 5–6, 2012, Saudi Arabia. Prepared by May Khamis, Tobias Rasmussen, and Niklas Westelius. The views expressed herein are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.

> Michael D端ren:

Four Steps Towards DESERTEC The DESERTEC Concept is more than the idea to harvest solar energy in the deserts of the world. DESERTEC uses a holistic approach to the world energy problem with the aim to provide renewable energy for a world of 10 billion people in the most economic and sustainable way. Four steps are needed to realize the DESERTEC Concept. Step 1: The Intercontinental Smart Super Grid In the old days our telecommunication system was based on a system of copper lines that connected telephones and fax machines. The transition to the modern Internet-based World Wide Web required large investments in optical fibre cables for high speed and large volume data exchange. Our electricity network is still oldfashioned. Even though we have e.g. in Europe an interconnected power grid that allows transfer

of power from one country to another, effectively the power transfer is limited to a few hundred kilometres as the losses of alternating current (AC) power lines are large. A modern power grid needs, in addition to the regional AC distribution network, a high voltage direct current (HVDC) system that is overlaid to the AC network. As the energy loss of HVDC lines is only about 10% for 3000 km, this new technology allows for an efficient large distance

energy exchange on the scale of a few thousand kilometres. DESERTEC proposes to set-up transcontinental HVDC grids that connect sites with abundant solar and wind energy with the centres of human energy consumption For the EUMENA region (Europe, Middle East, North Africa) this concept means e.g. to interconnect the excellent solar sites in North Africa with the centres of energy consumption in Europe and the excellent wind sites of trade winds in Morocco with the offshore sites in the North Sea, the

Figure 1: A transcontinental HVDC power grid will interconnect the best solar sites in North Africa and Middle East with the centres of power consumption in Europe and with the best wind sites in the north of Europe [Source: Desert Power 2050, Florian Zickfeld, Aglaia Wieland, Dii, 2012].

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Figure 2: The hybrid power plant in Kuraymat/Egypt uses a solar trough field to add renewable solar power to the firing by fossil fuels [Source: Desertec]

Baltic Sea and possibly the onshore wind sites of kV) in Germany has a length 39,000 kilometres, Step 2: Installation of Wind and Solar PV Russia’s Arctic northwest (see Fig. 1). which corresponds to a length of 50 centimetres Farms A transcontinental grid has two important per capita. This is surprisingly few and will have The most inexpensive large-scale renewable implications. Firstly, it allows the separation to be increased in future significantly to meet the energy sources currently are - besides hydropower of the sites of production and consumption of demand of a modern power market. Worldwide - onshore and offshore wind farms in strong wind renewable energies, so that wind and solar farms investments in smart HVDC power grids will pay regions (westerlies and trade winds) and PV can be installed not only locally but preferentially off for three reasons: 1) Volatile renewable energy farms in the sunbelt of the earth. But still, the in those regions with highest costs for renewable power potentials and lowest energy are - at least in many regions production costs. The “... most important for the usage of renewable energies - not yet competitive with economic benefit will be large fossil and nuclear power at large scale is the reduction of fluctuations.” since the transnational grid for three reasons: 1) there will increase the international is still a learning curve to business competition of producers in the sources require power backup systems and be paid for the novel technologies of renewable conventional as well as in the renewable power storage devices. The ability of the super grid to energy but economy of scale will reduce the costs sector. average out fluctuations will reduce the costs for in future. 2) Fossil and nuclear power cause large storage and backup capacities. 2) It is expected external costs (pollution, accidents, catastrophic Secondly, and most important for the usage of that in future electricity demand will rise rapidly, events, global warming) that are not mirrored in renewable energies at large scale is the reduction as electric power will have to replace fossil fuels, the prices. 3) There are still large governmental of fluctuations. Wind energy, and photovoltaic e.g. in the mobility and heating sector (electric subsidies paid for nuclear and fossil resources in solar power are volatile as they depend on the cars and electric heat pumps). This fact is many countries. weather conditions. Weather conditions like overlooked in many scenarios that predict falling storms, calms, fog and clouds correlate spatially electrical power consumption based on saving Therefore, a fast transition to a renewable energy on a scale of typically a few hundred kilometres. potentials. An early installation of a powerful grid system requires reliable and efficient feed-in A power grid on the scale of several thousand will prevent traffic bottlenecks and blackouts in tariffs, quota regulations, or subsidies for the kilometres is able to balance out weather- future. 3) Load management, i.e. setting up a installation of wind farms and solar PV farms dependent fluctuations to a large extend: For grid that is a “smart grid”, will become important at large scale. In addition, subsidies for nuclear example, it is unlikely that there is calm in wind in future to chop the peaks in power demand and and fossil resources must be stopped and the parks in the North Sea, in the arctic regions in power consumption. Currently, the abilities companies selling these resources should be of Russia and in the region of trade winds in of load management are very limited, but in forced to pay for caused external costs and to Morocco at the same time. Also, clouds that future when the mobility, the heating and airre-insure the external risks. Public interest and might cover PV farms in the south of Spain are conditioning market and (in desert countries) the acceptance for such requests exists and therefore uncorrelated with clouds in South Germany. desalination plants will have a significant share it is the task of the governments now to leave of the electricity consumption, load management the pressure of the energy lobbies behind and to Currently, the high voltage grid (380 kV and 220 will be increasingly efficient and important. go ahead. Once the external costs are taken into | Capital Finance International


account, renewable energies will be competitive immediately on the global market. Step 3: CSP for Power and for Water Desalination Concentrating solar power (CSP) plants are available today as trough, Fresnel systems and power towers. Due to the decline of costs for the installation of PV systems they have a hard time to compete and recently several planned CSP installations were cancelled. PV-technology was deployed instead. CSP has four disadvantages compared to PV installations: 1) Standard CSP plants require water for the cleaning of the mirrors, for the steam cycle and for cooling. So CSP plants for desert regions have to minimize water consumption. This can be achieved by a closed steam cycle, by air-cooling and by cleaning the mirrors with pressurized air. Nevertheless, there is a remaining need for water, e.g. due to leaks in the steam cycle. 2) The CSP plants work efficiently only in a dust- and fog-free environment, which usually excludes sites close to the sea. 3) CSP plants have a minimum size of about 50 to 200 MW to be cost effective, whereas PV farms can be scaled to any size, starting from the KW up to the GW range. Despite these disadvantages, there are good arguments to predict a bright future for CSP plants: CSP is the only solar technology that can produce power on demand, 24 h a day, by using large and cheap heat storage devices. Today renewable energies have only a small share in the total power production the advantage of thermal power storage is not compelling. This explains the current decline of this technology. But the day we want to have 50% or even 80% renewable power in the grid, wind power and PV alone will simply not work. Large intermediate storage is needed to regulate the daily fluctuations. Furthermore, we can assume that electrical power storage with batteries and water pump stations will not be sufficient in future, taking into account a world energy consumption of about 16,000 GW. Therefore, CSP technology with thermal storage will be the only choice for a reliable, cost-effective carbon-free energy supply. It can be expected that economy of scale will drop the costs of CSP (e.g. of solar towers) significantly when they are produced in large quantities for the following reasons: The technology is simple; large fields of heliostats can be built in developing countries on site. Heliostat fields require materials that are available worldwide in large quantities like glass, concrete and steel. In contrast to CSP, most of the PV technologies require expensive high-tech installations and relatively large quantities of rare-earth elements, which will become scarce in future and are not an option for a global energy market of a few thousand GW.

Figure 3: Sunset at a solar power station [Photo: Michael DĂźren]

“CSP is the only solar technology that can produce power on demand, 24 h a day ...�

In desert countries fresh water availability is even more important than the allocation of energy. The problems of water scarcity - especially in

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The Davos World Economic Forum can be a booster for DESERTEC • Chief executives and global leaders understand the importance of a paradigm shift for saving the climate. • Long-term thinking, sustainability and new transnational cooperation strategies are the basis of a future economy. There is no room for unstable systems based on trial and error. • A powerful, quick and efficient implementation of the “Green Climate Fund” and a massive investment in education, training, research and development of renewable energies are important first steps. • Open and transparent market structures including tradable green rights and a stop of the direct or indirect benefits for fossil and nuclear fuels are key for a successful development and integration of renewable energies. | Capital Finance International


Figure 4: Tanks of hot liquid salt are used to store solar energy during the day and to use it for power production on demand in the evening [Source: Solar Millenium].

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North-Africa - will increase drastically in future, due to the ongoing exhaustion of fossil water and due to climate change. The above-described disadvantage of the water consumption by CSP installations can be turned to an advantage: CSP plants can be water producers instead of water consumers. This is possible as the exhaust heat of CSP plants can be used efficiently for seawater desalination. As sites close to the sea are not optimal for CSP plants, seawater pipelines will be needed to transport the seawater to the desert inland. Freshwater production in the inland allows for a limited agriculture and can play an important role for the living conditions of remote desert sites. To summarize: CSP plants combined with heat storage and water desalination are the ideal allin-one device for desert countries and they will become irreplaceable as soon as the renewable energies dominate the power production. Largescale governmental research and development programs, as well as large-scale demonstration projects are urgently needed to improve CSP technologies, to bring down the material budget and the costs of these devices and to improve their efficiencies and reliability in desert areas. Step 4: Synthetic Fuels and the Storage of Renewable Gas While heat storage of CSP plants will be mainly used as buffer of the daily power fluctuations, there is need for a large-scale long-term storage of energy, e.g. to handle seasonal fluctuations and to store energy locally in case of problems in the transnational grid.

The existing natural gas distribution and storage system seems to be ideal for that purpose, provided a renewable gas replaces the natural gas. It turns out that storage of methane is more efficient than the storage of hydrogen, therefore the future technology might well be the production of renewable methane, where part of its energy content comes from biomass and part of it comes from seasonal surplus electrical energy. Today, the efficiencies for the production of renewable gas (e.g. hydrogen by water electrolysis) are still low and about half of the energy is lost during the process of production. Therefore, the production of renewable gas (e.g. “windgas”) at large scale will work on the free market only, once the exploitation of natural gas is significantly reduced. Nevertheless, the future perspective to use renewable hydrogen or methane for mobile applications and for the production of expensive regulating power has important consequences for today’s investments in gas power stations and in the development of cars with fuel cells. In future, CSP technology might play an important role not only for the production of electrical power on demand, but also for the production of synthetic fuels. It has been demonstrated that the high temperature in solar towers can be used to synthesize liquid fuels (e.g. alcohol) from water and CO2 using catalytic reactions. Large R&D programs are needed to make these promising future technologies available for renewable fuel production at industrial scales.

1-2-3-4… Sorry, but you are too late. The above steps 1-4 describe how the transition to a renewable energy system could proceed. Unfortunately, climate researchers tell us that we are late. A replacement of more than 50% of the fossil fuels by renewable energy is required until 2050. That means in result, that we have to cope with the installation of new power plants with a speed of 1 GW per day over 40 years. Even though the DESERTEC concept uses a technology that is simple, safe, based on renewable sources and accepted and supported by the population, the installation of 1 GW per day is almost beyond human capabilities. The real challenge of DESERTEC is not its future realization. The concept is so convincing that it will evolve naturally at some time. The real challenge is to realize DESERTEC within the about 40 years left to save the climate. As the consequences of the climate change are irreversible in human timescales, measures to cope with climate change require more than an evolution based on trial and error. An organic evolution of DESERTEC on the free market will not work at the required time scale, as cheap fossil fuels are still available in large quantities. Instead, we need scientifically based governmental decisions, international coordination, and strong measures to push the right technologies. i

Acknowledgements: The author wants to thank all his colleagues working on the DESERTEC ideas for valuable discussions and for input to this article, especially Sabine Jungebluth, Thiemo Gropp, Paul van Son and Florian Zickfeld. About the Author Michael Düren studied Physics at the RWTH in Aachen, Germany and obtained his PhD in 1987 in the field of particle physics. After being a postdoc at the Max-Planck-Institute for Nuclear Physics in Heidelberg,he habiltated at the University Erlangen-Nürnberg, was interim professor at the University Bayreuth and, since 2001, he is full professor for experimental physics at the JLU Giessen. Since 1988, he is member of the Energy Working Group at the German Physics Society. In 2006, he was co-founder of the interdisciplinary SEPA working group (Solar Energy Partnership Africa-Europe) at the Univ. Giessen and in 2008 co-founder of the DESERTEC foundation. Since July 2011, he is coordinator of the DESERTEC Academic Network.

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


> Mohamed El-Erian, PIMCO:

The Other Financial Crisis


EWPORT BEACH – Two variants of financial crisis continue to wreak havoc on Western economies, fuelling joblessness and poverty: the one that we read about regularly in newspapers, involving governments around the world; and a less visible one at the level of small and mediumsize businesses and households. Until both are addressed properly, the West will remain burdened by sluggish growth, persistently high unemployment, and excessive income and wealth inequality. The sovereign-debt crisis is well known. In order to avert a likely depression, governments around the world engaged in fiscal and monetary stimulus in the midst of the global financial crisis. They succeeded in offsetting nasty economic dislocations caused by private-sector deleveraging, but at the cost of encumbering their fiscal balances and their central banks’ balance sheets. While sovereign credit quality has deteriorated virtually across the board, and will most probably continue to do so, the implications for individual countries vary. Some Western countries – such as


Greece – had fragile government accounts from the outset and tipped quickly into persistent crisis mode. There they remain, still failing to provide citizens with a light at the end of what already has been a long tunnel. Other countries had been fiscally responsible, but were overwhelmed by the liabilities that they had assumed from others (for example, Ireland’s irresponsible banks sank their budget). Still others, including the United States, faced no immediate threat but failed to make progress on longer-term issues. A few, like Germany, had built deep economic and financial resilience through years of fiscal discipline and structural reforms. It is not surprising that policy approaches have also varied. Indeed, they have shared only one, albeit crucial (and disappointing) feature: the inability to rely on rapid growth as the “safest” way to deleverage an over-indebted economy. Greece essentially defaulted on some obligations. Ireland opted for austerity and reforms, as has the United Kingdom. The US is gradually transferring resources from creditors to debtors through financial repression. And Germany is slowly | Capital Finance International

acquiescing to a prudent relative expansion in domestic demand. So much for the sovereign-debt crisis, which, given its national, regional, and global impact, has been particularly well covered. After all, sovereigns are called that because they have the power to impose taxes, regulations, and, at the extreme, confiscation. But the other credit crisis is equally consequential, and receives much less attention, even as it erodes societies’ integrity, productive capabilities, and ability to maintain living standards (particularly for the least fortunate). I know of very few Western countries where small and medium-size companies, as well as middleincome households and those of more limited means, have not experienced a significant decline in their access to credit – not just new financing, but also the ability to roll over old credit lines and loans. The immediate causes are well known. They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.

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Such credit constraints are one reason why unemployment rates continue to rise in so many countries – often from already alarming levels, such as 25% in Greece and Spain (where youth unemployment is above 50%) – and why unemployment remains unusually high in countries like the US (albeit it at a much lower level). This is not just a matter of lost capabilities and rising poverty; persistently high unemployment also leads to social unrest, erosion of trust in political leaders and institutions, and the mounting risk of a lost generation. Indeed, unemployment data in many advanced countries are dominated by long-term joblessness (usually defined as six months or more). Skill erosion becomes a problem for those with prior work experience, while unsuccessful firsttime entrants into the labour force are not just unemployed, but risk becoming unemployable. Governments are doing too little to address the private credit debacle. Arguably, they must first sort out the sovereign side of the crisis; but it is not clear that most officials even have a comprehensive plan. Policy asymmetry is greatest for the countries most acutely affected by the sovereign-debt crisis. There, the private sector has essentially been left to fend for itself; and most households and companies are struggling, thus fuelling continued economic implosion. Other countries appear to have adopted a “Field of Dreams” – also known as “build it and they will come” – approach to private credit markets, In

the US, for example, artificially low interest rates for home mortgages, resulting from the Federal Reserve’s policy activism, are supposed to kickstart prudent financing. The European Central Bank is taking a similarly indirect approach. In both places, other policymaking entities, with much better tools at their disposal, appear either unwilling or unable to play their part. As such, action by central banks will repeatedly fail to gain sufficient traction. In fact, only the UK is visibly opting for a more coordinated and direct way to counter the persistent shortfalls stemming from the private part of the credit crisis. There, the “Funding for Lending Scheme,” jointly designed by the Bank of England and the Treasury, seeks “to boost the incentive for banks and building societies to lend to UK households and non-financial companies,” while holding them accountable for proper behaviour. The UK example is important; but, given the scope and scale of the challenges, the proposal is a relatively modest one. The program may stimulate some productive credit intermediation, but it will not make a significant dent in what will remain one of the major obstacles to robust economic recovery. Proper access to credit for productive segments is an integral part of a well-functioning economy. Without it, growth falters, job creation is insufficient, and widening income and wealth inequality undermines the social fabric. That is why any comprehensive approach to restoring | Capital Finance International

the advanced countries’ economic and financial vibrancy must target the proper revival of private credit flows. i

“Governments are doing too little to address the private credit debacle.” Mohamed El-Erian

About the Author Mohamed A. El-Erian is CEO and co-Chief Investment Officer of the global investment compamy PIMCO, with approximately $1.4 trillion in assets under management. He previously worked at the International Monetary Fund and the Harvard Management Company, the entity that manages Harvard University’s endowment. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, and 2011. His book When Markets Collide was the Financial Times/Goldman Sachs Book of the Year and was named a best book of 2008 by the Economist. Source: 2/11/12


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> Winter 2012-2013 Special: Ten Politically Powerful Women Unsurprising, most – but not all – of the women profiled here are very senior politicians exercising political power in their own right. Many are of such a high calibre that they would be included in a list of the World’s most politically powerful regardless of gender – and at least one of these

high power women would have a fair chance of topping such a list. The continents are well represented with highly talented and successful women bringing real change to North, Central and South America; Europe; Asia and Australia. In so many cases those profiled are trail blazers, | Capital Finance International

the first women to reach high office in their respective countries. Many have suffered along the way and all deserve our admiration for what they have achieved. This is not a ranking but do please let us know what you think about this list at


> Dilma Rousseff President of Brazil Dilma Rousseff became the first female president of Brazil in October 2010. As successor to the popular and charismatic Luiz Inacio Lula da Silva, she had big shoes to fill. It can now be safely said that although their styles are different, Rousseff has not disappointed her people and has the approval ratings to prove it. The President has been able to keep up the momentum of the previous administration which was instrumental in lifting so many Brazilians out of poverty and creating a fast-growing and dynamic economy. Before her election success, President Rousseff had been a career civil servant. She was a very effective chief-of-staff to Lula, her mentor, for five years and very much his choice for the job. They shared an unshakable belief that Brazil’s major challenges were at home and that the country needed to mobilise its considerable resources and potential for the benefit of all. Efficiency, honesty and transparency are the watchwords of the Rousseff administration and she has always waged war on corruption. There is a sense of justice, opportunity and equality in contemporary Brazil that makes the people very proud. This contrasts with a sense of powerlessness and exasperation of many people in austerity Europe. Although the economy stalled in 2012, Brazilians are more than comforted by

the fact that unemployment is at such a very low level (less than 5% as of December 2012). Expectations in Brazil, the world’s sixth largest economy, are high and the creation of new jobs is, of course, of paramount importance. Significantly, Rousseff has been encouraging entrepreneurship in a big way and the number of start-ups is increasing dramatically. At we believe this is the surest way for Brazil to move forward. As soon-to-be hosts of the Soccer World Cup and the Olympics, Brazilian pride will take another boost and Rousseff and her government look set to deliver further on the aspirations of their people. As for the economy, Rousseff has certainly kept the train on the track during her presidency and avoided over-heating. She has promised a PIBao grandao (a big fat GDP) in 2013 to make up for the disappointment of last year and has the skills, authority and determination to see that this happens. With President Rousseff actively promoting FDI inflows and given the strong regulatory structures, effective judiciary and huge economic potential of the country, Brazil is right at the top of the priority list of many investors. Her administration has been working hard to ensure that all such investments are very much in Brazil’s long term national interests.

> Angela Merkel German Chancellor

Angela Merkel entered politics in 1989 with the fall of the Berlin Wall. When she narrowly defeated Gerhard Schröder in the 2005 election, she became the first former citizen of the GDR to lead reunited Germany and the first woman to head the country since it was established in 1871. Germany is the largest country in the world to be led by a woman and the Chancellor and head of the Christian Democratic Union is also leader of the European Union in all but name. is not ranking the politically


powerful women in this feature but few would deny that Merkel would take first place in any such list. It has even been suggested that she is the most important world leader of either gender. Merkel may one day be recognised as the saviour of Europe for backing the European Central Bank’s plan to buy back government bonds from distressed nations despite opposition from the Bundesbank. She is a strong and resolute woman who is often compared to Margaret Thatcher and has been called the Iron | Capital Finance International

Frau. The past few years of Merkel’s leadership in Germany and support to the EU has been a balancing act of extreme skill and perseverance and things could so easily have gone very badly wrong. A worthy successor to Helmut Kohl, it may be that Angela Merkel will also be recognised as an outstanding visionary - albeit in very different times.

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> Michelle Obama First Lady of the United States The 2012 speech by Michelle Obama at the Democratic National Convention in support of her husband was undeniably brilliant and a political tour de force. She connected with the aspirations of millions of worried voters by recalling the personal stories of the Obamas - which were, of course, in stark contrast to those of the Republican candidate. At least one commentator noted that if Obama were to be re-elected he would have a greater debt of gratitude to his wife than any other president in history. She may also have helped him secure his second term by assuring women voters of his worth. Michelle Obama studied sociology and African American studies at Princeton University, graduated from Harvard Law School in 1988 and then took up work at a Chicago law firm. Her later appointments have included Assistant Commissioner of Planning & Development at Chicago’s City Hall, Founding Executive Director, Chicago Chapter of Public Allies (which prepares young people for public service) and Associate Dean, Student Services at Chicago University. In 2010, the First Lady launched ‘Let’s Move’ a camp to fight childhood obesity and in the following year ‘Joining Forces’ in concert with Dr Jill Biden. ‘Joining Forces’ was established to respond to and support the needs of military personnel and their families. Since her husband became president, Michelle Obama has demonstrated that she could easily have a prominent political future in her own right and perhaps as part of a double act to rival that of the Clintons. There is no question that she has acceptance, popular appeal and the relevant skills, but is there any inclination on her part? It would seem unlikely at this point but at one time there was also doubt about Hillary Clinton’s motivation.

> Sonia Ghandi President of the Indian National Congress

Pictured: Sonia Ghandi with Pranab Mukherjee and Manmohan Singh

Sonia Ghandi, aged 66 and widow of former PM Rajiv, is India’s most powerful leader and the longest serving president of the Congress Party. Elected in

1998, Ghandi was the first foreign born president of Congress since Indian Independence. She is the leader of the ruling party in the world’s | Capital Finance International

second most populous country and tenth largest economy. Her son Rahul is next in line to take over in the dynasty.


> Ngozi Okonjo-Iweala Minister of Finance, Nigeria When Dr. Okonjo-Iweala departed the World Bank in 2011 to become Nigeria’s finance minister, she was managing director and second in charge. It was no surprise that in the following year her name appeared on a short-list for the WB presidency. She didn’t get the job but it is widely considered that she was by far the best candidate. At we believe that the World Bank’s loss was Nigeria’s gain. Okonjo-Iweala had also been finance minister (2003 – 2006) in an earlier administration. These were very different times and her crowning glory was in securing an $18 billion debt writeoff from Nigeria’s creditors. She also ensured Nigeria’s first sovereign debt rating which resulted in significant foreign investment in the country. Nigeria is now experiencing strong economic growth and her challenge is to see that the distribution of its benefits is fair. Income inequality would hinder sustainable growth but believes that this strong leader is in the right place at the right time. She is a fearless opponent of corruption in all its forms. Ngozi Okonjo-Iweala is a world renowned economist but more than this a role model for all talented and ambitious women in Nigeria and throughout the continent of Africa. We also believe she has much more to offer the world.

> Joyce Banda President of Malawi In April 2012, Joyce Banda, 62 years, became the first female president of Malawi following the death of Bingu wa Mutharika. She was minister of Foreign Affairs (2006 -9) and then vice president under Mutharika in one of the poorest countries in the world. Her vice presidency and the transition of power was fraught with difficulties and danger but revealed her as a politically powerful, resourceful and determined woman who may be able to bring real improvement to the lives of her people. Mutharika’s administration was characterised by nepotism and chronic economic mismanagement which appalled donors – particularly the United Kingdom which was providing the largest share of aid. Mutharika wanted his brother Peter as his successor and did his best to completely undermine Banda. She was expelled from the ruling Democratic Progression Party and there were attempts to seize her government vehicle and prevent her from registering her own party. The role of vice president was withdrawn


during a cabinet reshuffle but according to the constitution she could not be removed from this office. With Malawi in disarray after Mutharika’s death she sought the support of the army commander who placed troops around her home. Upon assuming the presidency, Banda decided to sell the presidential jet and reduce the government’s fleet of cars. She would also need to devalue the currency by 40 per cent in order to restore donor funding and correct the country’s relationship with the IMF. The president is keen to show solidarity with her countrymen – three quarters of whom are living on less than one dollar per day. She has said that, ‘The time has come to move from aid to trade’ and has hopes for the agriculture, tourism and mining sectors. Amnesty International commended Joyce Banda for an ‘historic step forward’ when, in November, she suspended anti-gay laws pending a debate to repeal existing legislation. This followed international outcry when a gay couple were arrested in 2009. | Capital Finance International

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> Laura Chinchilla President of Costa Rica

One of two VPs in the previous administration, Laura Chinchilla was the first female president of Costa Rica when she assumed that office in May 2010. Since coming to power she has had to deal with the Nicaraguan border crisis and reforms

to correct the country’s staggering deficit. Chinchilla has championed ecotourism and placed a moratorium on oil exploration. Chinchilla has written extensively on judicial reform and public security and before taking up

office was a consultant on these matters in Latin America and Africa. She is a social conservative opposing the separation of church and state and supporting a ban on the ‘morning after pill’.

> Rania Al Abdullah Queen of Jordan Born in 1970 in Kuwait to Palestinian parents, Rania, wife of King Abdullah II has been his Queen since 1999. Her concerns at home include environmental matters, health, education, youth and human rights. She looks to ‘Righting the wrongs of the country and helping the people have better lives’. Much more than a royal ornament, Rania has made a good stand against terrorism and spoke eloquently after the bombings in Amman. Her first venture was the establishment of the Jordan River Foundation (1995), an NGO which places the welfare of children above political considerations and social taboos. In 2002, Queen Rania was appointed as a member of the World Economic Forum’s Foundation Board, became a member of the UN Foundation Board of Governors four years later and Chair of the UN Girls Education Initiative in 2009. She is UNICEF’s advocate for children. After receiving a Business Administration Degree, Rania took up posts in Amman at Citibank and Apple. She is a respected author who writes mainly for children and in May 2010 topped the New York Times Best Seller List (Children’s Books). | Capital Finance International


> Julia Eileen Gillard Prime Minister of Australia Julia Gillard was born in Barry, South Wales in 1961 but renounced her UK citizenship on entering the Australian parliament in 1988. Her family had moved to Australia when Julia was five years old. She was the first PM since Billy Hughes to have been born overseas, the first never to have married and the first woman to be deputy PM, leader of the country and head of the Australian Labour Party. Perhaps unsurprisingly, her political hero is the Welsh Labour politician Aneurin Bevan. As chief-of-staff to John Bundy, Leader of the Opposition in Victoria, Gillard had the responsibility for drafting affirmative action rules with the target of pre-selecting women to contest 35 per cent of Labour’s winnable seats. She also played a role in founding ‘Emily’s List’ a pro-choice fundraising and support network for women. Gillard has been the subject of quite vicious sexist taunts and misogynistic attacks during her parliamentary career. When Peter Slipper, former speaker of the Australian parliament was accused of sexual harassment and attacked by her opposition opposite number Tony Abbott, Gillard sensed some hypocrisy in the air and memorably turned on Abbott in parliament to remind him of her sufferings. Her speech last year was applauded by, among others, the political leaders of the United States, France and Denmark.

> Cristina Fernandez de Kirchner President of Argentina President Kirchner, who has been in office since December 2007, was re-elected in 2011 and may have her sights on a third term - which would require an amendment to the constitution. She was the first elected female president of Argentina and the second to hold that office after Isabel Peron in the 1970s. Her landslide election victory resulted from a popular policy of wealth distribution. She is an admirer of the Peron dynasty and the widow of Nestor Kirchner, a former president of the country. Kirchner’s administration has not been without criticism and there have been allegations of corruption and crony capitalism. Early in the New Year the IMF censured Argentina for failing to comply with international standards for compiling inflation and economic growth figures. The country is experiencing its highest inflation for a decade. An anti-government demonstration in November attracted up to half a million protestors. However, the opposition is in very poor shape and things look more promising for the government now that GDP is improving.

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> Gulf Finance House:

Accelerator of Economic Development


ulf Finance House’s long track record of innovative Islamic investment, specialisation in the creation of new financial institutions and conceptualisation of high value economic infrastructure and private equity projects sets it apart from the competition. As a result, the CFI. co judging panel had no hesitation in declaring GFH ‘Best Islamic Investment Bank, Bahrain, 2012’ By identifying investment opportunities that balance risk with reward, GFH has provided Islamic investment banking services to its investors with an emphasis on regional development. GFH has focused on setting a regional benchmark with regards to risk profile and risk management abilities, corporate governance and corporate social responsibility to safeguard investors’ interests and build a well-diversified business portfolio through its numerous ventures. GFH has earned a unique and formidable reputation for sourcing innovative investment opportunities that reward investors with excellent returns. With an excellent year for the bank, rewarding

“As a result, the CFI. co judging panel had no hesitation in declaring GFH ‘Best Islamic Investment Bank, Bahrain, 2012’” years of patience and restructuring following the upheavals of the financial crisis, the core business will continue to focus in the area of development infrastructure and private equity, where GFH will act as an accelerator of economic development within fast emerging GCC, Asian and North African economies. The Bank activities focuses on diversified products that match client needs in Infrastructure Development, Asset Management, Private Equity, Venture Capital, and Treasury sectors. Development Infrastructure / Real Estate The Bank has successfully launched a number of key infrastructure projects across the MENASA region with a total estimated development value exceeding US$ 20 billion. GFH takes a unique view in the investment world when approaching

Morocco: Cape Malabata

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these large scale economic infrastructure projects and this has played an instrumental role in encouraging a paradigm change in the economic landscape of the GCC, North Africa and other parts of the world. The GFH approach focuses on delving into the details of an investment, following due diligence, conceptualising the project, securing land and injecting cash into the project to start the ball rolling. Some of these projects are co-ordinated in partnership with various governments and aim to contribute positively to the socio-economic development of countries hosting the Bank’s initiatives. To name a few of the region’s leading financial institutions established by GFH: First Energy Bank, the world’s first Islamic investment bank to focus exclusively on the energy sector; the Khaleeji Commercial Bank in Bahrain; First Leasing Bank in Bahrain; QInvest in Qatar; Arab Finance House in Lebanon; and Asia Finance Bank in Malaysia. The flagship infrastructure projects set up by GFH in the MENA and Asian regions include:

Winter 2012 - 2013 Issue

India: Energy City

Bahrain Financial Harbour, Tunisia Financial Harbour, Energy Cities in Qatar, Libya and India, the Royal Ranches of Marrakech in Morocco and Jordan Gate in Amman. Asset Management GFH prides itself on the level and quality of service that the Bank’s Asset Management Department provides to clients that are interested in Islamic assets management services. The Bank focuses on managing monies through two key strategies to enhance the investor’s wealth namely, GCC equities and property investments. The funds

managed include Al Basha’er GCC Equity Fund and Aqaar Fund. Private Equity / Venture Capital GFH employs a philosophy that combines the opinions of leading industry experts and taps into GFH’s extensive network of professional relationships to identity market opportunities and creates unique value propositions for its investors. The GFH Venture Capital (VC) team has a strong and proven track record. However the team

is always exploring new options in response to market conditions, aiming to create many more high value investment opportunities that leverage qualified market demand and offer solid returns to investors. Currently the VC team is focusing its attention on financial services and technology markets. The investments that have been successfully launched include: Injazat Technology Fund, Rawaj Holding Company, The Royal University for Women, Oman Development Company, First Energy Bank and Cemena. Treasury The Islamic banking treasury sector has become increasingly competitive and sophisticated over the years, with demand fuelled by clients and investors looking for and expecting Islamic products that provide the same features and benefits as conventional investment and hedging products. GFH has a proven record in catering to this fast growing niche group of Islamic products and their skyrocketing demand. It offers a wide range of Sharia compliant products that are designed to meet the varying needs of clients and investors - all of which are managed by a team of experienced and dedicated personnel. These products include: Mudharba, Wakala and Commodity Murabaha. The Bank has been recognised consistently over the years by the industry and the recipient of several awards. These include: ‘Best Islamic Investment Bank’ in 2005, from Euromoney, ‘Best Investment Bank’ for three consecutive years - 2005, 2006 and 2007, and in 2008 the ‘Deal of the Year’ Award from the Banker Middle East.

Marrakech: Royal Ranches | Capital Finance International


In Pictures: Tunis Financial Harbour

In Pictures: India

In Pictures: Energy City, India

50 | Capital Finance International

Winter 2012 - 2013 Issue

Tunis Financial Harbour This project will create North Africa’s first offshore financial centre and local, regional and international players are likely to be attracted to its world class infrastructure. TFB will offer superb office space and an elegant waterfront lifestyle in a country that is close to Europe and can function as a gateway to the rest of the African continent. The Project has the full support of the Tunisian government and, according to Acting CEO Alrayes, the benefits to Tunisia, GFH and investors will be extraordinary. The Harbour is likely to become a favoured destination for holiday makers as well as businessmen. Tunisia offers an attractive package for investors, access to a well educated population, a beautiful climate and good national infrastructure. The country will be a strong candidate for premier financial centre in North Africa once the Project is completed. Mumbai Economic Development Zone Project GFH’s 1600 acre, state-of-the-art Mumbai Economic Development Zone project is expected to attract a total investment of $10 billion and will be one of the largest development projects in the state. The Zone, which will include an IT and Telecom City as well as Energy City, India – the country’s first energy business district is a mixed use development which will be strategically located close to the new Mumbai International Airport. The Bank’s private placement initiative raised $630 million for the initial phase of development and GFH’s partner for the project is Wadha Group, an Indian real estate developer. In October 2012 the Mumbai Project secured direct access to the Mumbai Pune National Highway. This link will provide connection to the National Highway and all utilities. No other project in the area has this level of access. Chandan Gupta, Managing Director of the Project commented, “As part of our re-envisioned business strategy, we are committed to moving our existing infrastructure projects forward towards completion, and achieving successful

“As part of our re-envisioned business strategy, we are committed to moving our existing infrastructure projects forward towards completion, and achieving successful exits from these projects for our investors.”

exits from these projects for our investors. Completing acquisition of this land access, to connect directly to the main industrial corridor in India brings us one step closer to realising our goals, both for our investors and for the good of the project.” An Wadhwa Group spokesman confirmed that, “The most critical piece of the project is in place. Now we can concentrate on getting procedural permissions to kick start the project at the earliest”. If everything goes well, the filling of the path and sales offices can start in early 2013. The acquisition of this path will give a beautiful access to the proposed Cities.” Royal Ranches, Marrakech Reflecting the needs of a changing market, GFH announced in October, 2012, that its development project in Morocco, the Royal Ranches Marrakech (RRM), will shift its focus from luxury villas to small and midsized apartments. Acting CEO Alrayes commented at the time, “We understand that market needs can change over time, and as such we make it our business to monitor these potential and actual changes as a matter of course. In order to better cater to local needs due to the market changes and the existing oversupply of luxury villas, we have taken the decision to alter the plan to include affordable residential units and medical health facilities, rather than the ranches and large scale villas initially planned”. Cemena Holding Company Set up by GFH in 2008 to focus on cement sector opportunities across the MENA region and in the emerging markets, Cemena is now well established in Bahrain and further afield. Cemena brought Falcon Cement Company to the market some years ago and has a controlling stake in Bahrain Aluminium Extrusion Company (Balexco).

GFH: The New Owners of Leeds United FC After months of quiet planning, Gulf Finance House finally acquired Leeds United Football Club on December 21st 2012. Manager Neil Warnock described this as a massive day in the history of Leeds United. According to a GFH spokesman this purchase would have a positive impact on the Bank’s profitability in Q4, 2012 and Q1 2013.

The Company has interesting diversification plans and looks likely to become one the leading building material suppliers in the region.

Chairman Ken Bates will continue in his role until the end of the season and commented that GFH was, ‘Bringing additional working capital and funds to strengthen the team.’ Three GFH executives have joined the board of the Club.

The positive financial results from Cemena are all the more encouraging because they contrast with the negative trends in the cement industry.

GFH places great faith in the current team manager and Warnock’s continuation at Leeds was a condition of the sale. i

Mohamed El-Erian | Capital Finance International


> The Wall Investment & Real Estate Development:

Towards the Realisation of a Dream

The Wall” is a not just a company but also a dream to be realised by its founder Dr. Naseer Homoud. The Wall Investment and Real Estate Development was established and has always been managed with passion and commitment. Dr. Naseer Homoud’s enduring commitment has taken this company to a height which is perhaps commensurate with the growth witnessed in Qatar’s economy. Dr. Homoud conceived the plan of shaping the real estate sector in harmony with the human touch that reflects the aspirations and values of its inhabitants and occupiers. Whilst establishing this real estate development company, Dr. Homoud was actually addressing an inner call to do good for the society which had given him so much. His idea was to harmonise Arab-Islamic traditional architecture with contemporary trends to ensure that the built landscape of the vast Middle East region is unique and wholly admirable. Qatar has been just the right place for bringing this dream project to reality. The largest exporter of liquefied natural gas, Qatar has a booming economy which is capable of supporting such innovative projects. Dr. Homoud moved from his home country of Jordon to Syria to take up his higher studies. He joined the Faculty of Dentistry at the University of Damascus and found himself at the heart of the early Arab-Islamic civilisation, surrounded by marvels of architecture which were constructed during the medieval period. After graduating in 1987, Dr. Naseer returned home to Jordan and made great strides in dental healthcare but his mind and heart craved for more work achievements and even greater success. He wanted to move beyond geographical and professional boundaries. He left for Doha in 2001. This relocation was a good choice. The State of Qatar was progressing in leap and bounds. Today it is one of the leading countries of the world in terms of prosperity, economic growth and per capita savings. The establishment of The Wall by Dr. Homoud was a combination of chance and intuition. In 2002, he was in the process of establishing the Consultant Dental Center and needed residential accommodation for his staff. He found a vacant building with nine apartments and was advised to take the whole building as it was available at a very reasonable rental. Dr. Homoud took the building and let out the apartments which he did not need.


That was the beginning. Dr. Homoud’s story progressed alongside the economic development of the country. Qatar had successfully bid to host the Asian Games in 2006 and there was a boom in the construction sector with many infrastructure projects giving impetus to the real estate sector. He was quick to understand the growth potential in the real estate sector. Even before coming to Qatar, Dr. Homoud realised that Qatar’s economy was about to grow rapidly. This Gulf state, having large deposits of liquefied natural gas (LNG), was of course destined to have one of the best growth rates in terms of economic and human development indicators. He also understood that the country was going to be one of the most outstanding states in terms of infrastructure, healthcare, education, sports and other services as its leadership’s vision is clear on these points. Dr. Homoud entered the Qatar real estate sector by establishing a company specifically for the purpose namely, “The Wall Investment & Real Estate Development”. For Dr. Homoud, the name “THE WALL” signified protection and durability for customers. But the name also suggests greatness, like the greatness of the Great Wall of China, or the wall that was built by the Dutch to protect their livestock as immigrants in New York. This area was named “Wall Street” and continues to reflect strength, durability and long-term safety. Continuing with the core philosophy, Dr. Homoud also took into account the diversity in the demographic contours of the country’s population. Qatar, like the other Gulf States, has a large number of professionals such as doctors, engineers, academicians, business managers as well as labour from all around the globe. He was quick to understand this diversity and the opportunity that it offered to the real estate sector. Understanding and innovation were keys to harnessing the potential of this diversity. He sensed that reality sector would have to cater to the workers employed in oil and gas, professionals employed in various other service sectors and academics and students at the international educational institutions and those established by the Qatar Foundation for Education, Science and Community Development. Another important group to need accommodation was that of engineers as there would be large-scale infrastructure development including the construction of bridges, tunnels, a | Capital Finance International

In Pictures: Dr. Naseer Homoud

“Even before coming to Qatar, Dr. Homoud realised that Qatar’s economy was about to grow rapidly.”

Winter 2012 - 2013 Issue

Qatar: Doha Skyline

“The Wall has always been more concerned about building trust and confidence among its clients than the profit motive. The trust built over the years has paid dividends.�

rail network and international standard sporting facilities. Because of this investment in the infrastructure Qatar won its bid to host the 2022 World Cup. The Wall has always been more concerned about building trust and confidence among its clients than the profit motive. The trust built over the years has paid dividends. The Wall has taken into consideration the position of its customers and adjusted its terms during the global financial crisis. The Wall has been providing users of its facilities with a series of integrated services beyond the conclusion of leasing contracts. It never abandons these users but continues be concerned about maintenance issues and the updating of facilities. Dr. Homoud has kept pace with the changes in the economic and social atmosphere of the country and the region. During the financial crisis, he took advantage of falling construction prices and presented customers with his residential and commercial products at very reasonable prices. And, thanks to the strength of the Qatari economy, domestic demand continues. The Wall, under his leadership, has also been able to win a series of exclusive contracts for the implementation of many

development projects in Qatar. This became possible because of the reputation and credibility that the Wall earned by keeping profit margins low and quality high. The Wall has also been able to engage with many governmental and private sector organisations outside Qatar for the development of non-residential real estate projects destined for commercial, industrial and even hospitality purposes. Such contracts include direct business as well as sub-contracts from major contractors. In order to seize opportunities provided by markets in the Gulf, Dr. Homoud is planning to expand The Wall beyond Qatar. He has plans for reaching out to Saudi Arabian and the UAE markets. The Wall will concentrate on providing residential units in Saudi Arabia for its residents while in the UAE, the focus will be on luxury buildings. Dr. Homoud believes that he will be able to harmonise architectural style in conformity with the Arab culture and address the climatic challenges of the region by adequately planning for protection against solar radiation and ensuring proper lighting. He has contracted with a number of Spanish real estate development companies which own resorts in Spain. The Wall has become an important player in the field. However, the | Capital Finance International

crisis faced by the Spain has forced it to reduce its presence in Madrid and focus on Doha. The Wall is now adjusting its business plans in tune with the goals of the National Vision for Qatar-2030 which targets the establishment of a knowledge society and preservation of the environment. The Wall has planned to design all its units consistent with the vision for the environment in terms of electrical connections and green spaces. Dr. Homoud knows that the real estate sector provides him an opportunity to combine contemporary architecture with cultural heritage in a manner that addresses basic housing needs at an affordable cost without affecting reasonable surpluses for his company. He attempts to realise this goal with the benefit of his experience and passion and through his understanding of engineering and architecture. With the pool of over 600 thousand Jordanian expatriates, The Wall has approached the Jordanian government to allot sufficient land for the realisation of a dream project. The Wall has taken up this project without concern for profit. The project addresses the twin needs of good housing facilities for the expat Jordanians and, at the same time, the provision of gainful employment opportunities for thousands of Jordanians who are living in their motherland. i


Buenos Aires 54 | Capital Finance International

Winter 2012 - 2013 Issue

> Sergio Caveggia, Ernst & Young: 2012 Global M&A Tax Trends 2012 continued to show uncertainty in the M&A market. Consequently, companies are thinking more strategically about the value that tax can deliver in the M&A space. Tax directors are not only focusing on the tax aspects (contingencies,

exposures, tax assets) of the Target itself but also on the value that the structure of the deal and post-deal benefits may create. During this calendar year, Ernst & Young has commissioned a market research | Capital Finance International

to survey tax directors at 150 of the world’s largest companies across 14 major markets to ascertain their views on tax issues surrounding transactions. Below is a summary of the main findings and trends of this survey.


Tax focus in deals The first conclusion of the work is that tax remains a key driver of value for deals. Tax directors surveyed said that tax issues and tax planning in deals have continued to be as important in 2012 as they were in 2011. When asked whether their organizations place more or less importance on tax issues compared to three years ago, 54% of tax directors stated that they were more important, with only 2% responding that they were less so. The main important cause continued in 2012 to be an increasing focus on tax efficiency to reduce cost of deals or improve the return from deals. On the other side the survey shows that the increasing scrutiny of deals by tax authorities continues to be important to tax directors. Especially when 64% (2011: 49%) of tax directors said that the tax authorities level of scrutiny of the tax planning aspects of deals has increased in the last three years. This last topic is driving the following conclusion: Companies continue to seek value from transactions in a wider range of tax areas than they had in the past and are more willing to factor this in the deal valuation. The survey discloses that the three main factors in deal tax planning are (i) Post-transactions business combinations; (ii) The availability of tax relief for financing costs in structuring a deal and; (iii) Tax-efficient or structure financing. Other factors were considered of less importance (Indirect tax, IP, Tax effective supply planning, etc.). The first point (post-transactions business combinations) is driven by the fact that companies are required to look beyond the tax value a deal can create immediately and to consider the value realizable over a longer period –looking specifically at what can be done post-deal to crystallize value and integrate an acquisition fully within a business. Despite the fact that much of this value is delivered over longer periods, tax directors are building post-deal opportunities into their valuation models. The above conclusion is reinforced in the survey when it comes to emerging markets. When tax directors were asked about the principal challenges when entering a transaction with emerging markets, there was a decline in the risk of inheriting pre-transaction tax liabilities. This is actually consistent with tax directors having been involved in investments in emerging markets for a number of years now and being more comfortable about the different processes that need to be undertaken to achieve an acceptable level of comfort around pre-existing liabilities. In other words, the perception of pre-existing tax liabilities risks in emerging markets is, to some extent, changing in tax directors’ minds. The trend is now also focusing on the actual value that the deal structure and post-deal integration may create as well as coping with pre-existing tax liabilities.


Nevertheless, the reaction of tax directors to risks inherent in emerging markets would appear to be a combination of factors depending on the circumstances and the risk. These are a) to perform additional work with a view to understanding the risk better; b) simply to reflect such risk in the valuation model; and/ or c) to accept such risks as inevitable in some markets. M&A cannot be viewed in isolation. The survey shows that there are significant challenges for tax directors when delivering tax synergies post-deal. The biggest change from the last year was that 55% (2011: 46%) of those surveyed thought that one of the principal challenges to delivering synergies post-deal was the tax function not being brought into the deal early enough. While, overall, the tax function is being involved in deals on a more timely basis, more tax directors are being brought in once the decision has been made to perform initial due diligence, rather than soon after deal is identified. The involvement of Tax in the initial stages of a deal allows other business functions to include tax fully in the processes required to deliver synergies. This aspect within the organization is critical to maximize the likelihood of benefits being delivered. The more the organization understands the teaming approach in a deal, the better tax value may be identified and timely delivered to stakeholders. The relevance of this topic was captured by the survey when it discloses that the main challenge for tax directors when delivering tax synergies post-deal is the strength of the relationship between the tax function and those persons with management responsibility for closing the deal. In our day to day activity we experience that the closer the team and the tax function is, the better results are achieved in the transaction. Increasing focus on tax in divestments Over half of the tax directors surveyed said that they are currently reviewing their corporate structure to facilitate a future divestment, if required. When divesting, the early involvement of the tax function is critical and more tax directors continue to be brought in at the beginning in sell-side transactions. This is important, as it allows the tax function to identify areas where value may be created on a sale of a business and to ensure that value is not lost. The survey shows that the four main issues considered when enhancing value for a likely buyer are: (i) Pre-sale action to preserve tax attributes such as losses and to address areas of value leakage linked to tax indentified in due diligence; (ii) Purchase price allocations; (iii) Mitigation of transfer taxes; and (iv) Pre-sale action to separate the Target from the seller´s group, supply chain, etc in a way which creates a stand-alone business for the buyer. | Capital Finance International

As a conclusion, tax is increasingly important in the M&A space. Such importance is mainly driven by the value the tax function may deliver. Currently, tax directors are aware of this situation and are broadening their view on the deal itself to capture such value. Not only by performing the due diligence itself but also by focusing on the structure of the deal in eventual future synergies and post-deal integration. To achieve this, the early involvement and teaming with the M&A team is essential. i

about the author Sergio Caveggia is a Tax Partner currently in charge of the Transaction Tax Area in Argentina. He joined the tax division of Ernst & Young in 1994, and has developed strong expertise, over 18 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 corporate restructuring services within the Transaction Tax area. Sergio has served numerous clients in a variety of industries, moreover has also been involved in practically all Buy-side and Sell-Side due diligence processes performed by our firm in the last 10 years. He has given lectures in national universities and is a frequent speaker in tax seminars. Sergio has also written several articles dealing with Argentine tax issues. Sergio is a Certified Public Accountant, graduated from University of Belgrano. He also obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management. from Universidad Católica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association. He is fluent in English.

Winter 2012 - 2013 Issue | Capital Finance International


> Meets Managing Director of Gulf African Bank, Kenya:

Asad Aziz Ahmed


r Ahmed brings over 30 years of experience in banking, credit management and in formulating and managing strategic and operational change in financial institutions. He brings indepth knowledge of strategy formulation and implementation, performance improvement initiatives and change management programmes. Mr Ahmed has held various senior management positions in the Middle East and Canada. Joining Gulf African Bank from the global financial advisory firm, Alvarez and Marsal Ltd. where he was Managing Director and Head of Middle East, Mr Ahmed served earlier at National Bank of Fujairah as General Manager.

gratis basis, as well as offer internship to select students undertaking a Diploma in Islamic Banking. An annual prize for the best student in Islamic Banking diploma program has also been instituted by the Bank. Asad Ahmed said at the time, “With the increase of Islamic banking evidenced by most commercial banks opening Islamic windows, it’s not easy to get the right human resources that really have a deeper understanding of Islamic finance. This poses a challenge where the need for training and development is constant. At Gulf African Bank, we strive to share Islamic finance knowledge and make Shari’ah banking accessible to all Kenyans as an alternative way of banking

With a master’s degree in business administration from Institute of Business Administration, Karachi, Pakistan, Asad Ahmed is also a Certified Public Accountant (CPA) from Illinois, USA, and a Certified Credit Professional (CCP) from the Credit Institute of Canada. He is a Fellow of the Institute of Canadian Bankers (FICB) and has a diploma from the Association of International Bond Dealers. In addition to serving as Executive Director on the Board of Gulf African Bank, he is a Director of Nairobi Hospice and a member of the Governing Council of the Kenya Bankers’ Association. Gulf African Highlights in 2012 award winner: Best Islamic Bank, Kenya, 2012 May: As Kenya’s first fully Shari’ah compliant bank, Gulf African entered into partnership with Kenya School of Monetary Studies to support Islamic Banking training. As part of its corporate social investment, the Bank has volunteered some of its experts to teach at the college on a


available to everyone. Since Islamic finance is knowledge based, sharing this knowledge is the key to growth” July: Gulf African launched a new facility - totally dedicated to serving the needs of women by women - called an Annisaa Centre. “We believe that women need specialised banking services because of their unique roles in the society as wives, mothers, business women and career women. Our ladies only account seeks | Capital Finance International

to satisfy the various needs of women with special benefits designed to fit their needs perfectly. At the launch of this account we promised to give holders innovative financial solutions and to continuously come up with new ways to deliver our services. This is an exclusive centre for the women by the women and it is one of a kind in the country. All personnel serving in this centre are women.’’ Mr Ahmed pointed out. October: Gulf African Bank held a colourful ceremony on Tuesday, October 9, 2012 at Nairobi’s Norfolk Hotel to reward winners of the Deposit Mobilization Campaign – Inua Akiba Inua Jamii. Present at the event were Her Excellency the Tanzania High Commissioner, Dr. Batilda Burian, Deputy Head of Mission to Saudi Arabia, Mr Ibrahim Barnami, Consul General of the Cyprus High Commission Mr Larkos Theokli among other invited dignitaries. The Bank rewarded a total of 13 winners with cash prizes and ipads. The main prize was a trip for two to Hajj. In his remarks, Mr Asad Ahmed said, “As part of our CSI initiative, the bank will donate Ksh. 200, 000 from the proceeds of this campaign to Mama Fatma Children’s Home. As a bank we believe in continued commitment to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. We respect cultural differences and find the business opportunities in building the skills of employees and the community. We will endeavour to identify programmes that are related and add value to the communities in which we operate and exist in while at the same time respecting the cultures of these communities, protecting the environment and strengthening the communities.” i

Introducing The Gulf African Bank Debit Card! Now you can own anything, anytime, anywhere.

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> Meets President of Consumer Products at Olayan Financing Company:

Jean-Marc Delpon de Vaux


ollowing the judging panel’s selection of Olayan Financing Company (OFC) as the recipient of the 2012 Corporate Leadership Award, spoke to JeanMarc Delpon de Vaux, President - Consumer Products of OFC. OFC is the Saudi arm of The Olayan Group. According to Delpon de Vaux, The Olayan Group was shaped by the business principles embraced by its founder, Suliman Olayan, when he first started doing business in the 1940s, the core of those principles being good corporate governance, impeccable business ethics and personal and professional integrity. He observed that soon after joining Olayan he came to realise that these were not just words on paper, but principles that all at Olayan live each day and on which the Olayan family places great value. Today, Olayan is a group of more than 40 companies operating in eight countries with more than 15,000 employees. In part, he attributes the strength of Olayan to the fact that members of the Olayan family - the children of Suliman Olayan – remain involved in the business. Much of the success of OFC can be attributed to the direct involvement of Khalid Olayan, as Chairman, and Lubna Olayan, as DeputyChairman and CEO, especially their strong desire to maintain the principles, management style, discipline and relationships established by their father as they grow the business and establish new relationships. Olayan is firmly of the view that

Mrs Lubna Olayan


being successful does not just mean growing its business and increasing its profits. It also means caring about its employees, its customers, its business partners and the world in which we all live. ‘We enjoy a strong business base because of this heritage which also includes long-standing and highly effective business partnerships,’ Delpon de Vaux pointed out. In its early days, the Kingdom of Saudi Arabia presented a real opportunity to foreign companies, but it was at the same time a new, developing and often bewildering territory, for those international companies. In Olayan, they found a reliable local partner with considerable keen local knowledge, financial strength, an ethical approach to business and an understanding of how business was done abroad. The division president explained that the Olayan view of partnership is to connect with companies with shared values and then look to how best to achieve their joint long term objectives. ‘This implies that when our shared business evolves we must be ready to adapt to new situations and be open to all opportunities. As partners, we do not simply sit back and rely on our partners to make things happen, we engage and often sit on the boards of companies in which we invest. And we are able to uniquely combine international expertise and experience with local knowledge and standing’ Olayan is known to operate in sectors and industries where its knowledge and expertise contribute to its partnerships and the companies that they create. As the local partner to many industry leaders from around the world, Olayan believes that it must help unleash the skills and abilities of its partners and to enable them to reach their full potential in the market as fast as possible by providing insight, guidance, support and advice as and when needed. These are some of the elements that have helped Olayan build long term relationships that in many cases have been in place for more than 50 years. In several cases, Olayan has helped its partners bring their own CSR programmes to the local market to address local issues, including unemployment amongst both males and females. In fact, the judging panel were especially impressed with Lubna Olayan’s support of women in the workplace. According to Delpon de Vaux, ‘Mrs Olayan and the Group try to make a difference. In 2008, OFC established a specialised department dedicated to the recruitment, training and retention of young Saudi males and females. Recognising that there is clearly under-utilisation of women in the country, Olayan is working hard to ensure that we have an increasing proportion | Capital Finance International

of female employees throughout the business and in senior management roles as well. We monitor the situation on a monthly basis. For Mrs Olayan this is a key performance indicator, just like any other.’ Olayan makes an on-going effort to maintain a focused CSR programme. Somewhat surprisingly given its stature, Olayan prefers maintaining a relatively low profile. It is a good corporate citizen with an exemplary code of conduct and the Company plays its full part in the Kingdom without drawing attention to its many generous acts carried out by The Suliman S. Olayan Foundation. The Foundation is managed by a committee of volunteers from within The Olayan Group. Delpon de Vaux explained that apart from their focus and leadership in providing opportunities for young Saudis, especially women, Olayan also focuses on its environmental footprint - ‘Whatever we do in the Group, there is proper regard for environmental impact. We are managing this and making good progress.’ Keying off the strength of the Saudi economy, Delpon de Vaux reports that business is good at Olayan: ‘We are very happy with our results. Non-oil GDP growth in the country is around 7 per cent but we are out-performing this significantly and delighted with our levels of profitability. The economy may slow a little in 2013 but we are still expecting robust growth at Olayan.’ Longer term, Delpon de Vaux expects OFC to continue pushing boundaries beyond the GCC. The business will seek diversification, but always focus on the more promising sectors - ‘We are very strong at home, in the Gulf and will be broadening our reach in the MENA countries especially Egypt, Morocco and Tunisia. The Group is, of course, involved in the wider world economy through its investment programme.’ i

Jean-Marc Delpon de Vaux joined Olayan after three years as the head of SABMiller’s India where he boosted market share by five per cent. A Unilever veteran, his appointments included chairman and CEO of the Pakistan business. Delpon de Vaux is one of two Olayan Financing Company presidents. He heads up all consumer activities and shares other corporate responsibilities with Jonathan Franklin who oversees the Olayan industrial businesses and investments.

Winter 2012 - 2013 Issue | Capital Finance International


> Meets Managing Director/CEO of Greenwich Trust Limited:

Q&A with Kayode Falowo May we know about your education and industry experience before joining Greenwich? I attended the University of Ife (now Obafemi Awolowo University) where I obtained a BSc. (Hons) Agricultural Engineering in 1982. I obtained a Master’s degree in Business Administration from the University of Benin in 1988. I am a distinguished Fellow of the Chartered Institute of Stockbrokers, a Fellow of the Association of Investment Advisers and Portfolio Managers and a Fellow of the Certified Pension Institute of Nigeria. I am a Vice President of the Nigerian-British Chamber of Commerce, a Council Member of the Nigerian-Malaysian Chamber of Commerce & Industry and a Member of the Institute of Directors (IoD) Nigeria. I also have membership status of the Institute of Management Consultants, the Nigerian Institute of Management and the Nigerian Society of Engineers I commenced my career in the financial industry at the Nigerian Agriculture & Cooperative Bank Ltd where I held the position of Assistant Manager. Prior to establishing Greenwich Trust Limited in 1998, I worked with North South Bank as the Head, Credit and Marketing Department and as the Managing Director of Atlantic Investments Limited. I have over 25 years working experience in the financial sector. I am currently a member of the Technical Committee of The National Council on Privatization and a member of the Presidential Advisory Committee on the Nigerian Capital Market. I am the immediate past Chairman of the Association of Issuing Houses of Nigeria (the trade group for Investment Banks) and a Director of the NASD Limited (the Nigerian OTC trading platform). I am the Chairman of Wema Registrars Limited and a Director of DN Meyer Plc. (a company quoted on the Nigerian Stock Exchange). Please outline your career progression at Greenwich and main responsibilities In my capacity as the Group Managing Director/CEO of Greenwich Trust Limited, I am responsible for the formulation of policies within the Group in conjunction with the Board. In addition to the above, I also ensure the effective implementation of strategic policies with a view to steering the organization towards achieving its objective. In the past 14 years I have led a team that has grown the firm from its humble beginning of being a start-up with a shareholders’ fund of USD640,000 to a market leader with a Group net worth of over USD75Million. 62

Kayode Falowo: Managing Director and CEO

“In recognistion of our distinguished role in the Nigerian Capital Market, Greenwich was appointed as one of the 10 equity Market Makers in April 2012.” | Capital Finance International

Winter 2012 - 2013 Issue

How does Greenwich differentiate itself from the competition in Nigeria? Greenwich Trust Limited, like other financial service firms operated under difficult circumstances within the Nigerian Economy as a result of the Global Economic Crisis in 2008. In spite of the stiff operating environment, Greenwich ensured value creation for its clients by creating investment products to meet our clients’ economic needs at the time. The satisfaction of our clients’ financial need is paramount to effective service delivery, and as such Greenwich provides bespoke financial solutions to clients seeking Investment Management, Advisory and Capital raise services. We deploy these services through our Investment Management and Investment Banking Divisions. Our Investment Management team, in addition to providing tailor-made financial advisory services to clients, keeps them abreast of capital market developments via periodic daily research reports. In recognistion of our distinguished role in the Nigerian Capital Market, Greenwich was appointed as one of the 10 equity Market Makers in April 2012. Our institution was also appointed in January 2013 as one of the 6 Fixed Income Market Makers on the Nigerian Stock Exchange. Our Investment Banking team provides bespoke financial solutions in the areas of Capital Raising, Mergers and Acquisitions, Divestments and Structured Finance to our institutional clients. We ensure value creation and adopt global best standards in transaction execution. Over the years, we have participated in various investment banking transactions involving the Federal Government, State Government and many corporate institutions. One of such transactions is the Local Contractors Receivables Management Limited Bond Issuance Programme which involved the resolution of the FGN N226 Billion debts to contractors in Nigeria. In addition to our service delivery approach, our business ethics and ability to understand our clients’ needs have led to longstanding relationships with our clientele.

Are you happy with the progress made by Greenwich in 2012? Do you have any success stories to share? The Group is happy with our performance in 2012 and proud to say that we are well on our way towards realizing our vision to be the leading financial solutions provider in Nigeria. In our respective business functions, Greenwich has proven, over the years to surpass prior performance and have emerged as a top contender amongst our peers in the Nigerian financial market. We successfully helped the Ekiti State to raise a significant sum for financing its infrastructural projects in addition to the successful N226 Billion Contractors Bond of the Federal government of Nigeria. We also acted as advisers to Access Bank and Wema Bank on 10 Divestment and M&A transactions. Please give examples of Greenwich building relationships based on integrity, efficiency and empathy Over the years, Greenwich has been known for its ethical stand in terms of transaction execution and has gained the trust of our clients by adopting corporate best practices in this regard. In terms of efficiency, we provide our clients with prompt and accurate information as and when due, to enable them make positive and timely decisions. These include our weekly stock recommendation, periodic updates on client’s accounts amongst others. Further to the above, we also provide end to end advice to our institutional clients to ensure seamless transaction consummation beyond our primary role as Financial Advisers/ Issuing House. We identify with our clients’ everchanging needs in the Nigerian Economy by developing various investment products to suit the financial ability of our diverse client base. During the global financial crisis, we developed strategies to safeguard our client’s portfolio. In addition to the above, we provided client specific advice in terms of stock selection. Most of our clients who invested in the Equity Market prior to the crash are still with us till date. | Capital Finance International

How do you ensure that value is created for all stakeholders? We create value by working closely with our clients to identify their specific needs and subsequently proffer the best investment decision and execution route for various transactions. Greenwich leverages on the expertise of our professional staff, vast previous experience and the existing relationships with local and foreign investors to ensure clients’ strategic objectives are actualized. What are your thoughts on the prospects for the Nigerian banking industry in 2013? Looking at the New Year, I believe that the Nigerian Capital market has the propensity to outperform other emerging markets around the world. The anticipated performance of the Nigerian Capital Market in the coming year is based on the developments and reforms currently taking place. These developments include: • Equity Market - the demutualization of the NSE, establishment of the NASD trading platform, proposed listing of communication companies and anticipated decrease in transaction cost is expected to increase stockbroking activities. • Fixed Income - the inclusion on FGN bonds in the Barclays Bank Emerging Markets Bond Index is expected to stabilize the Bond Market as we expect current FGN bonds to be re-priced leading to increased activities on the fixed income desk. • Business opportunities are being created for our Financial Advisory division as a result of the power sector privatization initiatives. We anticipate huge offshore investors’ appetite in the Energy Sector. The adoption of Public Private Partnership (PPP) by the Federal and State Governments will also lead to infrastructural financing mandates from governments and the private sector. i


> Banco Interacciones:

Preparing for the Future


anco Interacciones is a success story which was born 19 years ago among Mexico’s worst economic crisis. Established in 1993, the bank has stayed ahead of its competitors by focusing just in those market segments where it has several competitive advantages. Leveraged by its corporate values of teamwork, quality control, trust, commitment, loyalty and responsibility, Interacciones has been able to offer quality products to its clients, becoming in few years a respected institution in its target market, playing a major role in the public sector financing business, lending to the three government levels: federal, state, and municipal government; as well as state-owned firms and other public companies. By being experts in the structuring of infrastructure projects, financial advisory and project finance consultancy, Banco Interacciones is an ideal partner for international firms interested in investing in Mexican public infrastructure. Following a clearly defined strategy of leveraging its core competencies, the bank has been a major player in market segments that demand a high degree of specialization and knowledge in designing flexible financing mechanisms. Interacciones has a main and distinctive approach to business: a flexible strategy (the bank does not provide a standard product; it has an ability to offer custom-made services); as well as a short time to market in assisting with financial solutions for its clients. This strategy has led to major recognition by its peers and clients as experts in supporting governments and related companies, and participating in eligible infrastructure projects. The bank supports different kinds of projects which can help it grow, be it organically or inorganically, all inside the guidelines set by its strategy. Even with the success the bank has experienced recently, in the last couple of years, Banco Interacciones has emphasized a need for high returns, constantly ranking among the top 3 in ROE in the Mexican banking system, but at the same time without taking unnecessary risks. The bank has significantly improved its funding structure; its liquidity has increased, reducing gaps – increasing the duration of its liabilities and decreasing the duration of its assets, and

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Winter 2012 - 2013 Issue

improving its ratios to better levels than expected. At the same time, the quality of its credit assets has also widely improved (with a delinquency rate well below the industry average), consistent with a policy of maximum return with the minimum risk possible. Mexican Banking System Total Assets Credit Loan Portfolio ROE Delinquency Rate

Place 11th 9th 5th 2nd Lowest

Now, Interacciones has a better structured balance sheet, with an attractive growth of its assets that has been driven essentially through a greater assets turnover that in turn has generated a higher fee income. The key to its profitability, like it was in 2011, is an attractive profit margin that along with a high asset turnover has generated the sufficient fees to increase the bank’s total income and foster growth in the shareholders’ value. Banco Interacciones has kept intact its business fundamentals, encouraging growth in its financial results and rewarding performance and reliability, all of this under its current model and value propositions: Even with the rapid growth the bank has experienced in recent years, the management has been careful of maintaining a healthy portfolio, measured by its low default rates, high capitalization index and low exposure to credit and market risk. The bank has always been concerned with solving its customers’ needs by listening carefully to their goals, in order to develop high quality tailor made solutions. Interacciones has been an important partner for many Mexican governments, helping them with financial solutions that allow them to keep improving its infrastructure as well as improving the life of its citizens. Summarizing, Banco Interacciones is still looking forward, keeping its value drivers focused towards Infrastructure projects, financing to sub sovereign entities and factoring in the government value chains. i | Capital Finance International


> Banque Misr Liban:

Committed to Excellence in Service Poised for Strong and Sound Future Growth By Mr. Hadi Naffi


number of factors help Banque Misr Liban to stand out in Lebanon’s relatively crowded and competitive banking sector. It is one of Lebanon’s oldest banks as it was established in 1929 and ranks number 3 on the official historical list of banks in Lebanon. It is 92.44% owned by the Banque Misr Group, which is one of the largest banking groups in the Arab world with total assets exceeding USD 30 billion in 2011 and a network of branches and affiliate banks in the United Arab Emirates, France and Germany, a Rep Office in Turkey, and interests in 135 projects worldwide. The group is presently fully owned by the Central Bank of Egypt, which thus makes BML the only commercial bank in Lebanon backed by the credibility and resources of a central bank. Most important perhaps, BML has been totally reengineered along modern banking lines since 2007 and as a result is poised today to continue its long tradition within the Lebanese banking sector, and has the vision, financial soundness and resources for solid future growth. At a time when competition, whether in the retail or corporate/commercial business, takes place on the basis of the type and quality of the product or service provided, as well as pricing and client loyalty, BML’s primary vision is to be the preferred bank for its customers and it is working hard to achieve this vision through an emphasis on personalized service that only a smaller bank can provide, and a corporate culture of excellence, team spirit, integrity and professionalism. All this is allied with the application of the latest risk management guidelines, and the highest standard of corporate governance. The process of reengineering that started in 2007 and set BML on a new path of growth and development has encompassed a complete internal restructuring; the renovation and modernization of all its facilities; an expansion of the branch network; the redevelopment of its human resource base, and the creation of a full complement of services and products that are offered by a modern universal commercial bank. All this was supported by a 140% increase in its paid-up capital in 2010. Today, BML’s corporate loans and trade finance services are highly flexible and tailored to meet all institutional requirements. Its evolving retail services and products include all types of deposit

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Winter 2012 - 2013 Issue

BML Executive General Manager: Mr. Hadi Naffi

Total assets Loans and advances to customers Customer deposits Shareholders’ equity

2007 459 56 368 35

2008 522 71 418 35

2009 621 80 510 39

2010 870 98 688 94

2011 952 133 760 92

2012 1,082 173 858 95

% Growth ‘07-‘12 135.7 208.9 133.1 171.4

BML Financial Highlights: 2007- 2012 (USD million – rounded)

accounts; personal loans, consumer loans, housing loans, tuition loans and car loans; plastic cards of all types; insurance programs and products, and other modern services and products. Private banking investment services are provided through a small qualified team to ensure timely information, and fast response and execution. BML presently has a network of 18 branches,

strategically located in the major cities and regions of Lebanon and supported by a network of in-branch and external ATM machines. The expansion of the branch network is an ongoing process dictated by business targets and market considerations. BML also has plans to expand its activities regionally such as to take full advantage of synergies with the regional and international network of the Banque Misr Group. But these

plans have been put on hold since 2011 awaiting a return of stability to the region after the events of the “Arab Spring” that are not yet fully resolved. Reflecting the success of its development and expansion plan, BML grew rapidly between 2007 and 2012, with assets rising nearly 129% up to the end of November 2012, customer deposits by 128%, and loans and advances to the private sector by a whopping 204% The average annual rate of growth in all three aggregates was faster than the sector and peer bank average. In parallel to that, BML’s shareholders’ equity rose 171% during the same period. Needless to say, BML’s achievements over the last five years or so are particularly impressive given that the domestic market for banking services is highly competitive, that the rate of market penetration in Lebanon is very high compared with the other Arab countries and emerging economies, and that the 10 largest banks in the country, making up 15% of the total number of banks, control more than 80% of the banking market. i | Capital Finance International


> Pier Carlo Padoan, OECD:

The Short Term, the Long Term, and How to Manage the Transition


ive years into the crisis the global economy is weakening again. Activity has slowed markedly since the spring of this year, mostly due to negative trade, financial and confidence spillovers originating in the euro area. Deleveraging, possibly stronger effects from past policy tightening and uncertainty about the future policy stance in many countries are also taking their toll on growth. Global prospects are subdued, fragile and heavily dependent on the speed and decisiveness of policy actions.


The main risk to the outlook continues to stem from the crisis in the euro area. Adverse outcomes stemming from a country or countries being forced to exit the monetary union, explosive public debt dynamics, heightened bank sector stress and a collapse in confidence cannot be ruled out. Additional risks are that self-reinforcing dynamics push several major economies in recession, an extremely sharp US fiscal tightening in 2013 tips the US economy into recession, geopolitical tensions prompt | Capital Finance International

a spike in oil prices, financial conditions deteriorate suddenly with a fall in share prices, or a steep drop in investment demand materialises in emerging markets, notably in Asia. But the outlook is not all gloom and doom. The recovery in the United States may be stronger than expected if pent-up demand pressure is released. Moreover, the impact of past structural reforms, especially in the euro area countries under market pressure, may turn out to be more

Winter 2012 - 2013 Issue

timely and beneficial than currently hoped. The US: the fiscal cliff looming large Even though budget consolidation will exert a drag, US growth is projected to pick up gradually in 2013-14, helped by accommodative monetary policy, increasingly supportive financial conditions and the improving housing market. However, if a stalemate in Congress implied a much sharper fiscal tightening in 2013 than assumed, the US economy could slide into recession, as could also be the case if major financial turmoil erupted in the euro area. Under such harsh scenarios additional monetary policy easing may be called for, including further quantitative easing. This is not devoid of risks - super-easy monetary policy may prompt unsustainable asset prices and savinginvestment patterns, and may spill over to other countries. It is essential that a credible mediumterm fiscal framework for sustainable public finances be implemented, allowing additional fiscal policy space as needed. The euro area: a comprehensive strategy of durable adjustment needed Household and business sentiments have continued to deteriorate in the euro area, despite the European Central Bank announcement of its Outright Monetary Transactions (OMT) scheme. Tight financial conditions have persisted in vulnerable countries alongside problems in the banking system. Solvency fears for banks and their sovereigns are feeding on each other, due to government guarantees for banks and bank holdings of government bonds. The possibility of exit from the euro area has pushed up yields, which in turn reinforces break-up fears. Worries about government debt are driving up yields, which further exacerbate the debt dynamics. With fiscal headwinds and household deleveraging taking their toll, growth is not projected to return to trend until late 2014, with the unemployment rate rising to 12%. The divergences across the euro area remain sizeable, with the third and fourth largest euro area members, Italy and Spain, facing prolonged recessions.

Unisphere in NY

“But the outlook is not all gloom and doom. The recovery in the United States may be stronger than expected if pent-up demand pressure is released.�

Worse outcomes are possible. A sharp rise in bond yields in vulnerable countries could unsettle banks’ balance sheets once again, resulting in very tight credit conditions that could push the economy into a tailspin, with significant spillovers around the world through trade, confidence and financial channels. There is also a risk that the pace of institution building, such as the pursuit of a genuine banking union, is proceeding too slowly to restore confidence, and that political and economic events will lead to renewed convulsions in financial markets. Euro area member states and institutions are thankfully engaged in a tremendous effort to reach a different outcome. An upside scenario

Pier Carlo Padoan | Capital Finance International


Japan: a risk of adverse debt dynamics Following robust reconstruction-driven growth in early-2012 the recovery in Japan is also stalling, with export volumes declining and domestic demand slowing. As reconstruction expenditure peters out and fiscal consolidation gets underway, growth is expected to be only modest over the 2013-14 period. As long as inflation is not firmly positive, the zero-interest–rate policy needs to be maintained, and if the recent trend towards easing of deflation showed signs of being arrested or reversed, further measures should be undertaken, including expanding the scale of the asset purchase programme. Fiscal consolidation is set to intensify in 2014 with the planned increase in the consumption tax. However, additional measures are required to attain long-term goals, and a detailed and credible medium-term consolidation programme remains to be established. With the external position weakening - and hence a greater reliance on foreign savers to finance the budget deficit looming - a lack of fiscal sustainability could create a risk of disruptions in financial markets. Structural reforms that boost growth and ease negative debt dynamics are urgently needed. Policy barriers that hold back investment spending or the transfer of income to consumers should be tackled. Emerging market economies: facing challenges too After a period of unexpected weakness, output growth is now beginning to pick up gradually in the major emerging market economies, with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand. Accordingly, the recovery in these economies is projected to materialise faster than that of the OECD area. In China, there is


Purchasing Managers Index (PMI)














United States



Euro zone








25 Jul-10

25 Jul-09

30 Jan-09

30 Jul-08

A comprehensive strategy that pursues a durable adjustment of intra-area imbalances, reforms to improve area-wide growth prospects (including a deeper Single Market where a lot of scope for improvement exists) and urgent action to end destabilising feedback loops between banks and sovereigns would be instrumental in this regard. Structural reforms that boost competitiveness in the periphery should be combined with reforms that help activity in surplus countries reallocate toward sheltered sectors, to make the adjustment more symmetric. European authorities should also avoid excessive emphasis on headline fiscal balances, allowing automatic stabilizers to play fully in countries with sufficient fiscal space, especially in view of the spillovers of coincident adjustment across the area, and the inability of monetary policy to counter-balance its impact.

Business sentiment - Advanced economies


may materialize, which would lead to greater confidence and a positive market response, in terms of both risk assessment and investment and spending decisions.

Source: Markit.

scope to ease monetary conditions further while allowing for a faster effective appreciation of the renminbi to help rebalance the economy. Most emerging market economies still have sufficient scope for counter-cyclical fiscal action in case of an abrupt weakening of the global economy. But many of these economies also face the challenge of adjusting to international spillovers from easy monetary conditions in advanced economies. And this in a context where the slowdown in emerging markets may at least to some extent be indicative of insufficient domestic growth dynamics. This is notably the case in external surplus countries such as China, where structural policies could bolster these

growth dynamics. Equity an overarching concern Current fiscal consolidation plans in OECD countries, though warranted, are likely to increase income inequality. Fiscal consolidation may not be politically sustainable if concerns about fairness and inequality threaten the legitimacy of consolidation programmes. Increasing unemployment would trigger reform fatigue and social resistance. The good news is that there appears to be scope to rebalance consolidation efforts in favour of more equity, with only limited adverse effects on growth. For instance, increases in the effective retirement age, raising

Consumer confidence Consumer confidence survey indicators, standard deviations



United States Euro area Japan

0.5 0

0.5 0












-3 2008





Note: Normalised at 1999M1 to 2012M10 period average and presented in units of standard deviation. Values above zero signify levels of consumer confidence above the period average. Data for United States provided by the Conference Board. Source: Datastream, and European Commission. | Capital Finance International

Winter 2012 - 2013 Issue

Euro area trade spillovers on emerging economies Change in GDP growth contribution due to direct effects of changes in export growth to euro area, first half of 2012 relative to first half of 2011, percentage points




















-0.9 Brazil





South Africa

Source: OECD Economic Outlook 92, and OECD calculations.

efficiency in the education and health care systems, reducing tax expenditures and raising taxes on immovable property are consistent with equity goals but do little or no harm to potential growth. Fiscal consolidation should pursue the combined objectives of long-term supply growth, near-term demand growth and equity. Confidence is key The causes of the current slowdown are numerous, but one is worth underscoring again: a significant

drop in confidence. Lack of confidence largely reflects insufficient or ineffective policy responses, which are not caused by a lack of understanding of policy requirements, but rather the consequence of authorities’ failure to reach consensus on the policy response itself. It is an issue of the political economy more than of the economics of policy response. The fiscal cliff and the debt ceiling in the United States, policy dilemmas in Japan and the management of the euro area crisis are three cases in point. Policy dilemmas are present in

Table 1.1. The global recovery will gain momentum only slowly OECD area, unless noted otherwise

A v e ra ge 20002009

2 0 12 2 0 10

2 0 11

2 0 12

2 0 13

2 0 14

2 0 13 2 0 14 Q4 / Q4

P er cent

Real GDP grow th 1 United States Euro area Japan

1.7 1.7 1.3 0.5

3.0 2.4 1.9 4.5

1.8 1.8 1.5 -0.7

1.4 2.2 -0.4 1.6

1.4 2.0 -0.1 0.7

2.3 2.8 1.3 0.8

Output gap 2







Unem ploym ent rate 3








Fiscal balance 5 Memorandum Items World real trade grow th World real GDP grow th


1.0 1.8 -0.5 0.3

1.9 2.2 0.6 2.0

2.5 3.2 1.6 -0.1






































1. Year-o n-year increase; last three co lumns sho w the increase o ver a year earlier. 2. P er cent o f po tential GDP . 3. P er cent o f labo ur fo rce. 4. P rivate co nsumptio n deflato r. Year-o n-year increase; last 3 co lumns sho w the increase o ver a year earlier. 5. P er cent o f GDP . 6. M o ving no minal GDP weights, using purchasing po wer parities. So urce: OECD Eco no mic Outlo o k 92 database. | Capital Finance International

emerging economies as well, reflecting different country-specific conditions that become more challenging as growth slows down. While confidence requires decisive policy action now, it also needs to be underpinned by trust in the long-run future. This cannot rely, however, on a return to a business-as-usual scenario. The challenge for emerging market economies is to make the most of “catching up,” with policy measures focusing on better factor allocation, such as through product market reforms and improvements to the rule of law, as well as mechanisms that promote human capital accumulation. But even if catching up proceeds, with benefits for global growth, a main challenge remains: what will drive growth at the frontier? A recent paper by Robert Gordon suggests that spells of significant productivity growth are associated with “heroic” innovation cycles, which have occurred very few times in the past, and which are very unlikely to repeat themselves. Being optimistic, there are nonetheless two areas of innovation that could still bring significant contributions to productivity growth: intangible assets and green growth. Investment in intangibles such as employee skills, organisational know-how and various forms of intellectual property, is an important driver of productivity growth. Evidence shows that such investments are responsible for the largest increase in productivity (which could be as high as two-thirds of total productivity growth) in the most advanced economies. The frontier could also be shifted upwards by moving towards greener growth, i.e. fostering economic growth and development while ensuring that natural assets continue to provide the resources and environmental services on which the economy relies. Green growth policy has the potential to address economic and environmental challenges and open up new sources of growth through several channels. Long term growth will not come without imbalances. Current account imbalances are set to widen again as savings rise above investment in emerging economies. Imbalances are unavoidable to some extent, as they also reflect the global allocation of savings that support growth. While international financial integration is commonly seen as increasing economic efficiency and growth, it can also increase the risk of financial contagion and instability. Governments must be vigilant against this risk. New empirical analysis by the OECD, covering both advanced and emerging economies, shows that a bias in gross external liabilities towards debt, and in particular bank debt, substantially increases the risk of financial crises. Currency mismatches of assets and liabilities and shorter banking debt


Pier Carlo Padoan: Deputy Secretary-General and Chief Economist at the OECD.

maturities add to this increased crisis risk, the latter mainly by increasing financial contagion. By contrast, financial integration through foreign direct investment (FDI) is found to have little adverse impact on financial stability. Structural policies can help reduce financial fragility, typically through their impact on the financial account structure.

interdependence and channels of transmission more into consideration, and therefore shape policy responses accordingly.

International coordination part of the picture This leads to the last key element required to generate confidence and trust at the global level - the need to take international spillovers of domestic policy action into account. Indeed, this has been and is still at the heart of the G20 policy debate when looking at the issue of imbalances and, more recently, at the impact of monetary policies on capital flows and exchange rates.

One of the often-made claims about the G20 process is that while it performs a useful and effective role in crisis management, the group is less effective when dealing with longer term issues, especially given the tendency for expanding agendas as new chairs set in. This translates into a weaker capacity to influence the policy agenda, and therefore to contribute to confidence building. The issue is not so much the multiplication of agenda items, but often the lack of a clear connection between different agenda items and the difficulty in making a link between the short term, which includes crisis management, and the long term.

While the pressure to cope with such issues may vary with the economic cycle, it does point to the need for policy makers to take

The G20 have a powerful instrument to deal with this issue: the Framework for Strong Sustainable and Balanced Growth. It is a tool for analysis of

72 | Capital Finance International

the policy issues that helps highlight connections and complementarities between policy domains and countries. It is a tool for policy design and assessment, as it allows identification of “superior� policy scenarios and assessment of implementation and impact. It provides a link between the short term and the long term. It helps manage the transition. Of course, G20 policy effectiveness is directly related to the effectiveness of policy commitments made by member countries. By providing the possibility of exercising peer pressure, the G20 helps build credibility on a coherent policy response. The costs of inaction can be very high, and markets are particularly disappointed when they see that superior solutions are feasible, but not implemented. This can derail the transition away from a sustainable long term path, towards a bad balance of higher debt and lower growth. We should not, and cannot allow this to occur. i

envisioning financial prosperity in the region

Burgan Bank, established in Kuwait in 1977, is a regional financial powerhouse that provides innovative banking solutions to customers at their every stage of life or business cycle. With its solid financial delivery in a wide range of diversified portfolios enabled by its expertise and vast regional footprint, Burgan Bank is your best partner in the Middle East and North Africa region. Members of Burgan Bank Group:

For more information please call Burgan Bank on (+965) 22988400, or visit


AWARDS 2012 WINTER HIGHLIGHTS Once again brings you reports of individuals and organisations that our readers and the judging panel consider worthy of special recognition. We hope you find our short profiles interesting and informative. All the winners announced below were nominated by audiences and then shortlisted for further consideration by the


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

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

Winter 2012 - 2013 Issue

> Amazon’s Jeff Bezos: Corporate Leadership in North America Jeff Bezos, founder and CEO of Amazon, gives micro-management a very good name. His attention to detail – and concerns for customer satisfaction – are legendary, and as a result Amazon is the largest online retailer and a model for effective e-commerce. By many measurements Bezos is the most successful CEO in the United States. Christmas 2012 was Amazon’s best ever season – with the Company moving 306 items every second - and its stock market price hitting an alltime high. The judging panel pointed out that,’ A recent study estimates that by 2016 e-commerce will be worth upwards of $1 trillion with almost one quarter of sales attributable to Amazon. No question, Bezos is one of the finest corporate leaders in America.’

> Tata Steel: 100 Years of Responsible Business Practice in India

The judging panel accepts that Tata Steel, which last year celebrated 100 years in business, has ‘Adopted an approach of value creation – through sustainability – for all its stakeholders. Tata takes full responsibility for the impact of all the work it conducts and has an exemplary record in terms of workplace safety, CSR initiatives and concern for the environment. There is proper setting of objectives and measurement of progress at Tata. Published assessments of achievements are realistic and indicate that the Company is doing a good job. Tata Steel wins our Sustainability Award, India, 2012.

> Debevoise and Plimpton: Our Best Law Firm, United States

Debevoise and Plimpton closed the year 2012 with a victory for Yves Saint Laurent in the ‘red shoe’ trade mark litigation which followed a law suit brought by shoe designer Christian Louboutin. This prestigious firm’s client roster includes American Express, Coca-Cola, CNN, Deutsche Bank, Goldman Sachs, JP Morgan Chase, NBC, The New York Times, Shell Oil, Sony and Yahoo. The firm has also distinguished itself by working on behalf of captives at Guatanamo Bay despite what the judging panel described as, ‘Outrageous remarks from the office of Detainee Affairs suggesting that law firms should choose between lucrative corporate retainers and the representation of terrorists. (The offending spokesman was widely criticised and subsequently resigned.) Debevoise and Plimpton is one of the most profitable and successful law firms in the world as well as thoughtful, intelligent employer and wins our 2012 award for Best Law Firm, United States. | Capital Finance International


> Gulf Finance House: A Long Term Winning Approach Gulf Finance House (GFH) is the standout winner of our award for Best Islamic Investment Bank, Bahrain 2012. The organisation’s steadfast approach to investing primarily in high quality infrastructure and private equity projects that help provide sustainable growth opportunities in the GCC and beyond was applauded by the judging panel. GFH provides an excellent example of how good investment banks bring real benefit to the societies in which they operate. 2012 was an excellent year for the Bank – rewarding years of patience and restructuring following the upheavals of the financial crisis. GFH has proved that they are in it for the long haul and have the resilience not only to survive uncertainties but to thrive throughout difficult times. Since its foundation in 1999, Gulf Finance House has established itself as one of the world’s most innovative Islamic investment banks. For more than a decade now, GFH has been unlocking value in some of the most dynamic emerging economies. Its strategy is based on identifying and delivering investment opportunities in the Islamic financial services and infrastructure sectors of the Middle East, The Levant, North Africa and Asia. The Bank’s shares are listed on the Kuwait Stock Exchange, the Bahraini Stock Exchange, the Dubai Financial Market and the London Stock Exchange in the form of a GDR. This has seen GFH raise funds of more than US$5 billion to invest in Islamic financial institutions and infrastructure projects, harnessing the enormous potential offered by the region’s dynamic economies.

> Julius Baer: Best Private Bank, Switzerland

Assets under management amounted to CHF 187 billion at the end of October 2012 (up 10 per cent from the end of 2011) while total assets grew to CHF 274 billion (up 9 per cent). Julius Baer prides itself in making extra efforts to get to know their clients so to better advise them. The judging panel noted JB’s acquisition of Merrill Lynch’s international wealth management business (outside the United States). Julius Baer takes the 2012 award for private banking.

> Herbert Smith Freehills: Best Law Firm, Australia The merger between London’s Herbert Smith and Sydney’s Freehills which went live in October 2012 has not been without its difficulties but is an extremely promising combination. Herbert Smith is best known for its litigation work while Freehills are energy and mining sector specialists. The merger creates a global giant with 2800 lawyers working out of 20 offices. The panel congratulated HSF on its full financial integration approach, agreeing that if something is worth doing, it’s worth doing well. The award is in consideration of Freehill’s work in Australia in 2012 and also reflects the panel’s confidence in the depth and scope of the merger.

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Winter 2012 - 2013 Issue

> CFI Award Panel Recognises Red Cross and Red Crescent Societies We are delighted to announce The International Federation of Red Cross and Red Crescent Societies (IFRC) as winner of a CFI award for Corporate Leadership. The IFRC has for nearly 100 years been helping to ensure that the national Red Cross and Red Crescent societies work together effectively. The IFRC brings the world closer together and cuts through political, national, racial, religious and economic differences in helping humanitarian efforts across the globe and stands out as a force for good. What is less well known is that in order to achieve its goals, Society members raise over 50% of their revenue from a diverse range of commercial activities. Many of these efforts serve the dual purpose of achieving the stated aims of the IFRC while in addition providing revenue for other humanitarian work. We think commercial organisations would do well to consider how the IFRC operates in the commercial world when trying to balance CSR activities with the overall needs of all stakeholders.

> Keep an Eye on Cairo Amman Bank: Winner in Jordan and Palestine

The judging panel congratulates Cairo Amman Bank, the leading retail bank in Jordan, for pioneering iris recognition services for the identification of account holders and authorisation of their transactions. Several years ago, Cairo Amman was the first bank in the world to offer this service and has been improving on and updating the technology ever since. The Bank also has a refreshing ‘back to basics’ approach to the industry in regard to customer service. Their branch network is expanding well in both Jordan and Palestine and Cairo Amman was declared Best Bank in both countries.

> GRUMA: Corporate Leadership Award, North America Gruma has been prominent in the food industry since 1949 and is the largest producer of cornflower and tortillas in the world. The Company has been making a series of important investments outside Mexico since the 1970s and the judging panel recognises Gruma as a major global player. In early 2012, Joel Suarez Aldana, who had held a number of important management roles since joining the Company in 1987 - and was responsible for expansion of the business in Europe and the United States - was appointed CEO. | Capital Finance International


> New CEO and UK Banking Award for Barclays, 2012

Antony Jenkins became CEO of Barclays at the end of August after the Libor interest rate scandal. He admits that over the past 20 years the banking industry has been too aggressive, overly focused on the short term and disconnected from the needs of its customers, clients and wider society. He has drawn up a ‘Purposes and Values’ blueprint which calls for integrity, service, excellence and good stewardship and has made it clear that performance will also be judged on the holding up of these values. He has told employees that the rules have changed and that anyone who is uncomfortable should leave the Bank. The judging panel feels comfortable with Anthony Jenkins. It should not be forgotten that Barclays was the only major bank not to require a bail-out during the Crisis. There were questions about the way this was avoided but clearly they were running a tighter ship and should be credited for that. Barclays is our UK Bank of the Year.

> 2012 Corporate Leadership award for SABIC

Saudi Arabian Basic Industries Corporation is considered by the judges to be a model Middle Eastern public company. It manufactures chemicals, fertilisers, plastics and metals and is a world leader in many of its product offerings. SABIC has a good corporate social responsibility programme, is concerned about business ethics and sustainability issues. SABIC’s presence around the world is exemplary. The panel unanimously declared SABIC a very worthy recipient of a Corporate Leadership Award for the Middle East.

> The Wall Sets a Global Example in Property Development

CFI are delighted to declare The Wall for Investment and Real Estate Development as a Corporate Leader. For the past ten years, The Wall, Investment and Real Estate has been involved in some of the major property development projects in Qatar and is active throughout the region. The management style is inspirational – encouraging and achieving work that conforms to the very highest international standards. The Wall is facilitating the progress of Qatar through the delivery of consistently high quality projects with a strict focus on key areas of development namely, healthcare, education and infrastructure. Innovative and reliable property developers such as The Wall are of critical importance to the region and this Corporate Leader has shown its concern for the communities it serves through an admirable corporate social responsibility programme.

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> Bredin Prat M&A Legal Award Winner in France Bredin Prat is a world class independent law firm which leads the field in mergers and acquisition work in France. The firm has worked on a large number of major privatisations and takeovers during the past 20 years. According to the judging panel, ‘In many cases this firm sets the standards by which the competition is judged.’ Bredin Prat is our Best M&A Legal Team in France, 2012.

> Olayan Financing Company: A Corporate Leader in the Middle East The Olayan Group was established in 1947 by Suliman Olayan. It is a private multinational enterprise that engages in distribution, manufacturing, services and investment. Olayan Financing Company is responsible for the Group’s business in Saudia Arabia and the Middle East (including JVs with major multinationals). The CFI judging panel takes the view that the founder’s values of dedication, integrity, teamwork and continual improvement inform the present management of the business and are as important to the Olayan family now as they ever were. In many ways the progress made by Olayan over these long years mirrors that of the Kingdom of Saudi Arabia itself. The name Olayan has been associated with major international brands and some of these relationships have been in place for over fifty years. Lubna Olayan is a champion of women in the work place and the firm is a good corporate citizen and a thriving business with strong momentum.

> Bladex is our Best Trade Finance Bank, Latin America

An obvious choice for this award, Bladex demonstrates an excellent and complete understanding of business in the region. Operating in 23 countries, Bladex was set up by central banks of Latin America and the Caribbean. The panel confirm this award on the basis of Bladex’s decades of experience and impressive trade financing achievements over the years. | Capital Finance International


> Greenwich Trust: Best Investment Bank, Nigeria

Good investment banking is critical for sustainable growth and to achieve this, banks should balance the needs of all stakeholders.’s awards panel are pleased to have identified Greenwich Trust Limited as a bank that does so consistently. The panel also felt that the long term financial success of Greenwich is due in large part to the excellent value set that the bank applies not only to its investments but also to its own internal management. It is only when management teams truly lives up to their mission statements that real success can be achieved. Greenwich Trust is of sufficient size to offer excellent research and strong local knowledge to help its clients and stakeholders whilst maintaining a high degree of flexibility. The panel were delighted to announce Greenwich Trust as the Best Investment Bank, Nigeria, 2012

> Denmark’s Lars Sorensen: Corporate Leader, Europe Lars Sorensen is the CEO of Novo Nordisk, the largest company in Scandinavia and the world’s biggest insulin maker. His twelve years at Novo have seen 42 consecutive quarters of double digit growth. The business model of the Company has protected it from much of the criticism directed at other large pharmaceutical firms. The judging panel notes that Novo provides insulin at cost to the poorest countries, cheap generics to the somewhat better off and make their money from innovative products sold to the richest countries to finance the model and drive their business forward. Sorensen receives one of our European Corporate Leadership awards for the year 2012.

> Emirates: Best Islamic Bank in the UAE

In 2012, Emirates Islamic Bank completed the integration of Dubai Bank to become the third largest Islamic lender in the United Arab Emirates. The judging panel commended the Bank’s handling of the process which took up most of the calendar year. One of the fastest growing banks in the country in 2012 and with a sixty per cent improvement in profitability, Emirates look set to benefit from the ruler of Dubai’s recent stated ambition for the Emirate to become the global capital of Islamic economy.

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> Y.C. Deveshwar: Corporate Leader in India

Yogi Deveshwar is a former president of the Confederation of Indian Industry and present chairman of ITC, one of India’s largest conglomerates. He was educated at Harvard, Cornell University and the Indian Institute of Technology. ITC reported a 21 per cent jump in profits in the third quarter of the year and reports consistently strong financials. Under the leadership of Deveshwar, ITC has been carbon positive for seven consecutive years and water positive for ten years (creating freshwater potential far in excess of its consumption). The judging panel accept that ITC is the only company in the world of this size to be able to make such a claim. The CTI ‘Farmer Empowerment initiative’ is now a case study at Harvard Business School and Deveshwar was described by them as the 7th best performing CEO in the world.

> Bank Misr Liban Wins Lebanon Award

We are pleased to announce Bank Misr Liban (BML) as Best Commercial Bank Lebanon, 2012. The Bank and its stakeholders are now seeing the benefits of the restructuring that has taken place over the past few years. This restructuring has left BML not only in a better financial position but also with improved levels of corporate governance and transparency. In the view of’s judging panel, these achievements – combined with the very strong local knowledge built up since 1929 – means that the Bank is perfectly positioned to provide safe and very high levels of service to its customers and deliver just rewards to all its stakeholders.

> ING: Best Bank, Netherlands

The Bank is working well on its extensive re-structuring plan and attracting a good number of new customers. ING is also committed to simplifying the model by exiting certain businesses outside the home markets. The judging panel were impressed by the creation in 2012 of a sustainable lending team in commercial banking and congratulated ING on being the first bank to take this step. The Bank comments that it sees sustainability as an opportunity rather than a threat. Since May 2012, ING has been chairing the Equator Principles Steering Committee which helps financial institutions and their borrowers manage environmental and social risk in financing their products. | Capital Finance International


> M&S Award in the UK: Looking Good is not Enough

Marks and Spencer wants to be recognised as the most sustainable retailer in the world. We do not have such a category available this year but the CFI. co panel has no hesitation in handing the UK Sustainability award to this high street giant. In summer, 2012, M&S unveiled a stylish, well cut suit retailing at 350 pounds which is probably the greenest garment ever made. The Company insists that all products not only look good but are sustainably resourced. Around one third of all products on sale in store are now sustainable in some way and Marks & Spencer claim to be the first major retailer to be carbon neutral. The judging panel characterises M&S sustainability efforts as intelligent, very effective and, indeed, rather stylish.

> Corporate Social Responsibility Award for Banro Corporation

Banro Corporation has been mining for gold in the Democratic Republic of the Congo since late 2011. The Company has developed a very generous and solid corporate social responsibility programme that is our winner in the DRC. Banro works hard to create local jobs and provide training opportunities; shows concern for the environment; and is very concerned about safety in the workplace. The Banro Foundation provides generous support to the people of the DRC particularly in terms of healthcare and education. A recent initiative ‘Celebrate the Congo’ delivered local art and music to a Canadian audience and the proceeds helped support the building of a new hospital. The award to Banro is ‘Best CSR, Democratic Republic of the Congo, 2012.

> David Thodey’s Corporate Leadership at Telestra David L. Thodey was appointed CEO of Telestra, the Australian telecoms giant, in May 2009 after the departure of his much reviled predecessor Sol Trujilio. Thodey decided that the company need a radical attitude shift and that Telestra should listen more to industry colleagues and customers. Soon the corporate culture was to change from one of arrogance to responsiveness. Others had tried before but Thodey was the first to succeed. As a former IBM chief executive, Thodey was focused more on customer needs and disagreed with the Trujilio view that the Company would always be safe because the federal government had a majority stake in the business and Telestra could be premium priced. Thodey countered with ‘Project New’ - a marketing programme with a billion Australian dollar war chest – to re-establish Telestra as part of the competition. By mid-year, 2012, Telestra was reporting significant revenue and profitability improvement and had added 1.6 million new mobile customers during the previous twelve months. The judging panel are pleased to confirm David Thodey’s Corporate Leadership Award for Asia Pacific.

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> Oversea-Chinese Banking Corporation: Best in Singapore

A child of the Great Depression, OCBC resulted from the merger of three banks and has been described recently as the strongest bank in the world. The judging panel commends the risk management policies here and notes a good 2012 local lending record justified by the favourable performance of the Singapore economy. Oversea-Chinese is’s Best Bank, Singapore for 2012.

> First International Bank wins Liberia Award

The year 2012 saw a substantial increase in profitability at First International and the Bank has ambitious plans to extend the branch network. The panel commends First International’s due diligence activities and efforts to combat money-laundering. The Bank’s balance sheet has been well strengthened this year and CFI. co is pleased to name First International as ‘Best Bank, Liberia’.

> metrobank: Our Number One in the Philippines

The Metropolitan Bank & Trust Company results for the first nine months of 2012 were good with consolidated net income up 15 per cent at P10.2 billion with a 12 per cent return on average equity. Founded in 1962, Metrobank is one of the largest banks in the Philippines with 800 domestic and 40 foreign branches, subs and representative offices. The Bank has recorded a number of firsts: unveiling a talking ATM in 1990 and becoming a billion dollar bank five years later. The judging panel congratulates a bank that has corrected itself after tricky times and consolidated its leadership position. Metrobank was judged to be Best Bank, Philippines in its 50th anniversary year. | Capital Finance International


> Kenneth Gray & Alison Baxter, Norton Rose:

2020 Vision for Long Term Debt Towards a New Financial Landscape


he constantly changing regulatory landscape, the continuing fall-out from the global financial crisis of 2008 and uncertainties within the Eurozone have all combined to transform fundamentally the market for long-term structured debt.

by a new absolute leverage ratio. But a short law does not mean light regulation. Though superficially attractive, it may not meet with universal acclaim. It would limit banks’ rights to self-regulation and their flexibility and autonomy in innovating business.

Two principal questions have to be answered:

Even under the currently proposed regulations, the new liquidity standards and capital ratios proposed by Basel III and the ring-fences suggested by Vickers and Liikanen will push banks away from long-term structured products towards other, supposedly safer, activities.

• If the traditional sources of liquidity for much of the world, the commercial and investment banks, are required to reduce the debt funding they make available, what will replace them? • If the availability of the traditional debt product, the bank loan, becomes further restricted, what alternative products can take its place? Nature abhors a vacuum: infrastructure needs to be built, energy projects financed, natural resources extracted and aircraft and ships delivered. A new way of financing these vital assets is springing up to address the funding gap and although common themes are emerging, no two investors, countries and/or projects are the same. A bespoke approach is needed. How did we get here? Since the financial crisis of 2008, banks and other financial institutions have been hit by a tsunami of proposals for regulation: Basel III (and its European offshoot, CRDIV-CRR), the Vickers and Liikanen reports, the proposed single supervisory mechanism, and recovery and resolution proposals, for banks in the European Union, Dodd-Frank in the USA, Solvency II for insurers within the EU and the Financial Stability Board’s (FSB) proposals for shadow banking. Compliance by a financial institution, in all its business sectors and everywhere it does business, will be a Sisyphean task. The volume and complexity of new regulation has been routinely criticised as the root cause of the continuing financial challenges. But what is the alternative? Voices at both the Bank of England and the Federal Deposit Insurance Corporation in the USA have been advocating shorter regulatory legislation with greater discretion given to the regulators; less reliance on mathematical formulae and more subjectivity; possibly the abolition of risk-weighting and its replacement


Alternative funding sources In 2011, the percentage of corporate debt in Continental Europe provided by banks was over 80 percent and, in the United Kingdom, 70 percent (compared to less than 30 percent in the USA, where the capital markets are much more active). Those levels will be unsustainable in the current market and the new liquidity ratios imposed by Basel III mean those hardest hit are likely to be the long term structured finance markets.

“A bespoke approach is needed.” Borrowers know they need to diversify their funding sources, either replacing banks or finding other sources with appetite to work alongside banks to provide finance. Many are looking at institutional investors - insurers, pension funds, shadow banks - to plug the gap, either acting independently, or through fund managers, or in the capital markets. Governments, including export credit agencies and multilaterals, are also being asked increasingly to provide liquidity. How will the banking sector’s role evolve? A number of banks have been quick to recognise the need for alternative sources of liquidity and have developed a model they call “distribute to originate”. They form clubs with less experienced banks and other non-bank financial institutions who have no, or limited, expertise in the relevant field but who trust the lead bank to originate safe and profitable business. Non-bank investors face their own regulatory challenges - exacerbated by the lack of certainty | Capital Finance International

concerning Solvency II and the FSB proposals. If they are going to play a role in providing finance, their regulatory constraints need to be taken account of too, remembering that different investors face different challenges: a commoditised product that satisfies everyone does not exist. Innovation through collaboration is likely to be the new model for the long term structured debt markets as we approach 2020. Each institution needs to think about what they want to do; what they can do; and what they are allowed to do. Together this could lead to the creation of the debt solutions the market needs. Two products either completed or evolving in the European market show how differing needs can be united to bring about a single solution. At one end of the spectrum structures such as PEBBLE (or “Pan European Bank to Bond Loan Equitisation”) are being promoted by banks, particularly in the Netherlands. In these structures, the funding for a project is split so that an institutional investor will provide the core funding for a project - say, 85 percent of the debt - whilst the traditional banks provide a subordinated, first loss tranche for the remaining 15 percent. The net result allows the investors to provide relatively secure liquidity whilst shifting the top slice risk onto the commercial banks. However structures seeking to deliver the exact opposite results - where banks keep the liquidity but move the risk onto other investors - have also been seen in the market. An example is the “Blue Rock” transaction managed by Norddeutsche Landesbank (Nord LB). In this structure, the bank created a higher risk, mezzanine tranche from a PPP (Public Private Partnership)/PFI (Private Finance Initiative) loan portfolio which it placed with a third party infrastructure fund (which receives an enhanced interest rate). By divesting itself of the higher risk, Nord LB has reduced the capital charge of the loans, so freeing up its balance sheet. Between the two examples cited are a variety of tailor-made structures which involve different investors coming together to re-allocate risks and roles to suit their particular requirements and capabilities and to maximise regulatory and economic efficiency.

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European Court of Justice: Headquarters

Where is the government in all of this? There is a clamour in the marketplace for greater government involvement in the provision of long term debt. But the government response may differ according to the state and sector involved. Questions arise: in cross-border deals, which states should be involved? What is the role of the multilateral? What form should the support take - the provision of liquidity, assumption of risk, both or something else entirely? In the same way that no two commercial investors are the same, no two governments are the same. Some will provide funding either directly or through a capital markets vehicle; some will assume the totality of risk; and some will share. Examples abound, including the Europe 2020 Project Bond Initiative which contemplates the credit enhancement of senior secured project bonds to a level that is intended to be attractive to institutional investors. Credit enhancement may take the form of either funded subordinated debt, or an unfunded partial guarantee of senior debt service, provided by the EU with the involvement of EIB. In the United Kingdom, the government has recently revised its private finance initiative under a new scheme dubbed

Private Finance 2 (PF2). PF2 involves the government actually taking an equity stake in the infrastructure project and explicitly encourages the development of structures not reliant on bank debt; and UK Export Finance has just announced a ÂŁ1.5 billion direct lending facility or small and medium-sized transactions. For some asset classes, state support is nothing new. For example, aircraft manufacturers have benefited from export credit support for many years. However, often, the support is risk-based - guarantees rather than funding - and so does not address the liquidity challenge. Nevertheless, governmental support can be valuable when it comes to tapping alternative, more risk averse liquidity sources. Indeed, the combination of capital markets funding with export credit support is a growing trend. Common for many years in the aviation industry in the USA, the trend looks likely to extend into other geographical regions (particularly Europe) and asset classes such as energy and infrastructure. In the USA, Eximbank has guaranteed three notes issues, totaling $1.2 billion, by PEMEX, the Mexican state oil company. | Capital Finance International

An export credit supported bond or loan from a non-bank source may not on the face of it appear to be that cutting edge. But it reveals a common theme that may prove to be the foundation for the future development of the debt markets. By coming together to share ideas and expertise and assess how roles, risks and responsibilities can be allocated between them, different parties are working their way together through the challenges, creating new products and structures and thereby finding solutions that they could not deliver individually. Despite seemingly endless and endlessly complex regulation, the debt markets remain active and are adapting to the new financial and regulatory landscape. Almost 2,500 years ago Plato wrote that the true creator is necessity, which is the mother of our invention. The development of new financial products is proving him right. i

Kenneth Gray and Alison Baxter are consultants at international law firm Norton Rose.


> Thomas Kessler, DEG:

Fostering Financial Solutions for Small and Medium Sized Enterprises in Latin America By Thomas Kessler, Vice President, Financial Sector, Latin America


rivate enterprise in developing and transition countries calls for an efficient financial sector. This is why the development of that key economic sector plays a special role in DEG’s partner countries. It is DEG’s aim to support establishing a functioning diversified financial sector. Therefore DEG works on the setting up and institutional strengthening of private finance institutions. It improves access to long-term lending for local private enterprises, also in national currencies. Above all, small and medium-sized enterprises should have the chance to avail themselves of financial services. DEG priorities in the financial sector are financing banks, leasing companies and private equity funds. In addition, DEG imparts finance know-how, which benefits its partner institutions but also all those that contribute to growth in the regions. The promotion of small and medium-sized enterprise is of particularly high priority for DEG. The importance of these enterprises for the private sector in developing and emerging-market countries cannot be overemphasized. In Latin America small and medium-sized companies represent approximately 95% of all firms, are responsible for 60-70% of employment and account for 35-40% of the regional GDP. These effects are even more outstanding in rural areas, as agribusiness is often labor intensive. In summary, supporting SMEs is an important tool for poverty reduction. Furthermore, especially small and medium sized companies suffer from the fact that international commercial banks are retrenching as a result of

the financial crisis in 2008 and the recent crisis in the euro area. There is less capital available for Latin American banks and therefore they concentrate on the relatively easier corporate financing and reduce their volume with SMEs which are considered to be more risky. Last but not least, even where funds for SMEs are sufficiently available, local banks usually lack long term funding to support capital expenditures of their clients. It is the financial sector in developing and emerging countries that assists DEG in achieving

small commercial banks, the local banks, who are more familiar with the local conditions, in turn support DEG in becoming familiar with these local circumstances. DEG does not compete with commercial banks. Quite the opposite: it only acts in those areas where commercial banks do not or only to a limited extent offer long-term corporate financing. As soon as a commercial bank is prepared to provide the required long-term financing for an investment project, DEG takes a step back.

“In Latin America small and medium-sized companies represent approximately 95% of all firms, are responsible for 60-70% of employment and account for 35-40% of the regional GDP.” Thomas Kessler

its targets, thereby contributing to a sustainable development in these countries. In other words, DEG‘s cooperation with the financial sector in Latin America is a typical “win-win-situation”: local banks are provided with long-term capital, which they in turn can make available to small and medium-sized businesses to finance their investments. In this way, DEG indirectly promotes SMEs in Latin America. But also in terms of know-how, both parties can benefit each other. Whereas particularly DEG’s extensive sector know-how e.g. in the field of renewable energy, infrastructure and agribusiness, benefits

In countries which suffer from a lack of liquidity in their financial sector, DEG comes into play on the side of the end-borrowers, as already mentioned: it promotes finance institutions so that they in turn can provide small and mediumsized businesses with long-term capital to finance their investments. In doing so, DEG works hand in hand with local commercial banks. “Banco Improsa” in Costa Rica, to which DEG has been linked by a partnership for more than 10 years, is an illustrative example. DEG provided the bank with capital in the form of a loan, thus enabling it to finance small and medium-sized businesses.

DEG project in Brazil: The company Anhanguera Educacional Participações S.A. (AEDU) operates universities and distance-learning centres at different locations throughout Brazil. Especially via its distancelearning programme, AEDU is reaching young professionals of low-income backgrounds, thus allowing them access to higher education. DEG makes financing available in order to improve the prospects of young people. (pictures by Paxton Winters)

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Also the cooperation between different development finance institutions proved to be successful. One example in Central America is the partnership between DEG and the Latin American Agribusiness Development Corporation S.A. (LAAD). The agricultural development bank and DEG have already been partners since 2001. LAAD financings help create thousands of new jobs every year. The agricultural finance institution thereby contributes to poverty reduction in rural areas. DEG can offer several financing products, tailor-made to meet the clients’ specific financing needs. About 40 per cent of the DEG projects are equity participations: DEG purchases shares of the company in the investment country. It never assumes the role of a majority shareholder. In most cases it has a seat in the company’s supervisory committee. The company benefits from the advice and reputation of DEG. Another form of risk capital is mezzanine finance, a hybrid structure with instruments that may have characteristics of both equity and loans. In about 60 per cent of the projects, DEG provides the project companies with money – usually in euros or US-Dollars. The ceiling for loans is EUR 25 million, and the term is usually between four and ten years. Private equity and Tier II capital have a higher developmental impact as both of them are less widely available and exert a leverage effect on growth. This is why for example DEG’s last year’s transactions in Brazil have predominantly been of this character. Senior lending only accounts for about 40% of the projects financed in this market in the last five years. Similar outcomes are valid for several other countries in Latin America.

“Also the cooperation between different development finance institutions proved to be successful.” Recently, DEG has intensified its cooperation with a local bank: Together with local support from DEG, this bank filtered its client base, thereby identifying several medium sized customers which – apart from the need for working capital that the local bank provided – demanded long term financing for capital expenditures. Meanwhile a pipeline of those projects has been analyzed and first co-financings have been initiated. This way the local bank serves its customer with a long term financial (DEG-) solution while customer satisfaction increases. In addition to project financing, DEG offers the possibility of accompanying consultation and training programs in order to support enterprises in their commitment to sustainable development, for instance in the fields of education, health, transparent corporate management or environmental protection. In the financial sector DEG assists its partners in implementing international standards of good corporate governance. Funds for technical assistance, partially being nourished from governmental funds and DEG’s own profit, may support banks in enhancing their control systems or risk analyses or SMEs in partially financing direct knowledge transfer and support by specialized entities.

The financing volumes DEG provides have been increasing for many years, including new commitments in Latin America. Approximately one third of the estimated USD 500 million DEG committed in 2012 in the region went to the financial sector. Based on the so called Corporate-Policy Project Rating (GPR), the development impacts - the effect of employment, the total investment volume and other factors are recorded. The outcome of these investments is especially satisfactory given the background mentioned above. Since 2001 DEG has been a member of KfW. The institution is thus an integral part of the international finance activities of KfW and KfW IPEX-Bank, as well as its financial cooperation with developing countries, which also include investments in infrastructure, education and health. DEG benefits considerably from being a part of KfW: thanks to KfW’s good credit rating it gets better terms in the capital market, and the joint use of what have become more than 80 representative offices abroad facilitates the local support for investors. DEG has decided to expand its impact on SMEs through the support of local banks. Based on a recent survey, DEG is learning how to increase the benefit for the financial sector and their SME clients. It seems that by specializing and thus focusing on specific areas of this sector of clients, both local banks and DEG might gain more efficiencies. Findings are expected for early 2013 and should result in specific adjustments during the year. For all three parties involved, SMEs, their local financial institutions and DEG, the win-win situation requires continuous learning and professional improvements. i

DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH, a subsidiary of KfW, is one of the largest European development finance institutions for long-term project and company financing. DEG invests in profitable projects that contribute to sustainable development in all sectors of the economy, from agriculture to infrastructure and manufacturing to services. To date, DEG has worked together with more than 1,600 companies. Its current portfolio of more than 5.6 billion euros has contributed to an overall investment volume of around 39 billion euros. If you are interested in working with DEG, have any suggestions or would like to go into more details, please fell free to contact us under | Capital Finance International


> Otaviano Canuto,World Bank Group’s PREM:

Overcoming Middle-Income Traps


ince the 1950s, rapid growth has allowed a significant number of countries to reach middle-income status; yet, very few have made the additional leap needed to become high-income economies. Rather, many developing countries have become caught in what has been called a “middle-income trap”, characterized by a sharp deceleration in growth and in the pace of productivity increases. An examination of the successful experiences in overcoming that trap suggests a number of public policies that governments can pursue, such as improving access to advanced infrastructure, strengthening the appropriability of returns from innovation, and reforming labor markets to reduce rigidities—all implemented within a context where technological learning and R&D are central to enhancing innovation. Such policies not only explain why some economies— particularly in East Asia— were able to avoid the middle-income trap, but are also instructive for other developing countries seeking to move up the income ladder and reach high-income status. In the post-war era, many countries have managed to fairly rapidly reach middle-income status, but few have gone on to become highincome economies. Rather, after an initial period of rapid ascent, many countries have experienced a sharp slowdown in growth and in the pace of productivity increases, falling into what has been called a “middle-income trap.” To be sure, the World Bank has recently estimated that of 101 middle-income economies in 1960, only 13 became high income by 2008—Equatorial Guinea, Greece, Hong Kong SAR (China), Ireland, Israel, Japan, Mauritius, Portugal, Puerto Rico, Republic of Korea, Singapore, Spain, and Taiwan (China). By contrast, although many countries in Latin America and the Middle East reached middleincome status as early as the 1960s and 1970s, a great majority of them have remained there ever since. In Latin America, for instance, income per capita relative to the United States has fallen almost continuously in the region during the period from 1960 to 2005, especially after the debt crises of the early 1980s. Likewise, economic growth in many Middle Eastern and North African countries has waned and given way to high unemployment, as evidenced most recently by the social and political upheavals


“In the post-war era, many countries have managed to fairly rapidly reach middleincome status, but few have gone on to become high-income economies.” Otaviano Canuto

that took place during the Arab Spring of 2011. Middle-income countries elsewhere have expressed fears that they could follow a similar path. Climbing and getting stuck in the middle of the income ladder The evolution of countries from low- to middleincome levels has been reasonably similar wherever it has happened. Typically, a large pool of unskilled labor is transferred from subsistencelevel occupations to more modern activities that do not demand much upgrading of these workers’ skills, but nonetheless employ higher levels of capital and embedded technology. Such technology is available from more-advanced countries and is often easy to adjust to local circumstances. The effect of the labor transfer is an extraordinary increase of GDP values beyond what could be explained by the augmented use of labor, capital and other physical factors of production. This growth pattern tends to eventually slow down, either when the pool of transferable unskilled labor is exhausted or if the expansion of laborabsorbing modern activities peaks before the pool is empty. Beyond that point, growth toward high-income levels will require an increasing share of the population occupied in activities that are more technologically sophisticated, human capital-based, and intensive in design and organizational capabilities. In that context, an institutional setting supportive of innovation and complex chains of market transactions becomes essential. Instead of mastering existing standardized technologies, the challenge becomes the creation of domestic capabilities and | Capital Finance International

institutions, which cannot be simply bought or copied from abroad. A local and idiosyncratic process of skill acquisition is essential. It no longer suffices to transfer and adapt technology blueprints and organizational capabilities from abroad. Education of the labor force and access to advanced infrastructure – which facilitate the circulation of ideas and promote knowledge networks – are obvious requisites. However, government efforts to provide them will not get a country very far if they are not accompanied by institutions that reward innovations in products and processes and that allow complex chains of market transactions to take place at low costs. Local people’s investment in innovative skill acquisition and organizational capacity building only materializes if appropriable private returns are commensurate. Are there lessons of wide applicability from successful stories of ascent? As mentioned earlier, only 13 countries were able to transition from middle- to high- income status since the 1960’s. Five of them – Ireland, Portugal, Spain, Greece and Puerto Rico – constitute a special case, with their ascent inextricably associated to their absorption by existing high-income country spaces. Equatorial Guinea also has the singular experience of a very small country that is extremely well endowed with natural resources. On the other hand, like Israel and Mauritius, the five East Asian economies in that select group – Japan, the Republic of Korea, Singapore, Hong Kong SAR (China) and Taiwan (China) – provide a reference of broader reach for autonomous efforts to transit steadily from the bottom of the income ladder to the top. First, of the East Asian economies that were able to escape the middle-income trap, all have succeeded in developing advanced infrastructure networks, particularly in the form of high speed communications and broadband technology. Due equally to the liberalization of telecommunication networks and the related reforms to regulatory frameworks, a number of countries in the region have been able to develop and enhance the availability of information and communications services. To be sure, previous research on regional competitiveness underscores the importance of broadband telecommunications technologies and interactive multimedia. For countries with large export-oriented information equipment

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industries, such as Japan, South Korea, and Taiwan (China), a drive to enhance international competiveness perpetuated the development of broadband and multimedia industries in domestic markets. Likewise, other economies in the region that were able to escape the middle-income trap, such as Singapore and Hong Kong (China), have developed their advanced infrastructure networks in order to enhance their role as regional headquarters for major foreign multimedia companies. Another key factor underlying the success of the East Asian economies that were able to transition from middle- to highincome status has been their ability to push the technological frontier and move from imitating and importing foreign technologies, to innovating technologies of their own. Underpinning this homegrown innovation has been strong intellectual property rights protections. According to the World Bank’s Doing Business Database, intellectual property rights in in economies such as Hong Kong (China), Korea, Singapore, and Taiwan (China) rival those in place in Japan, US, and other high income countries. As a result of a well functioning system of intellectual property rights protections, many countries in the region have become global leaders in patenting their own technologies. Using the number of patents issued by the United States Patent and Trademark Office as a measure, economies in the region have generated patents per 100,000 people at around the same rate as the advanced economies. In particular, Taiwan (China) now generates nearly as many as patents as the best performing developed economies, such as Japan and the United States, with Hong Kong (China), Korea, and Singapore not far behind. Supporting this innovation

has been a commitment to investments that spur the upgrading of skills and directing public funds to R&D efforts. According to the UNESCO database on R&D expenditures, Korea, Singapore, and Taiwan (China) now devote resources to R&D spending as a proportion of GDP comparable to the levels in the United States and other highly-innovative developed economies. Last, flexible labor markets and open economic policies have allowed for the reallocation of labor across sectors within the most successful economies in the region. Countries in the region have relied extensively on international trade to accelerate their labor transfer by inserting themselves into the labor-intensive segments of global value chains. Such a transfer was facilitated by advances in information and communication technologies, and by decreasing transport costs and lowering international trade barriers. Labor market flexibility has facilitated the new labor transition, now increasingly toward innovative occupations. Conclusion The features of East Asia’s experience in transiting from middle- to high-income status provide important lessons for other countries that are attempting to follow suit. The middle-income trap is not an ineluctable outcome; it can be avoided if governments act accordingly. Doing so requires implementing public policies aimed at improving access to advanced infrastructure, strengthening the appropriability of returns from innovation, and reforming labor markets to reduce rigidities. These policies are central to fostering technological learning, attracting talented individuals into R&D activities, and encouraging the buildup of national and international knowledge networks. i

ABOUT THE AUTHOR Otaviano Canuto is Vice President and Head of the Poverty Reduction and Economic Management (PREM) Network, a division of more than 700 economists and public sector specialists working on economic policy advice, technical assistance, and lending for reducing poverty in the World Bank’s client countries. He took up his position in May 2009, after serving as the Vice President for Countries at the Inter-American Development Bank since June 2007. Dr. Canuto provides strategic leadership and direction on economic policy formulation in the area of growth and poverty, debt, trade, gender, and public sector management and governance. He is involved in managing the Bank’s overall interactions with key partner institutions including the IMF and others. He has lectured and written widely on economic growth, financial crisis management, and regional development, with recent work on financial crisis and economic growth in Latin America. He speaks Portuguese, English, French and Spanish. Based on Canuto, O. “Navigating the road to riches”, Project Syndicate, 2011; and Agénor, P.-R., Canuto, O. and Jelenic, M., “Avoiding middle-income growth traps”, Economic Premise n.98, World Bank, 2012. | Capital Finance International


> Power from the Tides:

Top Eco Marks for SeaGen but Is it too Big and Costly? By CFI

It is not a job for the faint hearted. A 500-tonne tower the height of a 10-storey building fitted with two 16m-diameter rotors is dropped into a Northern Ireland loch for the first time and switched on in the belief that it will produce electricity from tides flowing through the loch. There can be no dry run – a thing like that is too expensive to rehearse and the kit is too big to mess about with. Yet three years down the line the turbine, known as SeaGen, is working, producing enough power to have made £200,000 (EUR 230,000) per year so far – just as well since the whole scheme has stacked up at least £35m (EUR 40m) in costs.


eaGen – the brainchild of Peter Fraenkel, technical director and co-founder of Marine Current Turbines, the company running the project – is considered the first device to produce and continuously sell electricity from a tidal race. Fraenkel, who calls himself “a very optimistic person”, certainly has chutzpah. Undeterred by the expense and risk of installing one turbine, the company, of which he is technical director, proposes to install four or five in a row, probably in Scotland. They have to push ahead, of course, because otherwise they will never make any money. If planners give the nod, the company’s first commercial tidal array could be up and running by 2014. If the whole venture looks odd, it is with good reason: it’s not unlike creating a jumbo jet before you’ve produced a biplane. For a start-up company’s first real commission, it all looks far too expensive and too massive a project, working in a medium Fraenkel himself describes as a “horizontal waterfall”. Oceans and their sheer power and volume are the simple reason behind this – a force Fraenkel has had to contend with through more than 30 years working in water, from the Nile to the Scottish Highlands. However, he does admit to being surprised at the turn of events. “Until two or three years ago I thought it looked good but I didn’t expect it to come to any kind of conclusion – I thought there might be a showstopper of some kind. But it just gathered momentum,” he says. It’s true that he had experimented with smaller models of the turbine previously – as with any start-up, proof of concept was needed to get initial funding, and this was done using a 3.5m-diameter, 10-tonne rotor in a Scottish loch. Later, a larger turbine was tested off the 90

coast of Devon in England. Fraenkel didn’t take any massive leaps as he developed the turbine. Coming from an aerospace background and using his engineering expertise, he reasoned that some of the characteristics of aircraft propellers, which had already been designed into wind turbines, could be used underwater, for SeaGen is effectively a type of submerged turbine not so different from those seen in onshore wind farms. One of the patented features of his invention for the tidal sector lies in its ability to change the position of its rotors, which both makes it more efficient and means it can come to a halt gradually, creating less strain on the machine.

“From an ecologist’s point of view, SeaGen seems to be scoring top marks.” To the layman, that is not an obvious switch. Turbines above water or onshore are hard enough to work with. The waters at Strangford Lough, County Down, can flow at nearly 5m/s, compared with 1.5m/s in Egypt, where he first produced a turbine to drive an irrigation pump. Water itself is thicker and much more powerful than most winds. Its velocity is a key to the amount of electricity a turbine can produce, but by the same token that makes it a devil to work with. “Colleagues have worked out that if you put SeaGen on a mountaintop, you would be dealing with the equivalent of winds going at 250 miles an hour – twice the speed of a hurricane,” says Fraenkel with a wry smile. So it is with good reason that the company has decided to produce this giant, made of a number of steel, carbon-fibre and other materials, planted 9m into the seabed. “The rotor blades | Capital Finance International

have a force of about 30 tonnes (the weight equivalent of three double-decker buses) trying to bend them, so we had to use an extremely strong (but costly) material like carbon fibre to carry such a high load through a slim blade root,” explains Fraenkel. Divers have only half an hour or so during the dead time between tidal flows to carry out any minor maintenance checks; after that, they would be dragged away. Repairs are a nightmare but a key problem all tidal developers have to build into their plans. The biggest problem of all is installing the device in the first place – especially for the first time in a new location. “Installation at the moment is two-thirds of our costs and that’s unacceptable,” states Fraenkel. Installing SeaGen was fraught with problems none of the team could have foreseen. For one thing, they had to wait for weeks for a delayed barge to arrive, costing a fortune. For another, plans to pump liquid concrete to fix piles pinning the turbine to the sea floor were wrecked by the viscious flow of the water, which sucked it out again. Unique installation mechanisms have been devised to deal with some of these problems. Having hopefully learned from these projects, the company plans to repeat the whole business again and again until costs fall. An incremental approach to innovation may be one of the secrets behind its success thus far, allowing lessons to be learned little by little over years, even decades. It is for that reason that Fraenkel ridicules most of his rivals’ weird and wonderful turbines. There are dozens of other ideas in the field, ranging from devices shaped like reversed sails to those that look like underwater kites. “The less innovation the better, so far as we’re concerned,” he explains, “because to minimise

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the technology risk you need technology that as far as possible is tried and tested. We use fairly conventional power units (gearbox, generator and power electronics) and conventional rotordesign methodologies, whereas competitors with numerous innovative features are having serious difficulties in getting any results.” SeaGen itself has been criticised for being too big and too costly. But many smaller devices have their own disadvantages, since they create less electricity and work in slower waters, yet may incur fixed and relatively high installation and connection costs. They may also be less able to carry some of the internal electronics and cabling necessary to connect arrays to the onshore grid in a cost-effective way. From an ecologist’s point of view, SeaGen seems to be scoring top marks. Before installing the turbine, there was no knowing how local seals – which could be sliced in two by a rotor – would react. But these have sensibly avoided the turbine, as Fraenkel says he foresaw.

If the whole scheme sounds like a black hole for investors’ money, it is not surprising. It is an offshore infrastructure project, and there are not many of those across the world except in oil and gas. The leaders of these multinationals also took huge risks to build rigs in the deep waters of the North Sea in the 1970s, but with more of their own cash and direct government assistance.

For Fraenkel, the most challenging aspects of the whole project appears to be behind him. He argues that the next phase, building an array in a similar loch, will be easier. “We won’t make the same mistakes with the second, third and fourth turbines and we’ll do them in less time. Overheads will be split between turbines so there’ll be economies of scale,” he points out.

Marine Current Turbines, on the other hand, employs 21 people and relies on dedicated supportive partners such as Germany’s Siemens, as many venture capital companies will not touch such a long-term programme. The government gives R&D assistance and a helpful mechanism for electricity payments.

Is it worth all the trouble? Climate change policies aim to slash carbon emissions in the next 20-30 years so tidal stream energy could contribute to that. Still, there are other ways that work more quickly, such as insulating buildings.

Dr Andrew Tyler – the company’s new chief executive, recruited this summer as it moves through to full commercialisation – is looking for new investment. “We need companies that are original equipment manufacturers (OEMs) that are likely to invest as part of a long-term strategic intent,” he says. | Capital Finance International

It is a remarkably bold scheme, which could eventually create new jobs. According to Fraenkel, “The core business of delivering and installing tidal turbines becomes ‘revenue neutral’ – that is, capable of trading without recourse to further finance – by about 2015 if we can get moving rapidly.” Whether it develops into a niche market or becomes a commonplace form of energy is anybody’s guess. i 91

> Seeking Afghan Treasure:

Not for the Faint-hearted but Early Investors will Succeed By CFI

When Gul Mohammed Niayz arrived in Kabul in 2002, everything was the colour of dirt. “Houses, roads... even the scenery seemed to be made of mud. People’s faces had hopelessness etched in them,” says the Afghan-American, who returned to his homeland after decades in exile.


aving run a construction business in the US, he wanted to do the same back home, but got more than he bargained for. “We had so many difficulties at first. There was no infrastructure, no electricity, no fuel. Some of the equipment was from the 1930s but we had to use it because there was nothing else. We employed old Mujahedeen fighters who were more used to fighting than building work.” A year after the Taliban fell, the country was in chaos. Fast-forward a decade and companies are poised for growth. Sectors such as construction, agribusiness, telecoms and mining have seen massive gains in the past few years and can present attractive opportunities.“It’s different today,” says Niayz. “Afghanistan has changed a lot, people are more open and the construction sector is more developed. There is foreign investment available, but there is also more competition.” The Afghanistan Investment Support Agency (AISA) says there are nearly 16,000 private companies registered in the country today, out of which 1,300 are foreign owned. It’s hard to get comprehensive statistics because data is often unreliable. The UN 2008 World Investment Report estimated foreign direct investment (FDI) in 2009 stood at $185m and total FDI stocks to date were at $1.11bn. But why would anyone invest in a war zone? Aren’t security companies and military contractors the only companies making money there? No, says Michelle Morgan, chief of the USAIDfunded Afghanistan Small and Medium Enterprise Development (ASMED) project. Foreign companies are here for the market opportunities, even though operating conditions are still difficult. “But profits will come to those who get in early.” She adds: “There has been progress in the last couple of years in terms of registration processes, administrative procedures, export taxes and other tax breaks and assistance for foreign investors. In fact many want our support to start up operations


in Afghanistan, and local businesses are keen to connect with them.” Under the current regulatory framework, investors are not required to secure an Afghan partner and have the right to move their capital and profits out of Afghanistan when they want. The only exception is that foreigners are not allowed to own land or real estate, although they may lease it for up to 50 years.

“Afghanistan has changed a lot, people are more open and the construction sector is more developed. There is foreign investment available, but there is also more competition.” Gul Mohammed Niayz

Early investors are able to reap the benefits as long as they are patient. “It’s a gamble – the risk is there like in all business,” says Niayz. “But the higher the risk, the higher the return. This is an emerging market and those who are on the ground right now will get their break.” The Afghan government is keen to open its doors to foreign investors, but starting a portfolio here can be a challenge because most of the country’s wealth remains hidden. Afghanistan is remarkably rich in minerals and according to AISA there are more than 1,400 identified deposits of resources such as oil, gas and coal, as well as iron and copper. The total worth is estimated to be more than $1trn. Now, in its first move in four decades to open up the hydrocarbons sector, the government is seeking bidders for oil and gas exploration and production concessions in its Amu Darya Basin. One deposit alone is estimated to contain more than 80 million barrels of oil. But the basin is just the beginning. The US | Capital Finance International

geological survey in 2006 estimated there were 1.6 billion barrels of oil, 16 trillion cubic feet of natural gas and 500 million barrels of gas liquids lying undiscovered in the north of Afghanistan. And the state- owned China Metallurgical Group (MCC) was an early mover, winning the right to develop a large copper deposit in Aynak, near Kabul, after agreeing to invest $3bn. For centuries Afghanistan has been the hub connecting Asia, Europe and the Middle East. It is strategically close to two of the world’s largest markets: China and India. It is also located between the energy-rich republics of Central Asia and the major South Asian ports, making it an ideal transit route for Central Asian oil and gas to these markets. At the moment, just a handful of Pakistani and Iranian companies use Afghanistan as a supply route. Many roads, especially in the south and parts of the east, are controlled by the Taliban, which makes travelling on them a matter of life and death. The country is landlocked, surrounded by some of the world’s highest mountains, and its roads are in poor condition. But the mountains hold a promise of treasure. There are emerald, jade, amethyst, alabaster, beryl, lapis lazuli, tourmaline, ruby, quartz and sapphire deposits; and high-quality marble is abundant in at least 400 varieties, valued at more than $150bn. Adam Doost is an Afghan who returned in 2006 to invest in mining through his company, Equity Capital Group. “We have invested over $40m in the marble quarry and processing factory in Herat,” he says.”I returned because there was a need for private-sector investment to create sustainable businesses that can eventually lead the country towards prosperity.” Afghanistan is still a rural society with agriculture generating 50% of the country’s $30bn GDP and supporting 85% of its people. According to AISA there are approximately a million farms in Afghanistan and more than 2,000 wholesalers. “Investment in agro-businesses will boost the

Winter 2012 - 2013 Issue

National Park: Band-e Amir, Bamyan Province, Afghanistan

economic development of Afghanistan and will give its people a sense of pride when they buy local products,” says AISA chief executive Noorullah Delawari. “We should become selfsufficient again and subsequently be able to create a sustainable export industry.” Poor packaging is a major problem, however, resulting in the waste of 20%-40% of post-harvest horticulture products. “The market potential for food-related packaging is enormous,” says Delawari. “We need everything from basic storage containers to freezers.” Meanwhile, fewer than 50 refrigerated trucks serve a population of 30 million. Demand is also massive for new machinery such as tractor trolleys, ploughs and grain-cleaning and sieving equipment for flour, as equipment is currently imported from abroad or dates back to the Soviet era. Another growth sector is technology and telecoms. Since the fall of the Taliban, when Afghanistan had only a few thousand landlines and no international service, the number of mobile phone users has grown to 13.3 million, generating $129m in taxes last year. Revenue from the sector is expected to reach $800m in five years, according to government figures. The potential has not gone unnoticed by the growth-hungry Middle Eastern telcos. Indeed, the UAE’s Etisalat plans to invest $100m this year and next and seeks to launch 3G networks here. This may all sound tempting for the brave and ethical investor, but the realities are far from ideal. Being an investor in Afghanistan carries different kinds of risks from those in an ordinary

growth market. Firstly, there is the lack of security and stability, making the country a veritable Wild West. If you’re in the wrong place at a wrong time, your life could be in danger. “The security situation changes almost daily,” warns one investor, who asked for anonymity. “It might be okay to drive to the north by road one day to survey a field, but another day, it might just cost your life if you are unlucky.” Suicide bombings and shootings are commonplace even in the relatively peaceful capital, and criminal gangs have begun to target businessmen in the hope of claiming ransoms. “If word gets out how much money I’m making, I’ll be at the top of the kidnappers’ list,” says another entrepreneur. Afghanistan is still a very tribal society where the village elder’s word is law. “We have developed a good relationship with the local elders and community leaders and this makes security less of a hassle to deal with,” says Doost. “Some of the security challenges have been improved by developing a good relationship with the local communities by creating jobs. Challenges still exist, but having the trust and loyalty of the elders makes business in Afghanistan possible.” Geography, too, presents a challenge when many places are not reachable by road. Morgan says: “Investors have to be aware of the fact that if you are planning to do carpets, you want to be in the north, whereas vegetable and fruit-processing opportunities are greatest in the south and east. Some areas have electricity on the grid, and access to transportation is easier, while others require generator power and may be difficult to | Capital Finance International

access at times. This needs to be considered when choosing business partners. Sadly, 50%60% of investors who come here are not aware of the landscape and the differences in the regions.” Then there’s the rampant corruption, which makes everything difficult and at times nearimpossible. In recent rankings, Transparency International rated Afghanistan 179th out of 180 nations. “The country needs reforms desperately,” says Niayz. “To get the right permits and correct stamps, you need to pay hefty sums to various officials. It has become borderline unbearable.” Years of war have left the country in a state of constant change. The regulatory framework is fluid, and for those who want to support Afghan businesses directly, finding the right investment target is not always easy. “The most difficult part is to find the right Afghan partner,” says Morgan, “because the majority of businesses don’t know how to advertise themselves or how to pitch business plans when meeting with potential investors.” The country is not for the faint-hearted or those seeking a quick buck, but Niayz believes he’ll be rewarded in the end. “Security will come to Afghanistan, resources will come and that’s when the big bucks will come,” he says. Afghans too deserve a break. Without economic transition and growth, it will be impossible to create the prosperous and secure future they deserve. And there is real hope in people’s eyes, says Niayz. “I see colours now, instead of just the dirt and mud.” i


> Enterprise Europe Network:

Helping SMEs Seize Global Opportunities


he priority for Europe now is to overcome the crisis boosting competitiveness and growth. Fast growing emerging markets such as China, India, Russia and Brazil, with strong growth rates and potential represent significant opportunities for EU companies. Exports outside the EU to expanding markets could trigger new dynamism for European economy. The Enterprise Europe Network helps European small and medium sized enterprises (SMEs) seize these opportunities and take the step into internationalisation. The Enterprise Europe Network is the world’s largest business support network, based in close to 600 local organisations in more than 50 countries. The partner organisations include chambers of commerce, enterprise agencies, regional development organisations, research institutes, universities, technology centres and innovation centres. The EU-funded business and innovation support network eases the way for companies to start trading abroad, find business or technology partners and access EU funding. Its presence in Europe, the Middle East, Asia and the Americas gives SMEs a foothold in established and emerging global markets. India is the latest country set to join the Network, with three new centres to start operating in New Delhi. An office will also shortly open in Canada, while four new branches in Shanghai and Nanjing have brought China’s total to 27. The Network also has branches in southern

Mediterranean countries, with eight contact points in place in Tunisia, a longstanding partnership with Egypt and seven Moroccan offices set up recently.

“Europe’s 23 million SMEs account for two thirds of jobs in the private sector and around 80% of new jobs over the past five years have been created by SMEs.” The focus on Africa is conceived to be of mutual benefit for SMEs in the EU and in Mediterranean neighbour countries, where a favourable environment for SMEs and further economic development is essential for political stability. Other countries to have recently joined the Network include Ukraine, Moldova and Mexico. Internationally active SMEs yield better results SMEs play a key role in creating growth and jobs. Europe’s 23 million SMEs account for two thirds of jobs in the private sector and around 80% of new jobs over the past five years have been created by SMEs.

internationally active firms report employment growth of 7% compared with only 2% for companies that have not internationalised. There is also a strong relationship between internationalisation and innovation. According to the same study, 26% of internationally active SMEs have introduced new products or services for their sector in their country; for other small businesses this is only 8%. However, SMEs’ international activities are mostly geared towards other countries inside the internal market and only about 13% of EU SMEs are active in markets outside the EU. SMEs face particular obstacles to tapping the global market, not least when it comes to access to market information, locating possible customers and finding the right partners. The Network helps SMEs dealing with these challenges. Tapping into world markets With branches in 25 countries outside the EU – in Europe, the Middle East, Asia, Africa and the Americas – the Network is well-placed to help European enterprises establish themselves in foreign markets.

Furthermore, a recent study carried out by the European Commission showed that trading abroad is of major importance for European SMEs and the European economy, given that

Case study: Ticket to ride for tourism web developer

For more than 20 years, Italian SME Editel has been developing websites and applications for corporate clients in the northern Trentino region. Working with an Armenian partner it found through the Enterprise Europe Network, the micro-company is taking its business to the next level. Editel, based in the town of Pieve di Bono,


caters to corporate clients in several sectors including tourism – for which Russia is a growing target market. For help finding a business partner Editel turned to the Enterprise Europe Network. Its local branch is hosted by business and innovation agency Trentino Sviluppo. Network business adviser Francesca Azzolini added Editel’s profile and request to the Network’s powerful business matchmaking database. “We can help even the smallest SMEs with international ambitions,” she says. Many kilometres away, Network expert Ani Khandamiryan of the SME Development CENTER of Armenia flagged the profile to | Capital Finance International

E-Works, an SME specialised in web design and multimedia for Russian, Swiss and American companies. Soon after, the companies agreed to cooperate in some projects and develop Russian-language mobile applications. “Armenia is at the forefront of research, development and production of high technology,” says Editel owner Pierlugi Ghizzi. “Thanks to the Network, we can benefit from this know-how and expand our offer in ways we never thought possible.” And for E-Works, predicts commercial director Andranik Martirosyan, “this partnership will help us conquer Europe.”

Winter 2012 - 2013 Issue

Case study: Plugging in to new connections

Olympia Electronics, founded in 1979 by a pair of Greek entrepreneurs, has grown into one of the country’s most successful makers of emergency lighting, gas detection and fire alarm systems. Working hand in hand with the Enterprise Europe Network, the electrical and electronics manufacturer is now exporting its products to the world’s largest market. High-tech fire-detection system made in Greece: “Our dogma is to think globally – act

The Network encourages SMEs to do business across borders through partnerships and technology transfer agreements. In three years, 4,300 cross-border cooperation agreements were concluded through the Network with a total impact on sales growth estimated at EUR450 million. Participating firms created 2,400 new jobs. The partner organisations have access to two powerful databases: one for business partnerships and one for technology transfer. Company profiles and offers are inserted into the databases and made available to the whole Network. Local offices use the databases to search for the right match for their clients and then help them to link up. The databases contain more than 23,000 profiles.

locally,” says Dimitrios Lakasas, Olympia’s marketing manager. “We are now finally selling in the United States with small volumes, the first step towards further penetration.” Based in the northern Greek city of Thessaloniki, the firm exports to more than 70 countries in the EU, Eastern European countries and the Middle East. But gaining a foothold in the United States, the world’s largest and most competitive market, posed a huge challenge for the company, a leader in the Greek market for emergency lighting and fire alarm systems. For guidance it went to the Enterprise Europe Network. Along with 15 other companies from seven other sectors, Olympia signed up for a trade mission to New York.

standards, managing technology transfer and protecting intellectual or industrial property rights. Opening the world for SMEs to enhance EU growth and jobs The sources of growth are changing rapidly in the world economy. The emerging market economies of Asia and Latin America are likely to more than double their output up to 2020, outpacing the growth of the more developed economies.

In addition, the Network organises brokerage events to bring companies together.

As part of the EU strategy for supporting SMEs in international markets, the European Commission launched in December 2011 a series of business diplomacy visits labelled “Missions for Growth”, aimed at fostering industrial cooperation and business relations with fast growing emerging international markets and helping EU businesses, especially SMEs, to make the most of global opportunities.

Network experts also help SMEs facing complex issues such as compliance with foreign laws, for example mandatory rules of contract law, customs rules, technical regulations and

On such visits the Commission delegation is accompanied by European representatives of European companies, industrial sector associations and horizontal business associations

“There is no substitute for face-to-face contact in the business world,” says Vanessa Vlotides, international affairs director for Network partner, the Federation of Industries of Northern Greece. “This is something the Enterprise Europe Network proactively promotes, drawing on our wealth of resources and contacts.” The Federation planned the mission with help from the New York-based European American Business Organization, which is also part of the Enterprise Europe Network, and the Greek general consulate. A meeting between Olympia and a US firm arranged by the Network partners led to an agreement under which the two firms are now selling each other’s products in their respective markets.

from all main industrial sectors. The visits usually include a series of high-level political meetings, promoting policy dialogue for improving industrial and business cooperation, so as the organization of business to business meetings, where EU entrepreneurs will describe their profile and manifest their interest in order to be matched up with business representatives of the host country. With branches around the globe the Enterprise Europe Network contributes to the business to business matchmaking events organized in the frame of the Missions for Growth, mobilizing European SMEs to participate and making use of its contacts and well developed tools to cooperate with the business organizations in the targeted countries. So far, Missions for Growth have been organised to Brazil, Argentina, Chile, Uruguay, USA, Mexico, Colombia, Egypt, Morocco and Tunisia. Future planned Missions include Russia, China and India. i

The Enterprise Europe Network was set up by the European Commission’s Enterprise & Industry Directorate-General and is managed by the Executive Agency for Competitiveness and Innovation. To find the Network near you, visit To find out more about Missions for Growth, visit missions-growth | Capital Finance International


> Meets Acting Chief Executive Officer of Gulf Finance House:

Hisham Alrayes


isham Alrayes has been Acting Chief Executive Officer of Gulf Finance House since April 2012. He is responsible for overlooking the overall performance of the Bank, setting the Bank’s strategic direction, management of the Bank’s assets and liabilities, and managing the communications with shareholders. His responsibilities also include the Bank’s direct operations, subsidiaries and investments under management. Mr. Alrayes first joined Gulf Finance House in May of 2007 and has also served as Chief Investments Officer. In that position, he was responsible for building, growing and maintaining GFH’s investment banking brand internationally and regionally, in addition to identifying investment opportunities, sourcing and negotiating various investment deals and overseeing the execution of due diligence, private placement memorandum development and fund raising processes. With over 13 years of extensive experience in the banking industry, he specifically focused on startup investment projects. Prior to joining GFH, Mr. Alrayes founded and acted as General Manager of Invita B.S.C., a business process outsource (BPO) company where he was recognized for developing the Company’s investment opportunities through establishing key alliances with leading technology and consultancy providers in the United States and Europe, thereby supporting operations and future company growth. Prior to that, Hisham was part of the Bank of Bahrain and Kuwait’s senior management team. In addition to his current role at GFH, Mr. Alrayes also holds directorships in several companies including Chairman of Cemena Holding Company, Gulf Holding Company and Al Khaleej Fund & Investment Company. He is a board member of Balexico, Naseej, G Capital and a number of other companies. Some of the projects Mr. Alrayes was recently involved in include the Tunis Financial Harbour and the recent acquisition of Leeds United, a leading English football club. He is currently serving as a board member for both projects. i Mr. Alrayes holds a bachelor’s degree with honours in Electrical and Electronic Engineering from the University of Bahrain and a master’s degree with honours in Business Administration from the University of De Paul, Chicago, USA.

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Winter 2012 - 2013 Issue | Capital Finance International


> Views of Hans Christiansen, OECD:

The State in the Market Place Resurgent State-Owned Enterprises and How to Maintain a Level Playing Field A renewed focus on the state-owned sector The role of state-owned enterprises (SOEs) in the economy, and in policy making, has changed radically over the last 10 years. Not long ago, SOEs were widely perceived as “enterprises that had not yet been privatised”. They have since moved back to the centre of attention. There are several reasons for this. First, the rapid growth in a number of emerging economies (including the BRIICs – Brazil, Russia, India, Indonesia and China – and the Middle East) which still have large SOE sectors has increased the weight of state ownership in the international economy. Several of these countries have in fact run large privatisation programmes in recent decades, but the growth of their economies has in many cases outpaced the divestment process. Secondly, a process of corporatizing and commercialising public sector activities is ongoing in the more developed economies. Government departments and public institutions are being converted into enterprises – not least in the infrastructure and public utilities sector. The SOE sector in an average OECD economy is not large (around 2 per cent of output and employment on latest estimates1), but because of its sectoral composition it has an importance which far outstrips its relative size. SOEs are concentrated in economic activities on which dozens of other sectors of the corporate economy rely for their downstream competitiveness. It also creates a raft of regulatory issues, since companies in the utilities sector almost invariably have monopoly elements in their value chains. Introducing such enterprises to the market place creates challenges for the authorities as well as their private sector competitors. Thirdly, the unfolding financial crisis in many of the world’s richest countries has led to an effective “nationalisation” of a number of ailing companies. Parts of the US car industry taken into government ownership and swiftly reprivatised, but in other sectors (notably finance) a number of OECD governments have to their own surprise become company owners – and likely to remain so for the time being. Finally, overall production figures in most industrialised countries reflect mostly the


Figure 1: Share of large listed companies in State ownership (per cent). Source: Forbes 2000, Orbis database and OECD calculations

activities of small and medium-sized enterprises – in which the State has little direct interest – but State ownership is much more prevalent among the largest, most visible and perhaps most politically-connected companies. A recent | Capital Finance International

OECD study examined the world’s largest 2000 listed enterprises2 (according to Forbes 20003). Perhaps unsurprisingly it found that the share of large enterprises that are in public ownership is much larger in emerging economies than in the

Winter 2012 - 2013 Issue

Figure 2: Percentage State ownership of large listed enterprises by sector. Source: Forbes 2000, Orbis database and OECD calculations

more mature, post-industrial countries (Figure 1). In a number of Asian and Middle Eastern countries SOEs account for a vast majority of the large companies, but OECD countries also figure on the “Top-15”. For example, Norway, France and Finland have express policies of safeguarding national ownership through government investment in “national champion” enterprises. The sectoral composition differs significantly among developed and emerging economies. In OECD countries there is, as indicated above, a concentration in the utilities sector. Conversely, among large enterprise active in the resource-based industries there is a predominance of SOEs – and almost invariably based in emerging economies (Figure 2). Do state-owned enterprises “compete fairly”? Some SOEs are of course inherent monopolies, but most of them are found in sectors where they compete – or could compete – with private enterprises. A number of competitive

distortions can arise from advantages public sector businesses have due to their government ownership. Governments may create an unevenplaying field in markets where an SOE competes with private firms, as they have a vested interest in ensuring that state-owned firms succeed. Accordingly, the government may, in fact, restrict competition through granting SOEs various benefits not equally offered to private firms. While in some areas this preferential treatment will be direct and obvious, there may also be indirect preferential treatment through other means. Such advantages are not necessarily based on better performance, superior efficiency, better technology or superior management skills but are merely government-created and can distort competition in the market. For example4: • Outright subsidisation. Some SOEs receive direct subsidies from their government or benefit from other public forms of financial assistance to sustain their commercial operations. For example, the favourable tax regimes or exemptions from certain taxes that are enjoyed by SOEs are | Capital Finance International

tantamount to selective government subsidies. Another form of subsidisation is in-kind benefits, for instance where state-owned operators in the network industries receive benefits such as land usage and rights of way at a price significantly below what private competitors would have had to pay in like circumstance. These exemptions artificially lower the SOEs’ costs and enhance their ability to price more aggressively than competitors subject to a full tax regime. • Concessionary financing and guarantees. SOEs may enjoy credits directly from governments, or provided via state-controlled financial institutions, at below-market interest rates5. A related area is explicit or implicit state guarantees for SOEs, which reduce their cost of borrowing and enhance their competitiveness vis-à-vis their privately-owned rivals. This anti-competitive effect may be somewhat more “accidental”, in that it is perfectly rational for commercial lenders to lower their rates when the debtor is perceived as enjoying state backing, and it may in practice be difficult for the state to convince markets that a given enterprise is not subject to such guarantees6. Conversely, the presence in many countries of a number of SOEs with negative book equity values may serve as an illustration of the continued importance of government guarantees. Moreover, SOEs of some sectors and/or some corporate forms may enjoy outright exemptions from bankruptcy rules. • Other preferential treatment by government. In some cases, SOEs are not subject to the same costly regulatory regimes as private firms, lowering their operating costs. According to the national context, these exemptions may, for example, include compliance with disclosure requirements and exemptions from antitrust enforcement, building permit regulations or from zoning regulations. Moreover, notwithstanding the relatively stringent public procurement rules of a number of countries, some SOEs may in practice continue to benefit from preference in public procurement. This may not necessarily reflect onerous practices at the level of general government – merely an accumulated competitive or informational advantage allowing SOEs to tailor their offers more closely to government requirements. SOEs may also benefit from more general information asymmetries, by having access to government information or data which are not available to their private competitors or only available to a limited extent. • Monopolies and advantages of incumbency. In many cases, governments entrust SOEs with exclusive or monopoly rights over some of the activities that they are mandated to pursue. This can be seen, for example, in postal services, utilities and other universal services that the state decided to pursue through statecontrolled entities. Where SOEs continue to benefit from a legal or natural monopoly this may be of little practical consequence for the competitive landscape, but a number of SOEs


in the network industries operate as vertically integrated structures with incipient monopolies in parts of their value chains. This can have a direct competitive effect, and it may also allow them to influence the entry conditions of wouldbe competitors across a number of commercial activities. • Captive equity. SOEs’ equity is generally “locked in”, i.e. in other words control of an SOE cannot be transferred as easily as in privately-owned firms. The inability to transfer ownership rights will result in a number of advantages for SOEs, such as: (i) some SOEs are generally absolved from paying dividends or indeed any expected return to shareholders7; (ii) SOEs will be more inclined to engage in anti-competitive (and rarely profitable) exclusionary pricing strategies, such as predation, without fear of falling stock prices when losses are incurred due to the below-cost pricing; and (iii) SOEs’ management will have less incentives to operate the company efficiently as it is not subject to the threat of takeovers and generally impervious to the disciplining effects of capital markets. • Exemption from bankruptcy rules and information advantages. SOEs often enjoy exemptions from bankruptcy rules. Because equity capital is locked, SOEs can generate losses for a long period of time without fear of going bankrupt. In addition, SOEs may also benefit from information asymmetries. Information asymmetries occur when SOEs have access to data and information which are not available to their private competitors or only available to a limited extent. In fairness, it must be recognised that a number of SOEs also suffer from certain competitive disadvantages. These arise chiefly from two sources namely (1) public service obligations that SOEs are tasked with by their government owners; and (2) capture by special interests and/or corporate insiders which makes it politically difficult to make SOEs operate efficiently. In some cases the advantages

of SOEs that are listed above are directly motivated by a desire to compensate them for the burdens of state ownership. This is politically understandable, but commercially problematic: unless benefits are carefully calibrated they tend to grow with the scale of a company’s commercial operations. The unintended effect is that they provide SOEs with an incentive – and perhaps a commercial advantage – to expand, including in the international market place. State-owned enterprises in the international market place It should be said that there is not much evidence to suggest that SOEs are being launched into international trade and investment for political reasons. Furthermore, it would appear that in few countries SOEs are being more internationally active than private enterprises in like circumstances. A frequently cited case is the Chinese “go global” strategy by which its state-owned enterprises were encouraged to expand abroad8. However, to some extent this was a consequence of the large structural current account surpluses of China. For example, Japan and Switzerland – also structurally “surplus countries” – have for decades been major providers of outward direct investment, the main difference being that almost all of their large companies are in private ownership9. Earlier OECD studies have indicated that in most cases SOEs pursue strategies of international diversification basically when they are located in sectors where their private peers do likewise. Hence, internationalisation is a matter of commercial logic rather than SOE preference. Classic examples include the mining and hydrocarbons sectors. A special case relates to the European single market, where a number of SOEs in the utilities sectors have expanded into neighbouring countries. This may be a logical consequence of large economies of scale in these sectors, but where this brings subsidised foreign

state-owned companies into competition with domestic private (sometimes recently privatised) companies, political controversy has inevitably arisen. Specific concerns arise when SOEs that are perceived as enjoying preferential access to finance (or equivalent benefits) engage in mergers and acquisitions abroad. Cross-border consolidation may be a shared goal of private and public participants in certain sectors (currently this appears to be the case in mining), but if state-owned actors are seen as enjoying an unfair advantage this can be highly problematic. In countries whose authorities screen or review inward investment, public protests of a nationalist nature against acquisitions by foreign SOEs have been a recurrent occurrence in recent years. Summing up, there is little evidence of state-owned enterprises operating internationally with purely political motives, but there are numerous indications that they may do so at a competitive advantage. A recent report by OECD suggests that the road forward might consist of a shared commitment to “competitive neutrality”10. By taking a few, pragmatic steps to ensure equal treatment in areas such as access to finance, regulation, taxation, public procurement and rate-of-return requirements, governments can put their enterprises on a sound competitive footing. This is not only important in the international context. It also prevents an unintended crowding out of private activities in the domestic context. It moreover shields governments that are committed to a continued State ownership in certain sectors from undue pressures to privatise. i

The views expressed here are those of the author and not necessarily those of the OECD. The topic is an area of ongoing policy debate.

Christiansen, H. (2011), “The Size and Composition of the SOE Sector in OECD Countries”, OECD Corporate Governance Working Papers, No. 5. OECD(2013), State-Owned Enterprises: Trade Effects and Policy Implications, OECD Publishing (forthcoming). 3 The focus on listed enterprises is motivated by a dearth of data on other kinds of SOEs. However, while listed companies are generally among the most commercially oriented, it must be recognised that this methodology fails to take into account, for example, such behemoths as Mexican Pemex and the postal monopolies of the United States and Japan. 4 These arguments are further developed by Capobianco and Christiansen (2011), “Competitive Neutrality and State-Owned Enterprises: Challenges and Policy Options”, OECD Corporate Governance Working Papers, No. 1. 5 This has been expressed repeatedly as a concern regarding some countries’ sovereign wealth funds. The allegation has been made that some of these entities had a central role the provision of subsidised credit in support of governments’ industrial policy objectives. 6 For example, the US government in the 1990s on some occasions tried to raise the funding costs of the “government sponsored entities” Fannie Mae and Freddie Mac by publicly declaring that these institutions would not be subject to a government bail-out in case of failure. 7 However, this contrasts sharply with certain other SOEs which are effectively used as “cash cows” by their national treasuries. Such enterprises may be expected to convert the monopolies they enjoy into a stream of fiscal revenues. 8 The South East Asian examples also include the use, in Singapore and Malaysia, of SOEs as part of government development and industrial policies, which has included elements of internationalisation. 9 That said, the sectoral balance of foreign investors does of course depend on whether or not they are subject to discriminatory treatment in their home economy. 10 OECD (2012), Competitive Neutrality: Maintaining a Level Playing Field Between Public and Private Business, Paris. 1 2

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Winter 2012 - 2013 Issue

“Summing up, there is little evidence of state-owned enterprises operating internationally with purely political motives, but there are numerous indications that they may do so at a competitive advantage.�

Hong Kong: Government Complex | Capital Finance International


> Meets the CEO of Banco Interacciones:

Carlos Hank González

Mexico City Financial Centre


n 1993 Carlos Hank González started his professional life as an executive of the trading desk in the Interacciones Casa de Bolsa.

Later on, he experienced a rapid rise within Banco Interacciones. He was only 23 years young when he joined the team in 1995, as the country was suffering a heavy financial calamity. He was an integral part in the creation of Hermer’s Automotive, the first distribution company of Mercedes-Benz in Mexico. The following year, dealing with the peso devaluation, Carlos Hank returned to Grupo Interacciones to help the firm to face the economic crisis and later was appointed to lead different business areas within the group. Gradually, Hank assumed leadership of the various businesses until finally in October 2000 he was named CEO of the whole business while his father carried on as chairman of Grupo Financiero Interacciones, formed by Banco Interacciones, Aseguradora Interacciones, Interacciones Casa de Bolsa and Interacciones Sociedad Operadora de Sociedades de Inversión, with an annual financial income of USD$1.1


billion and more than one thousand employees. Carlos Hank carried out equity injections to strengthen the financial situation of the company and made a plan to promote the company’s growth. The plan sought to find operational niches, to select market strategies and to develop a well trained work team. With this plan, Grupo Interacciones was strengthened and became a major financial lender for local governments and infrastructure projects.

“With this strategy the bank has had an accelerated growth in its fundamentals, growing by tenfold its equity, its assets as well as its net income.” Hank is very much a man with his own merits, works hard for his clients and strives towards continuous growth for the bank. He acquired a degree in business administration with a specialization in finance from the Universidad Iberoamericana. | Capital Finance International

In 2008, he was also appointed as the CEO of Grupo Hermes, founded in 1978 that operates in the construction and infrastructure sectors thorough its business units: HermesInfrastructure, Hermes-Construction, HermesConcessions and HOATSA a high quality investment. In the energy sector includes CERREY, a leading company in industrial boiler production with presence in 23 countries. In the automotive sector, HERMER performs as an auto distributor in the Premium segment of the Mercedes-Benz brand. Also, Grupo Hermes has presence in the transportation and touristic sectors, and has been committed with the economical and social development of Mexico, with annual sales in 2011 of USD$572 million and 6,800 employees. Today, Carlos Hank González heads the two companies that his grandfather, Carlos Hank González, established: Grupo Financiero Interacciones and Grupo Hermes. Moreover, he is a member of other Boards of Directors, such as Bolsa Mexicana de Valores (The Mexican Stock Exchange). i

Winter 2012 - 2013 Issue

Feels proud of having been the financial structuring agent of

ÒTheÊGreatÊMuseumÊofÊTheÊMayanÊWorldÓ at Merida, Yucatan. The first museum in Latin America built under the

PUBLICÊPRIVATEÊPARTNERSHIPÊ(PPP/PPS)Êmodel This project was granted the "Partnership Award 2012" as “The Best Pathfinder Project in the World”; which is given in London by the prestigious British publication Partnerships Bulletin.

Financing provided jointly with: | Capital Finance International


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Winter 2012 - 2013 Issue

> Meets Founder and Director, The Wall Investment & Real Estate Development:

Dr. Naseer Shahir Homoud


orn in 1963 at Irbid, Jordan, Naseer Shahir Homoud is a multi-dimensional personality - primarily a real estate developer but also well known as an author and philanthropist. A dentist by training, Dr. Homoud has made significant contributions in many diverse fields during the past two decades. After graduating from Damascus University, he established a dental centre in Amman in 1994. This centre achieved a very good reputation and, continues to provide the highest quality of dental service. Dr Homoud served the Jordanian Dental Association as its head of Education and Media Commission for six years. During his tenure, the Association became renowned throughout the country. In 2001, Dr. Homoud chose the State of Qatar as his new base. He set up the Consultant Dental Centre in Doha which is now well established as a dependable source of dental health care in the capital. Dr. Homoud’s success story mirrored the economic progress of the State of Qatar as growth in the production of liquefied natural gas, expansion of infrastructure and hosting of major international sporting events complemented and supplemented one another. Eager to diversify his business activities and become involved in other aspects of the economy, Dr. Homoud entered the real estate sector by

establishing “The Wall Investment & Real Estate Development”. Dr. Homoud believes that the name “The Wall” captures the spirit of his company – emphasising protection and durability for his valued customers. His involvement in this sector has resulted in many great achievements. This career path has not only enabled him to contribute to the growth of Qatar’s economy but has also helped create strong and meaningful associations with industry leaders in this sector in Qatar. “The Wall” is now moving to service the affordable housing sector. Dr. Naseer takes the view that there is a huge demand for low cost housing projects in region and accordingly, the company is set to announce some significant new projects in near future. He has already started working in this sector in Jordan and will soon be launching affordable quality house projects in Saudi Arabia. A Spanish International Business and Trading Center (SIBTC ) was established by Dr. Homoud in 2008 to promote bilateral trade between the Middle East and Spain. Dr. Homoud’s involvement in charitable work goes back many years as philanthropy is dear to his heart. The Wall’s founder is currently serving several humanitarian organisations. He was the Goodwill Ambassador and Regional Director (Middle East) for the Inter-Governmental Institution for the Use of Micro-Algae Against Malnutrition (IIMSAM) for 3 years. Dr. Homoud | Capital Finance International

has also helped in the development and renewal of one of the most important historical forests in Jordan. Ideon Charity Association, which provides both financial and medical aid to needy families, a centre housing a mosque and a school to teach children the Holy Qur’an and deliver modern education in the Irbid Governorate are some of the other cherished projects undertaken by Dr. Homoud. The International Jordanian Athletes Cultural Association honoured Dr. Homoud for his support and sponsorship of a mega sporting event for veterans held in Amman last May. He also serves as Honorary President of Al- Hussein Club, one of the oldest and highly acclaimed clubs in Jordan, which was founded in 1964 in the city of Irbid. Dr. Homoud has received several prestigious awards. In 1997, the late King Hussein bin Talal of Jordan honoured him for medical services provided to orphans. Dr. Homoud was placed 16th in the Arabian Business Qatar Power List for 2012 and 53rd on Arabian Business Power 500 – The World’s Most Influential Arabs List (2012). His standing in the construction and real estate sector was also recognised when he was placed in 84th position in the list of the 100 Most Powerful in Gulf Construction (Construction Week’s Annual Power 100 listing). He was also conferred with the CEO (Middle East) award this year in September by ITP Group. i


> Kellogg School of Management:

The Price of Pollution

By Valerie Ross based on the research of Ion Bogdan Vasi And Brayden King

How much does environmental activism affect a corporation’s bottom line?


hen a big corporation is accused of running roughshod over the environment, it is big news. Protests and boycotts aimed at companies that have violated emissions standards or razed rare ecosystems can certainly make headlines, particularly as “going green” has become a common concern among consumers. Brayden King, an associate professor of management and organizations at the Kellogg School of Management, wondered whether the effects of those rallies might also play out on the companies’ finances.


“I was interested in how activist groups were making the environment important for them as a company—not just as something they should think about because it affects all of our wellbeing, but because it’s something that could affect their bottom line,” he says. King, with his colleague Ion Bogdan Vasi, an assistant professor at Columbia University, set out to study both how activism impacts that bottom line and how it alters the way companies perceive financial risk related to the environment. The line from boycott to balance sheet, they found, is not as direct as they might have expected. | Capital Finance International

Two Kinds of Activism Not all activism, King points out, comes from outside the company; sometimes employees or investors try to change a corporation’s policies from within. The activism that often garners the most media attention—through rallies, protests, and petitions—is called secondary activism because it is done by secondary stakeholders, people who are not directly involved in the company but feel the effects of its policies as a customer, neighbor, or concerned citizen. Activism by people directly involved in the firm— its employees, investors, and other main

Winter 2012 - 2013 Issue

stakeholders—is primary activism. Both kinds, King hypothesized, could hurt firms financially. King and Vasi wanted to find out not only whether these two types of activism can impact a corporation’s financials, but also whether they can change how a corporation thinks about its bottom line. To do that, they looked at what is called perceived environmental risk, or how much environmental risk a firm’s analysts believe it to have. (In this case, environmental risk represents the possibility that an environmental catastrophe or a company’s environment-related policies lead to a financial loss.) “We were really interested in risk because that’s the language that corporate America uses,” King says. “You don’t make any type of decision in the corporate world unless you can explain the effect it’s going to have on the amount of risk a company faces.” Earlier studies had shown that boycotts and protests lead some companies to adopt more environmentally friendly practices, while other companies appear to adopt green initiatives without fundamentally changing their policies. But previous work had not examined which changes in attitudes or perception might give rise to a change in policy. Because risk is such an important consideration in the corporate world, King and Vasi thought perceived risk might be a big part of what was making companies switch from polluters to planet-lovers.

“Shareholder activists are indirectly leading to worse financial performance for firms because they lead analysts to see these companies as more risky.” Brayden King

To test their ideas, King and Vasi looked at how both kinds of activism affected the 700 largest corporations in the United States from 2004 to 2008. They gathered data about activism that originated within each company—such as shareholder resolutions—and without, as measured by media mentions of protests and other demonstrations. (Any protest that did not make the news, they figured, was probably not big enough to have much of an impact on the company.) They also collected data on each firm’s risk assessments and overall financial performance. In analyzing their data, the researchers controlled for factors like a company’s size, its research activities, and its record of pollution so they could isolate the effect of environmental activism on perceived environmental risk and financial performance. Activism and Perceived Environmental Risk Primary activism, it turned out, had a stronger effect on a firm’s perceived environmental risk than secondary activism, in part because it is driven by insiders, who analysts might assume have more detailed knowledge about internal policies and practices. For example, the potential costs of environmental litigation can be enormous. Although they rarely come up in a typical tallying of a company’s liabilities, investors may catch wind of potential problems | Capital Finance International

before outsiders hear of them. “Activism raises issues about practices these firms engage in that regular analysts or investors wouldn’t be aware of. People in the financial world don’t have time to do deep investigations of every company, or go to every plant and measure emissions,” King says. “By submitting a resolution to bring that information to the front of the agenda, shareholder activists are saying, ‘This is something that we should be concerned about, both as a planet and as a financial community.’” Neither kind of activism, however, directly affected financial performance; firms did not lose money simply because of a protest. What King and Vasi did find, though, is that companies with higher perceived environmental risk fared worse financially. In this way, activism— especially activism by shareholders—had a more roundabout effect. It bumped up perceived risk, which in turn hurt the company’s bottom line. “Shareholder activists are indirectly leading to worse financial performance for firms because they lead analysts to see these companies as more risky,” King says. King says this study along with his and others’ earlier work clearly shows how different types of activism influence corporations. “We know that boycotts and protests are an effective means of activism,” he says, “but it may be that their effectiveness in generating an immediate response from CEOs makes them less effective in increasing the long-term risk of the company.” Shareholder activism, on the other hand, often goes unnoticed by the general public, and slowly works its way through institutional channels rather than immediately grabbing the attention of—and eventually demanding action from— the company’s leadership. This gives it time to attract the notice of risk analysts, King says, who alter their assessments of the firm. It is also possible these different types of activism influence firms’ environmental practices in the long term, King points out. Most companies feel pressured to go green, but the approaches can be vastly different. Some revamp their policies while others “greenwash,” or paint themselves greener than they actually are. “I would speculate that the institutional avenue for change may be fairly effective for creating lasting implementation of environmentally friendly policies,” King says, “whereas boycotts are effective at creating immediate change but they may also lead to greenwashing.” i

Reproduced with permission of the Kellogg School of Management and Kellogg Insight, © Kellogg School of Management at Northwestern University


> Ross Jackson, PhD:

Sustainability and the Business Community


here is little doubt in anyone’s mind anymore that our planet is on a totally unsustainable path—ecologically, economically and socially. Nor is there any doubt that the business community is a major part of the problem and must be a major part of the solution—if there is one. This last statement may seem a little frightening, but the reality is that there may not be a solution, given the structure of our international political/economic system. We may be destined to follow the current path until the ecosystem breaks down catastrophically. In which case we are heading for a 5-6 degree centigrade temperature increase and a world that I don’t even want to think about.No responsible businessman wants to see this happen. We all have families and communities that will be utterly destroyed if we continue on the current


“business as usual” suicide mission. So why do I say the business community is part of the problem and why must the business community take the lead in finding a viable solution? Is this not why we have politicians? The answer may well be due to a “flaw” in our democracy. David Held, professor of Political Science at the London School of Economics and a leading expert on democracy, writes that “Democracy is embedded in a socio-economic system that systematically grants a privileged position to business interests.” This is the key to understanding what is going on. Thus while all citizens have in theory equal influence through the ballot box, it is those with unlimited money to spend that determine who gets elected and it is they who have the ears of the politicians on a daily basis. It is thus the business community’s | Capital Finance International

arguments that the politicians hear most forcefully. It is their agenda that dominates the political landscape. So the “flaw” is a double edged sword. It gives the business community more influence than politicians, which sounds incredibly good for businessmen at first glance, but has a downside. It means that in a crisis like we have now, politicians cannot take the lead without the concurrence of the business community. The next obvious question then is: Why does the business community not take on its responsibility and prioritize environmental protection for its own sake as well as the sake of the general interest, and just get on with it, as they would with any other threat to their survival? And here we get to the core of the matter. The answer is that any corporation, or for that matter, any country,

Winter 2012 - 2013 Issue

environmental standard. The longer answer is that major revisions in the WTO rules would be required (not an easy or quick task), or alternatively, an entirely new trade organization must be formed that is more in keeping with environmental and social needs.

that takes the lead and says “We are going to do things differently, putting sustainable production as our first priority” is penalized by the way we have organized international trade, because the immediate effect is increased costs and a loss of competitiveness to foreign producers that are not subject to the same environmental restrictions. So nothing effective happens. The EU CO2 quota system is a classic example of that dynamic in action. And, by the way, so-called “green growth” is not a viable solution either, and most businessmen realize this. The issues of resource limits are just too real to be circumvented by tinkering at the edges.

“Why does the business community not take on its responsibility and prioritize environmental protection for its own sake as well as the sake of the general interest, and just get on with it, as they would with any other threat to their survival?”

Now some may be surprised that I mention progressive business people as part of the solution while identifying too much corporate influence as a major part of the problem. There is no inconsistency. I spent my entire professional career in the private sector as a management consultant, especially in the area of international finance. And I can tell you that many businessmen are just as disturbed with the way things are going as the rest of us. But their mandate is to make as much money for their companies as they can within the legal framework defined by the political leadership. They want to know what the rules are as defined by the politicians and will happily operate according to those rules—as long as the same rules apply to their competitors. I am therefore convinced that many businessmen would prefer to operate within a framework that was protective of the environment and social structures as long as the political leadership could define such a framework that applied to everyone. But how do we do that?

In my recent book, Occupy World Street: A Global Roadmap for Radical Economic and Political Reform, it is the latter solution that I propose, along with a number of other new institutions that are necessary to establish a new world order that will work for everyone, including the business community, that will be as free to operate as today, but within a rule set that does not reward those who exploit the environment and the poorer members of our society, as is the case today. It is my hope that progressive businessmen everywhere will support my proposals for a new international organization, which I call the “Gaian League”, which puts sustainability and human rights as the two areas where international cooperation is absolutely necessary, while everything else can be decentralized to independent sovereign states with total control over their economies and cultural priorities. i (See

about the author Ross Jackson has a most unusual background, having been active in both the business and NGO worlds for many years. For 25 years he worked in international finance, where he founded the first currency hedge fund in the 1980s. But he is also chairman of Gaia Trust, a Danishbased charity he co-founded in 1987 to promote a more sustainable and spiritual world. He has for years been a leader of the Global Ecovillage Network and of Gaia Education, which provides educational programs for the sustainable design of human settlements. He is the recent author of Occupy World Street: A Global Roadmap for Radical Economic and Political Reform. Born a Canadian, he has since 1964 lived in Denmark, where today he owns the leading Scandinavian organic foods wholesaler, Urtekram, and lives with his Danish wife on an organic farm near Copenhagen.

Ross Jackson

The short answer is that those who take the lead must have the right to put tariffs on any foreign imports that are produced with a lower | Capital Finance International



Uplifting Standards of Education through the e-Schools Initiative


argny High School in suburban Dakar, the capital of Senegal, is among a hundred other schools in 16 African countries that were chosen for the NEPAD e-Schools initiative, established in March 2003 by African heads of state. The initiative involves the use of information technology to improve the quality of teaching and learning in primary and secondary schools in Africa. With the use of computers and other tools, young students are empowered with skills that will enable them to function in the emerging information society and knowledge economy, globally. In 2007, NEPAD in partnership with governments and the Information Society Partnership for Africa Development (ISPAD) a consortia of fifty private sector among them Microsoft and Oracle, donated dozens of computer equipment items to selected high schools. The schools are in Senegal, Algeria, Benin, Burkina Faso, Cameroon, Egypt, The Republic of Congo, Gabon, Ghana, Lesotho, Mali, Mauritius, Nigeria, Rwanda, South Africa, and Uganda. Bargny high school is a success story in that education standards have gone up due to the equipment which makes it easy to store and document data, as well as make research easily available to students. There has also been better administrative management of the school through the use of computers. In addition, students have access to a well-stocked information technology laboratory that has with 25 computers, a scanner, scanner, an interactive whiteboard, a television set and good Internet

connection. Life and Earth Sciences teachers as well as administrative staff have been trained to use the computer equipment in their daily work. Said the school authorities, “The NEPAD e-School initiative has radically changed the way teaching is done, especially for the sciences where it makes up for the lack of laboratories”. The positive impact on quality of education at Bargny school has encouraged similar projects in other countries to request additional support from NEPAD, in securing cost-effective Internet connectivity, training of teachers and administrative staff, maintenance

services and the management of a content portal that would pool the school curricula of the whole continent and which would be accessible to all students. NEPAD and the International Institute for Impact Evaluation are currently undertaking an impact evaluation for the e-Schools, so as to address any challenges which may have occurred during the pilot phase. The outcome of the Impact evaluation will pave a way for a massive roll out of this vital initiative throughout Africa, so bridge the digital gap that make many students on the continent fall behind in information technology. i

About NEPAD The New Partnership for Africa’s Development (NEPAD) is a flagship socio-economic programme of the African Union (AU). NEPAD’s four primary objectives are to eradicate poverty, promote sustainable growth and development, integrate Africa in the world economy and accelerate the empowerment of women. The NEPAD Agency is a technical body of the AU that advocates for NEPAD, facilitates and coordinates development of NEPAD continent-wide programmes and projects, mobilises resources and engages the global community, regional economic communities and member states in the implementation of these programmes and projects. The NEPAD Agency replaced the NEPAD Secretariat which had coordinated the implementation of NEPAD programmes and projects since 2001. The strategic direction of the NEPAD Agency is premised on six themes: Agriculture and Food Security, Climate Change and Natural Resource Management, Regional Integration and Infrastructure, Human Development, Economic and Corporate Governance as well as Cross-Cutting Issues including Gender, ICT and Capacity Development.

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> LEX Africa:

“New-Look Africa” Set to Reap Benefits of BRICS By Greg Knott

The new cooperative alliance that includes Brazil, Russia, India, China and South Africa is set to become an economic and political power broker in global markets.


ne of the most significant economic and political courtships over the past two years has been South Africa’s coming together with Brazil, Russia, India and China in a cooperative alliance, now known as BRICS. This alliance, given the very nature of the world economy, is going to play a huge role in influencing events in world markets. One only has to look at the numbers involved in the markets that Brazil, Russia, India and China (BRIC) embraces, to realise the real possibility of this - they are huge markets by any standard. These four countries have a combined population of around 2.85 billion - around 43% of the present global total - with a combined labour force of 1.5 billion and an average age across the four countries of only 29. Furthermore, Africa, as many economists have pointed out, is one of the most profitable areas in which to do business. South Africa, as an established economy within Africa, and the only African representative within the BRICS alliance, will be in a position to lend its political, economic and other expertise to its partners. A gateway into Africa Membership of this body will open doors for the other BRICS nations to use South Africa as a transit route to the rest of the continent. To its partners South Africa can thus be a portal into the rest of Africa.

“This alliance, given the very nature of the world economy, is going to play a huge role in influencing events in world markets.” to enter Africa for trade purposes. For this reason, South Africa must not become complacent. It must capitalise on its good standing within this body by spelling out the advantages that other BRICS countries stand to accrue by choosing South Africa as a point of entry to the rest of Africa. This is all the more reason why the South African government needs to work harder to remove some of the frustrating bureaucratic pinpricks that undo much of the good emanating from behind-the-scenes African initiatives undertaken at diplomatic and business levels. For example one of the issues raised by a number of presidents at the African economic forum held in Tanzania last year, was the negative effect that delays in issuing visas can have on trade within Africa. It hampers and impedes logistical transport, trade and movement of goods and people. African nations must recognise this, understand the impediments and move swiftly and decisively to ease and eliminate these kinds of bureaucratic burdens.

But South Africa is not only a strategic entry point for other BRICS nations to move goods, commodities and resources into the rest of the continent. As an established economy within Africa, South Africa - as a BRICS nation - can also lend its political and economic clout, and its streetwise experience of doing business in Africa, to the mix.

South Africa’s role in tapping the new-look Africa’s potential The good news is that Africa’s growth has shown an upward trend over the past decade, gaining exceptional momentum recently, albeit coming off a low base. There is a new shift in strategy in redefining business on the continent. It still has its challenges in regard to poverty, governance and some of the other age-old concerns, but this is without doubt a new-look Africa.

However, there are other gateways available for BRICS nations - or other nations for that matter -

Africa, as some economists have pointed out, is now poised to become an engine of world growth.

The “gateway” concept is nothing new.

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Author: Greg Nott, director at Werksmans Attorneys, is the Head of the Africa practice area at the firm. He specialises in corporate governance, cross border transactions, arbitration and public/ private partnerships, as well as contractual, statutory and regulatory issues in the power, mining and telecommunication sectors. In 2010 Greg was awarded Lawyer of the Year (Legal Business UK) and has been recognised in Chambers and Legal 500 Publications The continent has come of age over the past two years and, in every sense, the period from 2009 to 2011 has been this new Africa’s coming out party. On the wider world stage, it is South Africa’s policy to be a cooperative member of the African Union. Certainly at a political level it projects the impression that it wants to stand together at international level with the rest of the continent. Its participation in BRICS will allow South Africa to project not only its own standing, but that of its African neighbours and African union members.

Winter 2012 - 2013 Issue

South Africa: Harbour in Cape Town

South Africa, of course, is often cast in the role of “kingmaker” in Africa - witness its success in conflict resolution, for instance. But one of the realities of the BRICS alliance is that China and South Africa stand shoulder to shoulder as equal partners. China is South Africa’s largest trading partner and with that comes a whole host of advantages, challenges and diplomatic conundrums. But at the moment, the situation is one which South Africa is well placed to take advantage of. Each country has a fine regard for diplomacy and a recognition that working together can engender great benefits to both. Obviously there are concerns about unemployment among South Africa’s impoverished population. Hopefully these concerns will be taken into account when agreements are crafted. This is certainly something that must be hammered out by politicians on both sides. Away from the political hustling, the telecoms revolution and the commissioning of the first undersea telecoms cables is a significant development in the growth of a new Africa, because it enables ease of communication. And with this comes the ability to profile African markets. The new communication technologies will open doors and provide access to new opportunities. It is a huge development that cannot be overestimated. BRICS is well set to play the role of one of the major trading blocs in the world and could potentially dominate the world economy. Of

course Africa cannot escape the repercussions of a world economic crisis. It does not stand in isolation. But it may be in a better position than most to steer itself to a middle ground. There are enormous opportunities to be gained from the needs, commodities and resources that countries to the west and the east need to keep their engines alive.

- and there are plenty more of them around in Africa. Afro-pessimism is hard to push back, but certainly much has been done to paint a different picture of Africa in the recent past - and it amounts to far more than mere air-brushing. i

Resources are but one part of Africa’s competitive advantage. The continent offers financial services; tourism; transport; communications; agriculture; construction and infrastructure; and utilities - particularly energy, given Africa’s enormous natural resources of solar energy, wind and hydro-electric power. In the field of energy alone, for example, there are exciting exploration discoveries in gas and oil in Mozambique and off the Namibian coast. This itself creates greater cooperation between countries, from an economic as well as a political perspective. In turn, business people are assisted and emboldened by this process. Conclusion Today, there are a lot more people dancing to Africa’s beat and coming to its shores. And the more people that come, the more easily risk is mitigated as the bandwagon effect gains momentum. The 2010 FIFA World Cup opened a window on Africa for the world. It was a joyous occasion, well run and organised, which brought great happiness. People love these kinds of stories | Capital Finance International

With its extensive network of leading legal firms spanning 27 African countries, Lex Africa affords the international business community access to an established pool of skilled and reputable lawyers, all of whom strive to facilitate trade and investment in the continent through best legal practice. Established in 1993 Lex Africa’s management office is situated at Werksmans Attorneys in Johannesburg. For more information on member firms and to view the 2012 Guiwde to Doing Business in Africa please visit


> MIGA (World Bank):

World Investment and Political Risk By Conor Healy, Senior Risk Management Officer at MIGA


or the fourth consecutive year, the Multilateral Investment Guarantee Agency (MIGA) commissioned an Economist Intelligence Unit (EIU) survey of multinational investors that addresses their risk perceptions for developing countries in the short and medium term. As the political risk insurance arm of the World Bank Group, MIGA finds value in taking the collective temperature of these investors and making the results available to the public. While perceptions are just that—and MIGA uses a rigorous risk analysis model in the context of its own underwriting decisions—they matter enormously for investment decisions. World Investment and Political Risk 2012, the report that presents the survey findings, also looks at foreign direct investment (FDI) trends and developments in the political risk insurance industry with the aim of providing data and analysis to investors, lenders, host countries, and others interested in harnessing the power of smart and sustainable economic development. What we learned this year about FDI perceptions and trends This year’s survey reveals an increased perception of short-term risk, but continued medium-term optimism for investment opportunities in developing countries. In particular—and unsurprising given the fragile economic climate—shortterm issues identified included heightened concerns over macroeconomic stability and difficulty in obtaining financing. Over the medium term these changes, and structural issues related to political risk become the major preoccupation among foreign investors with operations in developing countries. Nevertheless, the good news according to the survey is that more than half of respondents expect to increase their investments in developing countries

“... in developing countries ... concerns over ... difficulty in obtaining financing.”


over the next 12 months. World Bank projections of FDI inflows into developing countries support this finding, with estimates for 2013 indicating a rebound to nearly $700 billion. Within the range of political risks, adverse regulatory changes remain the foremost concern to foreign investors over both the short and medium term, followed by breach of contract. Among those that do plan to withdraw or cancel investments, it is again mostly due to adverse regulatory changes or breach of contract. These two political actions are also responsible for losses suffered by most foreign investors in developing countries, according to the survey. The political risk that increases the most in perceived significance between the short and medium term is expropriation. In response to the Arab Spring, for the second year in a row, the MIGAEIU survey went into more granular detail about investors’ perceptions with respect to the Middle East and North Africa. Results confirmed that the crisis in the region is having a negative effect on FDI, as nearly 20 percent of investors plan to withdraw existing investments in Arab Spring countries. Nevertheless, MIGA underlines that the results also show that the majority of investors targeting the Middle East and North Africa do not plan to change their current (low) level of investment in the region with large. This means that any “perception contagion” within the region has been limited, and this is important news for the Middle East and North Africa—which has historically lagged with respect to other regions in FDI indicators. Turning from risk perceptions to FDI trends reported by the World Bank, the report notes that global economic growth estimates for 2012 indicate a continuing fragile recovery with significant downside risks. Private capital flows to developing countries moderated significantly, while FDI inflows declined across all developing regions, with the exception of Latin America and the Caribbean. MIGA is pleased to highlight a very important recent trend that continued into 2012: despite the decline in FDI inflows to developing countries, they

Figure 1: Net Private Capital Flows to Developing Countries | Capital Finance International

Winter 2012 - 2013 Issue

“Risks such as expropriation; currency inconvertibility and transfer restriction; war, terrorism, and civil disturbance; breach of contract; and failure of sovereign obligations.� Figure 2: Proportion of Firms that have Suffered Losses Owing to Political Risk over the Past Three Years

Figure 3: Changes in International Investment Positions, 1995-2010 | Capital Finance International


“Developing-country investment has picked up the slack and bolstered the global economy.” continue to account for a substantial share of global FDI. In 2012 they are estimated to be 36 percent of inflows and 14 percent of outflows. Indeed, FDI outflows from developing countries reached a new record in 2012, an estimated $237 billion. This is an exciting development, and not only for developing countries. It means that as Europe and North America—the traditional poles of investment—have struggled during the economic crisis, developing-country investment has picked up the slack and bolstered the global economy: a new and important role. Also noteworthy, nearly a quarter of this outward FDI stock of developing countries went into other developing countries, so-called “South-South” investment. Why is this significant? From a development perspective, increased South-South investment is an important goal as it broadens the investment universe, transfers skills and expertise that are often unique to certain contexts, and demonstrates that new engines economic growth are in gear.

Figure 4: Ranking of the most Important Constraints for FDI in Developing Countries

What we learned about the political risk insurance market The fact that investors view political risk as an important constraint to investing in developing countries has been a boon for the political risk insurance industry. New issuance of political risk insurance by members of the Berne Union—the leading association of public, private, and multilateral insurance providers—increased by 13 percent in 2011, setting a new volume record. Expressed as a ratio of FDI inflows into developing countries, new political risk insurance has risen to 12 percent on average during 2009-2011, compared with a 10 percent average during 2006-2008. As of the first half of 2012, political risk insurance issuance was still growing strongly, with another record level forecast for 2012. The current main drivers of the increased demand have been the events in the Middle East and North Africa, which have raised the specter of unanticipated events in seemingly stable political regimes; recent expropriations in Latin America; contract renegotiations in resource-rich economies; and capital constraints and increased regulation for financial institutions, which make financing with political risk insurance an attractive option. The FDI-Political Risk Insurance Link Why does political risk insurance matter for FDI? Foreign direct investment means a long-term commitment to the host country—which leaves more time for political events to have an adverse effect. Political risk insurance is a tool for businesses to mitigate risks arising from the adverse actions—or inaction—of governments. These include risks such as expropriation; currency inconvertibility and transfer restriction; war, terrorism, and civil disturbance; breach of contract; and failure of sovereign obligations. In addition to concerns about the risks mentioned above, investment decisions are constrained by the ability to expand investment financing capacity beyond internal country risk limits. This has prompted decisions of many investors and lenders to purchase political risk insurance to address such constraints. An additional advantage to most, if not all, public insurers is that they only support investments that are developmentally sound and meet social and environmental standards designed to mitigate adverse impacts. For example, MIGA’s environmental and social safeguard policies are derived from extensive experience insuring investments around the world that provide a tool for identifying risks, reducing long-term development costs, and improving project sustainability— benefiting affected communities, preserving the environment, and often also having a positive effect on a project’s bottom line in the long run. Development’s different indicators, drivers, and instruments are many and it is important that decision makers understand the interplay among them. Privatesector investment, done well, is a crucial and sustainable form of development. At the same time, other actors in the development field must demonstrate that they understand the needs and trends of the business world, so a mutually beneficial collaboration can take place with an aim to reduce poverty and to better lives. i

Figure 5: Primary Reasons for Investing More, or Reinvesting, in the Middle East and North Africa


This Conor Healy’s article is based on MIGA’s report “World Investment and Political Risk 2012”. | Capital Finance International

Winter 2012 - 2013 Issue

Dubai: Burj Khalifa | Capital Finance International


> European Environment Agency:

Working Towards a Green Economy By Almut Reichel


conomic growth, technological progress and the way Europeans use resources all impact the environment. For the EU-27 Member States, the average annual use of material resources is nearly 15 tonnes per person. The bulk of this ends up as materials accumulated in the economy; the rest is converted into emissions or waste. More than five tonnes of waste per capita are generated each year. The consumption of goods and services in Europe is a major driver of global resource use — and associated environmental impacts. Growth in global trade is resulting in an increasing share of lifecycle environmental pressures and impacts from European consumption taking place beyond Europe. A European Environment Agency (EEA) analysis of the EU-27 Member States has found that the majority of key environmental pressures caused by private (household) consumption can be allocated to eating and drinking, housing


and infrastructure, and mobility. These three broad consumption areas are estimated to have contributed nearly three quarters of consumption-related material use, greenhouse gas emissions, acidifying emissions and ozone precursor emissions. Green economy and sustainable consumption and production Conceptually, sustainable consumption and production, resource efficiency and better waste management are essential elements of a global, EU and national agenda on green economy as a means to achieve more sustainable development. We essentially face a twin challenge. First, we need to focus on the economy, finding ways to increase our prosperity without increasing resource use and associated environmental impacts. Put simply, we need to become more resource efficient. By itself, however, resource efficiency won’t guarantee steady or declining resource use or environmental impacts. We also | Capital Finance International

need to focus on ecosystem resilience — the status, trends and limits of natural systems. The third element that needs to be included in discussions on resource efficiency and ecosystem resilience is human well-being. A ‘green’ economy is one in which policies and innovations enable society to generate more of value each year, while maintaining the natural systems that sustain us. Essentially, it is a pretty simple concept. Unfortunately, translating the idea into reality is hugely complicated. Clearly, it will require technological innovation. But it requires lots of other changes too — to our consumption and lifestyles, the way businesses organise themselves; the way that we design cities; the way we move people and goods around; the way we live, essentially. Effecting changes of this sort requires the engagement of different actors, including policymakers, businesses and individual citizens.

Winter 2012 - 2013 Issue

EU policies The European Commission published a Roadmap to a Resource Efficient Europe in September 2011. Among many other initiatives, it includes proposals to strengthen green public procurement and address the environmental footprint of products. It aims to establish a common methodology for assessing, displaying and benchmarking the environmental performance of products, services and companies, and to ensure better understanding of consumer behaviour. It also recommends measures to reduce environmental impacts in the consumption areas of food, housing and mobility. In December 2012, the European Commission proposed the 7th European Environmental Action Programme. One of the seven priority objectives is to turn the EU into a resource-efficient, green and competitive low-carbon economy. In order to meet this objective, it is proposed, inter alia, to establish a more coherent framework for sustainable production and consumption, set targets for the reduction of the overall impact of consumption, apply the waste hierarchy and the effective use of market-based instruments in waste management. In addition to agreeing that green economy is important to achieve sustainable development, the Rio+20 outcome document ‘The future we want’ adopted a global framework of programmes on sustainable consumption and production which will require global, regional and national


Results of this work will be published in 2013.

EEA activities on green economy, sustainable consumption and production The EEA was established to gather, interpret and communicate regarding the European environment in order to support informed decision-making and public at large. EEA activities on green economy, sustainable consumption and production and resource efficiency include:

Assessments: The EEA regularly undertakes assessments which include analyses related to green economy, resource efficiency, sustainable consumption and production and waste. Most recently the EEA has published assessment on:

Indicators: In 2012 and 2013, the EEA is publishing indicators tracking progress towards sustainable consumption and production in Europe as well as on progress towards the waste hierarchy and the use of waste as a resource; Environmental Fiscal Reform: In 2011 and 2012, the EEA has held workshops with interested member countries with the aim to explore options for shifting the tax burden from labour towards resource use and environmental impacts through the use of market based instruments. This work will continue in in 2013 and be supplemented with an EEA report on the use of market instruments and resource efficiency. Green economy analyses: The EEA is undertaking analyses on various aspects of the green economy challenge., including on the role of the finance sector, on externalities, on the distance to targets and on exploring potentials though integrated environmental and economic accounting. | Capital Finance International

• Consumption and the Environment consumption-and-the-environment-2012 • Material Resources and Waste • Green Economy environmental-indicator-report-2012

The European Environment Agency is an agency of the European Union. EEA’s task is to provide sound, independent information on the environment. It is a major information source for those involved in developing, adopting, implementing and evaluating environmental policy, and also the general public. Currently, the EEA has 32 member countries.


> Meets CEO of Emirates Islamic Bank:

Jamal Bin Ghalaita


ecognized as the “Best Islamic Bank, UAE – 2012” Emirates Islamic Bank is an excellent example of a modern financial institution with a strong Islamic proposition. Established in 2004, Emirates Islamic Bank opened its doors with the clear goal of offering discerning customers Islamic finance solutions. Combining the best in Shari’a compliant services with the strongest levels of customer care and efficiency, the bank has established itself as a major player in the highly competitive financial services sector in the UAE. Within a short span of time, Emirates Islamic Bank has positioned itself among the largest Islamic Banks in the country, and the 6th largest in the UAE. The bank offers a broad range of products and services developed on the highest ethical standards and offering customers the transparency that they seek in their financial partner. It is these principles that have made the bank an attractive choice, to customers that are seeking a strong, honest financial partner, irrespective of their religious affiliations. The UAE stands as one of the most competitive financial services markets in the world with over 50 banks vying to establish themselves as a notable presence. Emirates Islamic Bank has had admirable success in carving out a strong presence for itself in this aggressive market. It combines a bricks and mortar presence that currently stands at 49 branches, with a network of alternate channels that include over 150 ATM machines, online, SMS and phone banking. The bank has also been recognized as the first Islamic bank to offer a comprehensive suite of mobile banking services across the three key mobile platforms Android, Blackberry and iPhone. It is this flexibility to bank anytime, anywhere coupled with the best in face to face service that continues to drive the bank’s rapid growth in the market. However, what earned Emirates Islamic Bank the highly sought award of “Best Islamic Bank” in the country was not just its superb offering. The deciding factor for the judges to name the bank as the best was actually the ‘breakneck’ growth that the bank has seen

in 2012, to become one of the fastest growing banks in the country. A statement that holds true when measured against both Islamic and conventional banks in the region. 2012 has seen Emirates Islamic Bank grow its branch network by nearly 50%, grow its customer base by over 30%, and expand its offering across all Commercial and Retail segments, with special focus on targeted propositions to each segment (mass, affluent, high net worth, and SME). The Acquisition of Dubai Bank Adding to the achievement, Emirates Islamic Bank has managed to achieve such growth while also completing an acquisition of the portfolio and branches of a sister Islamic Bank, Dubai Bank, during the year. Following the acquisition of Dubai Bank by Emirates Islamic Bank’s parent

of the bank’s refocus and the speed of impact achievement on the ground is one that definitely draws the envy of most organizations across the globe, not only in the UAE. The success was also reflected strongly in the bank’s financials for the year. The bank has managed to grow its operating income for the year by over 60%, building on the aggressive growth of customer base and assets. Such solid growth is further supporting the bank in continuing its proposition build-up for its customers in 2013 and the years ahead. Building on such strong foundations, the bank is on track to further expand its branch network and focused segmental offerings within the SME and high-net worth segments. This sharp focus and impressive growth is actually better understood when one looks at the leadership of the bank. Mr. Jamal Bin Ghalaita is a veteran banker with over 20 years of experience in the industry, with a solid track-record of business build-up. In his last role, Mr. Bin Ghalaita has served as the Deputy CEO and General Manager of the Consumer & Wealth Management division of Emirates NBD, the largest banking group in the UAE. During his tenure with Emirates NBD, Mr. Bin Ghalaita was instrumental in driving Emirates NBD towards the realization of its core vision, to be recognized as the leading financial services provider in the Middle East. As GM of the Consumer and Wealth Management (CWM) division, he established and grew multiple key businesses for the Group, including Private Banking, Asset management, and Emirates Money. Under his leadership, the CWM division has grown by nearly 800% within a span of less than 5 years, a success that he is looking to replicate within Emirates Islamic Bank to position it as a leading financial institution within the UAE. Mr. Ghalaita began his career in 1990 after completing his Bachelor’s Degree in Business from the University of Arizona and joined what was later to become the Emirates NBD Group, one of the largest financial conglomerates in the UAE. His focus, energy and commitment saw him rise rapidly through the ranks and across different departments to the

“Within a short span of time, Emirates Islamic Bank has positioned itself among the largest Islamic Banks in the country, and the 6th largest in the UAE.”


Group, Emirates NBD, Emirates Islamic Bank acquired the majority of Dubai Bank’s portfolio through a seamless transition in November 2012, a migration that was comprehensively planned and implemented through the year. Having been able to complete the migration within such a short period and without affecting the growth drive is another ‘case study’ that raised the admiration of the banking industry in the UAE and the region. New Leadership Under the leadership of the newly appointed CEO, Mr. Jamal Bin Ghalaita, the bank has redefined its strategy in late 2011 to focus on the Retail, SME, and mid-market segments. Following the new strategy, the bank has aggressively expanded its product and service offering to become a truly customer focused entity, one that is determined to become a lifetime partner for its customers, by providing the services they need when they need them. Within the short span of the year, the Emirates Islamic Bank brand has become known for best value banking across the target segments, reflected in the steep growth in customer base through the year. The speed | Capital Finance International

Winter 2012 - 2013 Issue

role of GM of the Consumer Wealth Management Division in 2007, and the Deputy CEO of the Emirates NBD Group in 2009. It was at this stage of what was already an extremely illustrious career that Mr. Ghalaita decided that it was time to take on a fresh challenge with Emirates Islamic Bank. Taking over at a critical juncture in the bank’s history, the moment where it was mandated to drive for market leadership and was also about to take on the challenge of absorbing the portfolio of another Islamic bank, an amalgamation that was the first of its kind in the Islamic banking market in the UAE. With their checkered history, acquisitions in the banking industry have always been fraught with challenges. But Mr. Ghalaita was successful in shepherding the journey of two distinct banks to the creation of a single customer focused entity in record time and perhaps even more surprisingly under budget. “My biggest challenge was to shape the management team to fully understand the potential of what we were becoming. Today, I am proud to lead one of the best and most aggressive management teams in the industry, one that has helped the bank achieve unprecedented growth rates and helped us establish ourselves as a leader in this industry.” said Mr. Ghalaita when asked about what was the key driver towards Emirates Islamic Bank’s ability to achieve its goals, while simultaneously managing the upheaval and uncertainty brought on by the acquisition. Complete Financial Solutions One of the biggest changes initiated during Mr. Ghalaita’s tenure has been the move away from traditional product based approach towards banking, towards a segment based, relationship driven solution provider. This was a strong element in the bank’s strategy in 2012 and remains a key focus in 2013. With a broad range of services and an aggressive focus on “crosssell”, the bank wants to be the “primary bank” for all its customers. “We are in the business of providing complete financial solutions that fulfills our clients’ financial needs, and thus creating long-lasting relationship with our client; we are not in the business of selling banking products. We see ourselves as partners in the journey that our customers are on, whether that journey begins as a young UAE national starting his first job or an expat making a move to a new country looking for a bigger challenge.” said Mr. Ghalaita. Coupled with the customer focus that is so necessary for a successful organization, Mr. Ghalaita is also full cognizant of the fact that it is the people within the organization that drive its ongoing success. An inspirational presence at all times, his voice takes on a new passion when he speaks of the role his people are playing within the organization. “I believe that no matter how much money we spend on technology or

CEO: Mr. Jamal Bin Ghalaita

building bigger and better branches, we cannot succeed without the support and commitment of our people. They are our ambassadors at every ‘moment of truth’ and as a service business we want to deliver on customer expectations in every encounter with the bank. I want to build a culture that values talent and ambition, one that realizes that not even the best of us can manage alone. We are a team and that is what drives our success.” It is this belief in his people and the value of a unified culture that has led to the concerted effort to put people at the heart of the organization. In an industry that is often cavalier with its human capital, Emirates Islamic Bank is focused on building that capital to create a truly | Capital Finance International

differentiated financial services institution. At the end, Mr. Ghalaita offers a very clear vision of the future for Emirates Islamic Bank, “Today, our bank stands as an example of what the right combination of ambition, drive and customer focus can achieve. I have great faith in our ability to deliver on our ambitions to become the preferred banking partner for our customers in the UAE. As an Islamic bank we operate to the highest ethical standards, offering our customers transparency and clarity in an often confusing market. I believe this gives us the edge, not just among customers who are looking for Islamic banking but those who are looking for ‘a satisfying’ banking experience. i


> Richard Dallas, Gulf Capital:

Private Equity Opportunities and MENA rivate equity as an asset class has become a popular choice for investors across the globe. With the world becoming increasingly globalised, investors are expanding and diversifying their geographic footprint towards emerging markets, including Middle East & North Africa (MENA) region, in search of higher returns than may be available in more developed markets with stagnating or slow economic growth. Businesses and investors are recognizing the potential of the MENA region as a promising, growing investment landscape.


respectively. Therefore, in most instances, traditional sources of funding are not as readily available to support growth for business needs. With the recent global economic downturn, coupled with the uncertainty from the Arab Spring events, capital raised from local banks and public markets have become increasingly difficult to secure, especially for Small and Medium Enterprises (SMEs). Regional financial institutions are hesitant to provide debt funding to SMEs and other corporate entities that need it for growth. Liquidity raised on the regional stock markets has not yet recovered to its historic levels, IPO markets still lack new issuances and

GDP for the MENA region compared with 0.10% and 0.14% for Brazil and China respectively. In developed markets such as the UK and US private equity investment exceeded 1% of GDP during 2010. PE houses across the region have successfully raised the funds to tap into the array of opportunities, but the real challenge comes in identifying, nurturing, and closing the transactions, not to mention eventually creating ultimate successful exits. To put a good example of such a process is the Maritime Industrial Services (“MIS”) which Gulf Capital invested and held for 5 years adding substantial value to the business before completing a successful sale to a regional trade buyer, Lamprell which is listed on the London Stock Exchange. During Gulf Capitals holding period, MIS revenues and profits were increased by 203% and 184% respectively.

The region has undergone structural reforms in the past 30 years necessary to support economic growth for an expanding and youthful population base. The reforms have improved “Businesses and investors are recognizing governance and encouraged the potential of the MENA region as a economic participation of the local The transactions that have closed population through government promising, growing investment landscape.” are geographically diverse across financial stimulus, especially the MENA region, but the majority in oil producing countries with of deals have been concentrated in Richard Dallas abundant liquidity. This, in turn, just a few countries. The UAE, which has generated a more stable is home to high spending citizens investment environment for local and and expatriates and one of the most international investors and has opened doors to trading volumes on the secondary markets remain stable and developed countries in the region, fresh investment opportunities. In recent times, volatile. Out of the total primary equity issuances has seen the most deal activity, followed by the Arab Spring has also forced governments of US$ 50 billion since 2005, around only 11% highly populated countries like Egypt and Saudi to further speed up reforms that encourage were raised during the past 3 years. Within this Arabia. Even though PE investments have been transparency in government and private sectors environment, the private equity industry can fill diversified across the MENA region, over 50% of in order to shore up investors’ confidence and an important part of the large funding gap and, PE investments since 2005 have taken place in create opportunities for new investments. thus, capture an increasing share of the regional these core markets. corporate financing needs. However, there is still a relatively limited pool of Private equity managers in the region tend to capital available to support these new investment The region is predominantly made up of family target defensive sectors which cater to the basic initiatives in emerging markets. According to businesses so the application of private equity needs of the population such as healthcare, the Global Financial Stability Report released varies somewhat to the model typically used in education, and power. Healthcare has been a in October 2012 by the International Monetary the West. Families are progressively beginning popular sector for investment, supported by Fund, the total size of MENA equities, bonds to appreciate the additional value private equity increased demand and spending power for and bank assets amounted to around 94% of can bring to their businesses as they become services and facilities. There has been a migration GDP, compared to other emerging market and educated about how private equity can solve away from patients traditionally travelling to the World averages of more than 175% and 366% their funding needs and provide much needed West to seek treatment. Instead, they now visit strategic re-engineering to regional advanced medical facilities. Retail their businesses to move to and food services related opportunities are also the next stage of their growth available. Investments in this sector benefit from cycle. consumers in the region who are less affected by the economic downturn in the US and Europe. MENA private equity is These consumers continue to show significant evolving from a low base; spending power, particularly in the GCC countries as such there is significant where there is a strong economic support from potential for catch up to other the local governments. Also, most recently, firms emerging economies like have been on the lookout for services orientated Brazil and China. In 2011 businesses with demographically linked growth PE investments stood at only prospects. 0.01% as a percentage of

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self-elevated support vessels in the Arabian Gulf. Upon acquisition in 2007, with a new strong management in place and guidance from its sponsor, GMS has developed a strong state-of-the-art asset fleet leading to a strong mix of blue chip clients while becoming a platform for further growth for international markets, witnessed by its most recent expansion into the Southern North Sea.

Another key sector that has been, and will continue, to be instrumental in government and private investment spending will be the Oil and Gas sector, where an estimated USD $500 billion has been spent between 2008 and 2012. The trend in expenditure does not seem to be cooling down, with a forecasted USD $480 billion spend over the next 4 years. While most of the upstream industry is dominated by the National Oil Companies (NOC), such as the likes of Abu Dhabi National Oil Company (ADNOC) and Saudi Aramco, there is a large opportunity for private equity money to cater to the underlying services that support those NOCs. This opportunity set is further enhanced by the aging infrastructure, where many of the onshore and offshore fields require increased maintenance, modifications, and new construction needed to maintain, if not increase, production targets.

on using their vast financial resources to drive increasing affluence and opportunity to promote social and political stability. The MENA is and will remain a challenging environment for private equity, but also represents a compelling, untapped economic region with vast growth opportunities available to PE firms with the local expertise to take first mover advantage of these opportunities. i

Private equity has naturally been cautious about new investments post the Arab Spring and financial crises. PE firms focused attention on the care and maintenance of the existing portfolio. As confidence builds through the coming year and a greater degree of certainty and stability is forecast for the region, more firms are again actively searching for attractive opportunities. In parallel, firms are increasingly focusing efforts towards exits as assets within portfolios mature and general partners are looking to provide the returns to their limited partners.

Gulf Capital, one of the leading alternative investments in the MENA region, has actively pursued this sector with a controlling majority stake in an oilfield services company, Gulf Marine Services (“GMS”), growing it to one of the largest independent operator of advanced

The current landscape is competitive and ripe for consolidation; a number of the smaller funds are forecast to exit the market. The majority of private equity funds fall within the range of $91$192 million, but there are approximately 30 funds which are less than $90 million in size. A reduction in the number of funds would help to rationalize price expectations and professionalize the market as only the fittest firms will be able survive in this competitive landscape. The number of transactions taking place in 2012 is a healthier number than that of 2011. It is the firms with regional history and local expertise, like Gulf Capital that are closing deals.

“MENA private equity is evolving from a low base; as such there is significant potential for catch up to other emerging economies like Brazil and China.”

Although the MENA region is undergoing a historic series of changes in its political landscape that cause uncertainty and economic dislocations, it remains a region with powerful demographic trends of a youthful and growing population, growing consumer affluence, appetite and sophistication, rapid industrialization and urbanization, all supported by a number of regional governments intent | Capital Finance International

about the author H. Richard Dallas is Managing Director of Private Equity at Gulf Capital, one of the most active and diversified investment firms, headquartered in Abu Dhabi, the UAE, that invests throughout the GCC and adjacent MENA region.






nce again, has selected for your consideration ten individuals who help shape a better world. This is not a ranking but rather a mixed group of people who are outstanding in their own special ways. There was some agreement regarding the choices we

made in the last issue and we were happy to hear anecdotes from readers who have met, studied or admired those Heroes from a distance. However, there are bound to be controversial choices and so do let me know when you think we get things wrong. I would welcome all feedback at | Capital Finance International

Winter 2012 - 2013 Issue

The Editor’s Heroes

> Melinda Gates Bill & Melinda Gates Foundation, USA “You have to let capitalism work the way it works. I don’t think you want to make a fundamental change to capitalism. It would be different if we were taking all the wealth we had and, as Warren says, building pyramids to ourselves. We are not.” Melinda Gates responding to the suggestion that because of growing income inequality in the US, the Gates family and their ‘Billionaire Club’ friends are giving with one hand and taking with the other.

The Bill & Melinda Gates Foundation is the largest transparently operated private foundation in the world. Its global aims are to enhance healthcare and reduce extreme poverty. Melinda Gates is one of the three trustees that control the Foundation. The other trustees are Bill Gates and Warren Buffett. Currently the Foundation has an endowment of some $36.2 billion. has taken the somewhat controversial decision to single out Melinda as the philanthropic Hero rather than naming the Foundation or husband Bill. We do so in the confident belief that Melinda has been a full

partner in controlling the foundation from its very earliest days. She also hastened the birth of the Foundation thus winning time in the battle against poverty and the struggle for improved healthcare. Melinda’s attitudes and focus have resulted in changes of direction for the Foundation which are significant. We credit Melinda with pushing Bill Gates to change the world through giving when he was personally committed to bringing change from a desk at Microsoft. It took a while for Bill to make the move but it would have taken much longer without Melinda’s interventions. Lives have been

saved and lifestyles improved. In 2010, Melinda influenced a Foundation shift in focus – from vaccines to mother and child – which recognised that technologies must engage with the complex needs of the beneficiary if they are fully to take hold. The Foundation finances half of the world’s HIV treatment, has promised $10 billion for a ten year programme to provided vaccines for the world’s poorest, is supporting a green revolution in Africa and assisting mothers during childbirth in the most needy countries.

> Dr A T Ariyaratne Sarvodaya, Sri Lanka

“Sarvodaya is the essence of religion because it seeks to unite all people so that they may work together to build a nonviolent and cooperative society. Everybody wakes up through sharing labour, energy, resources, and love.” Dr. A.T. (Ari) Ariyaratne founded the Sarvodaya Shramadana Movement in Sri Lanka in the 1960s and still serves as its President. It is the world’s largest spiritually-based people’s development movement and is at work in 15.000 villages throughout Sri Lanka. Since those early days, Sarvodaya has brought together tens of thousands of people to create housing, solar energy, food production, pre-school, legal services, women’s projects,

orphanages, child welfare agencies and village banks. Ari was strongly influenced by the economist Ernst Schumacher whose 1973 book Small is Beautiful proposes smaller appropriate technologies that truly empower people - and this notion informs the Sarvodaya attitude to development aid. Dr. Ariyaratne has described the goal of Sarvodaya as a “dual awakening” - that of the individual and that of society. | Capital Finance International

Sarvodaya means “the awakening of all” and Shramadana means “sharing”. Dr. Ariyaratne is a Buddhist who cooperates with all – irrespective of religious and ethnic groupings - and has worked tirelessly to address the conflict in his country. Among his most treasured international accolades for development and peace efforts is the Mahatma Ghandi Peace Prize awarded by the government of India (1966). 125

The Editor’s Heroes

> Dr. Gro Harlem Brudtland Norwegian Politician & Director General of the WHO Born in 1939 to an Oslo family in which politics and medicine were part and parcel of daily life, Dr. Gro Harlem Brundtland, has been Director General of the World Health Organisation for the past fourteen years. Prime minister of Norway for much of the 1980s and 90s, she was the first female to take up this role and, at 42 years, the youngest ever to be appointed. Her father, a doctor specialising in rehabilitation medicine was also a member of the Norwegian Labour Party and for a time minister of Defence. The family encouraged Brundtland to join the party when she was seven years old and convinced her that women can expect to achieve as much in life as men. Her husband, Arne Olaf, a political opponent who has a prominent role in the country’s conservative party is also an expert in international relations. According to Bruntland, ‘this makes for interesting breakfast debates.’ After graduating from medical school in 1963, Bruntland received a Master of Public Health from Harvard University. Her career then concentrated on paediatrics. In 1983, she set up the World Commission on Environment and Development, chairing the convention which coined the term ‘sustainable development’. Upon joining the WHO, Brundtland’s

“‘There is a very close connection between being a doctor and a politician. The doctor tries to prevent illness, but treats it if it comes. It’s exactly the same as what you try to do as a politician, but with regard to society.” championed key programmes including “Roll Back Malaria”, “Tobacco Free Initiative”, “Stop TB Project” and the development of an AIDS vaccine. Work began on a sustainable health finance system to help nations provide the necessary financial support to combat disease. She has confronted the disease of global poverty saying, ‘The WHO has to drive home the message that poverty remains the biggest source of ill health – and that ill health in turn breeds poverty. We need to present the evidence and develop the language to demonstrate that the right investments in health for all – but especially to children and women – means investing in a strong economy.’

> Dr Mahathir Bin Mohamad Former PM of Malaysia

“The Malays are spiritually inclined, tolerant and easy-going. The non-Malays, and especially the Chinese, are materialistic, aggressive and have an appetite for work. For equality to come about, it is necessary that these strikingly contrasting races adjust to each other.” 126

Dr Mohamad, an active man despite his 86 years, tends to lecture Europe on money matters. As a national developer of proven ability and great success we are inclined to at least listen. Our Hero from Malaysia has certainly done his bit to help world economies converge. This resolute and accomplished Malaysian politician served as prime minister from 1981 to 2003 and masterminded the country’s transition from a sleepy former colony to a highly successful industrialised state. He has been active in politics since the end of World War II, a member of the United Malays Organisation (UMNO) since 1946 and in 1964 became a member of parliament. Mathir Mohamad was kicked out of UMNO for espousing ethnic Malay nationalism in 1969 but soon re-joined the party after the appointment of a new PM. Much of the New Economic Policy adopted by the government two years later drew on his ideas. Clearly the economic condition of Malays had to be addressed given the way in which the ethnic Chinese community were dominating the local economy. In 1981, following a series of distinguished senior ministerial roles, Mahathir became president of UMNO and the fourth prime minister of Malaysia – the first commoner to hold that office. His long | Capital Finance International

term in government brought stability to Malaysia and the opportunity to follow policies that would encourage strong economic growth. He brought in tax reforms, reduced tariffs and privatised state-owned enterprises - always keeping the door open for foreign investment. Mahathir’s approach to the ethnic question in Malaysia was to increase prosperity for all and the New Development Policy (1991) embodied this vision. In the process manufacturing industries thrived and Malaysia became one of the most important economies in the region; the lifestyle of ordinary Malaysians was utterly transformed. According to Mahathir Mohamad, the message for Europe is simple: it must face up to the new economic reality. In a recent BBC interview, he noted that, ‘In Asia we live within our means. So when we are poor, we live as poor people. I think that is a lesson that Europe can learn from Asia. You refuse to acknowledge you have lost money and therefore you are poor. And you can’t remedy that by printing money. Money is not something you just print. It must be backed by something, either a good economy or gold. The West must restructure their economies to become less dependent on the financial sector.”

Winter 2012 - 2013 Issue

The Editor’s Heroes

> Ellen Johnson Sirleaf President of Liberia

“We cannot achieve democracy and lasting peace in the world unless women obtain the same opportunities as men to influence developments at all levels of society.” strongly supports this sentiment from the Nobel committee in their announcement that Sirleaf would share the Peace Prize for 2011 in recognition of her non-violent struggle for women’s safety and full participation in peace-building. We consider her an exemplary role model for ambitious and talented women in Africa. Ellen Johnson Sirleaf, whose supporters describe her as the ‘Iron lady’, became the first female African head of state after Liberia’s civil war came to an end. During her campaign she said that that she wanted to become president in order “to bring motherly sensitivity and emotion to the presidency as a way of healing the wounds of war” and encourage other women to aim for

high office in the continent. She had served at the head of the Governance Reform commission which was established as part of the deal to end the war in 2003 and talks constantly of the fight against corruption. A developmental economist, Mrs Sirleaf’s career included an appointment as Liberia’s minister of finance in 1979 and she has been Africa director at the United Nations Development Programme. Despite facing a popular presidential opponent she was considered well placed to rebuild Liberia’s economy. As president, Sirleaf renegotiated a $1bn contract with the world’s largest steel company, Arcelor Mittal and approved a $2.6bn iron ore concession | Capital Finance International

agreement entered into between the government and a consortium of Chinese companies. She was imprisoned in the 1980s for criticising the military regime of Samuel Doe and then backed Charles Taylor’s rebellion. Sometimes a controversial figure, Liberia’s Truth and Reconciliation Commission recommended in 2009 that she be barred from public office for backing Mr Taylor - who was facing trial for war crimes. She ignored the ruling but has apologised for backing Mr Taylor. Ellen Johnson Sirleaf has helped bring peace to Liberia, promoting economic and social development and significantly strengthening the position of women.


The Editor’s Heroes

> Ahmed Mohammed Ali Al-Madani Islamic Development Bank, Saudi Arabia “Today’s world is fragile and needs a new strategy for the post-crisis era. It is time to mainstream Islamic finance to address the myriad weaknesses inherent in the present global financial system. Islamic finance is ethical financing which is based on risk sharing and links the growth of credit to the growth of the real sector in the economy. Islamic financial products and services are opening up new opportunities for businesses in the financial and non-financial sectors. During the financial crisis of 2008 a number of Islamic financial institutions proved themselves to be more resilient than conventional financial institutions.” Ahmed Mohammed Ali Al-Madani, president of the Islamic Development Bank (IDB) since its establishment thirty eight years ago, was born in Madina, Saudi Arabia in 1934. He was appointed acting rector of King Abdulaziz University, Jeddah and served his country from 1972 to1975 as Deputy Minister of Education. He held the post of Secretary General of the Muslim World League from 1993 to 1995. IDB is a regional lender promoting trade finance, economic cooperation and poverty alleviation in the Muslim world. The bank addresses both the symptoms and root causes of

poverty by employing either short-run solutions - such as promoting economic growth that is expected to trickle down to the poor - or long-term strategies, mostly for the delivery of infrastructure and social services including healthcare and education. The Bank is an observer at the United Nations General Assembly. In September, The IDB President and Bill Gates joined Secretary-General Ban Ki-moon and a number of heads-of-state at a high-level event during the UN General Assembly. Dr. Al-Madani announced IDB’s full commitment to ending polio forever. Bill Gates commented at the time, ‘

I am enthusiastic about the Islamic Development Bank joining this important effort because I’m confident we can defeat polio if three things happen: existing and new donors like the IDB commit the necessary long-term funding; global polio eradication partners continue to apply innovative best practices including adopting new technology and financing solutions; and, there is continued leadership and accountability at all levels of government in polio endemic countries. I believe the IDB brings resources, creativity and credibility that can meet each of these goals.’

> Vitali Klitschko Boxer & Politician, Ukraine

“Sport has made me realise that you have to be stubborn and persevere to get results. It might take longer in politics, but once you have the right goal and desire, you will reach it.” One of the greatest heavyweight boxing champions of all time, Klitschko retained his WBC title in September this year. Known as Dr. Ironfist, he is the son of a Soviet general, speaks four languages, is passionate about chess and earned a PhD in sports science. And he wants to change the political landscape of the Ukraine. A strongly pro-European figure, Klitschko made his first political statement in the ring eight years ago by wearing an orange flag on his shorts to protest an election fraud. He went on to win a seat on Kiev council and in 2011 formed 128

the UDAR party, whose initials form the Russian word “punch”. Klitschko and UDAR are campaigning for improved services and against town hall corruption and the powers of business cliques. UDAR, now the country’s fourth largest political bloc is also pushing for improved human rights, privatisation and European standards of governance. The post-Soviet era experiences of Poland have been an inspiration to Klitschko. He believes that the comparison between that | Capital Finance International

country’s recent achievements and the limited progress to be seen in Ukraine is lamentable. Both countries faced similar problems after communism but Poland overcame them in a way that led to stability and prosperity as a member of the European Union. Working alongside his brother, Vitali Klitschko has established a charitable trust ‘to breathe new life into Ukrainian society.’ At CFI. co we like the cut of his jib and wish him well. What is Klitschko’s long term goal? Could he be sailing in the direction of the presidency?

Winter 2012 - 2013 Issue

The Editor’s Heroes

> Yingluck Shinawatra PM, Thailand

“I will utilise my femininity to work fully for our country.” PM Yingluck Shinawatra easily survived a vote of no confidence in the Thai House of Representatives on November 28th. Polls also show her as having the confidence of the electorate as she ponders her first eighteen months in office. A youthful and highly photogenic 45 year old former businesswoman, Shinawatra became Thailand’s first female prime minister last year and has the distinction of being the youngest PM in the country for the past sixty years. She is following on from her brother Thaskin, a former PM now in self-imposed exile but who still has effective control of her Pheu Thai party. Mr. Thaskin was ousted in a 2006 military coup. Her election promises included higher wages, lower taxes and free computers. This was the first time she had run for office and had never before held a government post. However, she is the youngest child of a highly political family, has two university degrees in politics and is the product of a well-oiled political machine. It is to her credit that Shinwatra mobilised her power base through the democratic process rather than in the bloody street protests that have been commonplace in Thailand. Her campaign was one of great charm and humility in which she sometimes damned her opponents with faint praise. She seems to have an easy and natural connection with ordinary Thai people and said that she planned to use her attributes as a woman to promote national reconciliation. The well conducted election and smooth transition of power has done much to boost confidence in Thailand. | Capital Finance International


The Editor’s Heroes

> Michelle Bachelet Former President, Chile

When Chile’s government was ousted by Augusto Pinochet in 1973, Michelle Bachelet’s father (a supporter of the deposed Salvador Allende) was arrested, tortured in prison and died in custody at the age of 51. Security forces later arrested Bachelet herself, then a 23-year-old medical student, jailing her at Villa Grimaldi, a house of horrors which she has never described in any detail. It has been reported that she would encourage the other prisoners to sing in order to keep hold of their sanity and cared for women raped by the guards.

“The world’s increasing population leads to poverty and scarcity of resources. This is due in part because women are denied access to contraception and education about family planning, which would counteract these problems. That the right of a woman to decide if and when and how many children she wants to have is still up for debate is a sign of the work that still lies ahead of us.” Michelle Bachelet was the first female defence minister of Chile and then the first female president (2006-10) of this South American country. She is currently head of UN Women, the high profile United Nations organisation dedicated to gender equality and female empowerment. Among others, U.S. Secretary of State Hillary Clinton urged Bachelet to accept the post. Her presidential election campaign in 2005 addressed poverty, called for a reform

of the pension system and the improved rights of women and indigenous communities. This platform supported a continuation of Chile’s freemarket policies and demanded improved social benefit programmes. As president she insisted on equal representation of women in her cabinet. Her fiscal policies ensured that Chile was not overly affected by the global economic crisis and she left office as one of the most popular presidents of all time.

> Mata Amritanandamayi ‘The Hugging Saint’, India Mata Amritanandamayi is an Indian spiritual leader known as ‘Mother’ and many regard her as a saint. Her message is delivered via a hug and in this way she has touched the lives of millions around the world. The hugs are completely free of charge but involve a long wait in line as there is no shortage of takers. Visitors to the hugging sessions will have the opportunity to purchase Mata merchandise: the usual guru fare - some of which is gloriously over-priced – but there is no pressure or obvious efforts at salesmanship from her blissfully relaxed helpers. understands that most of the profit generated by the Mata organisation funds worthy projects in India and other parts of the world. This seems to be a reasonable if relatively small-scale redistribution of wealth from the fairly affluent to the very needy. We have no doubt that Mata Ammritandamayi is responding to a genuine human need and becomes our Hero given the incredible number of hugs during her typical 18 hour working day. Could it be that the visitor about to be hugged contributes as much himself to the magic of the


moment? Most likely this is the case - and all the more wonderful if it should be so. The Mata Amritandamayi Math (MAM) is an international charity created in 1981 for the spiritual and material improvement of mankind irrespective of caste, creed or religion. It extends disaster relief, provides healthcare and education for the poor, supports the environment and feeds the hungry. MAM, and all other Amritanandamayi centres and organisations function collectively under the umbrella title of Embracing the World. In July 2005, the charity’s disaster-relief work and other humanitarian activities were recognised by the United Nations which conferred Special Consultative Status to MAM with its Economic and Social Council [ECOSOC], thus enabling collaboration with UN agencies. Three years later, the UN’s Department of Public Information approved MAM as an associated non-governmental organisation to help its work of disseminating information and research into humanitarian issues. | Capital Finance International

“The first step in spiritual life is to have compassion. A person who is kind and loving never needs to go searching for God. God rushes toward any heart that beats with compassion - it is God’s favourite place.”

Winter 2012 - 2013 Issue | Capital Finance International


> Joschka Fischer:

The New Middle East’s New Challenges hen hostilities flared in Gaza last month, it seemed like the same old story was repeating itself. The world again witnessed a bloody and senseless surge of violence between Israel and Hamas, in which the main victims were innocent civilians maimed and killed on both sides. This time, however, things were not what they seemed, because the Middle East has undergone a significant change in the past two years. The political epicenter of this troubled region has shifted from the conflict between Israel and the Palestinians toward the Persian Gulf and the struggle for regional mastery between Iran on one side and Saudi Arabia, Turkey, and now Egypt on the other. In the emerging struggle between the region’s Shia and Sunni powers, the old Middle East conflict has become a sideshow. Today, the key confrontation in this power struggle is Syria’s civil war, where all of



the region’s major players are represented either directly or indirectly, because that is where the battle for regional hegemony will largely be decided. This much is clear: Syrian President Bashar al-Assad and his Alawite/Shia power base will not be able to maintain control against the Sunni majority in the country and the region as a whole. The only question is when the regime will fall. When it does, it will be a major defeat for Iran, not only entailing the loss of its main Arab ally, but also jeopardizing the position of its client, Hezbollah, in Lebanon. At the same time, a variant of the Muslim Brotherhood will come to power in Syria, as has been or will be the case almost everywhere in the Middle East as a result of the “Arab Awakening.” From Israel’s viewpoint, the rise to power of Sunni political Islam throughout the region over the past two years will lead to an ambivalent outcome. While the weakening and | Capital Finance International

rollback of Iran serves Israeli strategic interests, Israel will have to reckon with Sunni Islamist power everywhere in its vicinity, leading directly to a strengthening of Hamas. The rise of the Muslim Brotherhood and its offshoots has come at the expense of secular Arab nationalism and the military dictatorships that supported it. Thus, the Brothers’ rise has de facto also decided the internal Palestinian power struggle. With the recent war in Gaza, the Palestinian national movement will align itself, under Hamas’s leadership, with this regional development. Palestinian Authority President Mahmoud Abbas and his Fatah party will be unable to offer much opposition – all the more so in view of Hamas’s break with Iran (despite ongoing arms deliveries) a year ago. This development most likely means the end of prospects for a two-state solution, because neither Israel nor Hamas and the

Winter 2012 - 2013 Issue

Great Mosque of Damascus

“The rise of the Muslim Brotherhood and its offshoots has come at the expense of secular Arab nationalism and the military dictatorships that supported it.”

Muslim Brotherhood has any interest in it. Hamas and the Brothers reject territorial compromise, because, for them, a Palestinian state means a Palestine that incorporates all of Israel. This is by no means a tactical position or an expression of political naiveté. On the contrary, the territorial question has morphed into a religious one, and has thus fundamentally redefined the conflict. Hamas is playing a long game. As long as it lacks the strength to achieve its more ambitious objectives, its intransigence in no way precludes negotiations with Israel or even peace treaties, as long as such agreements advance its long-term goals. But such agreements will produce only truces of shorter or longer duration, not a comprehensive settlement that ends the conflict. The recent success of Abbas in the United Nations General Assembly – securing observer-state status for Palestine – will not | Capital Finance International

alter the basic aspects of this trend. Palestine’s promotion is an alarming diplomatic defeat for Israel and a demonstration of its growing international isolation, but it does not imply a return to a two-state solution. Paradoxically, the position of Hamas fits the political right in Israel, because it, too, puts little stock in a two-state solution. And neither the Israeli left (of which little remains) nor Fatah is strong enough to maintain the twostate option. For Israel, a future as a bi-national state entails a high long-term risk, unless the option of a West Bank-Jordan confederation, lost in the 1980’s, is rediscovered. This is again a possibility. Indeed, after the Assad regime falls, Jordan could prove to be the next crisis hotspot, which might revive the debate over Jordan as the “real” Palestinian state. Israel’s settlement policy in the West Bank would then have a different foundation and take on new political significance. While I do not believe that a West Bank-Jordan confederation could ever be a viable option, it might be the last nail in the coffin of a two-state solution. Along with Syria, two issues will determine this new Middle East’s future: Egypt’s path under the Muslim Brotherhood, and the outcome of confrontation with Iran over its nuclear program and regional role. The Egyptian question is already high on the agenda; indeed, it spilled into the streets after President Mohamed Morsi’s non-violent coup attempt. Morsi’s timing was remarkable: the day after winning international acclaim for his successful efforts to broker a truce in Gaza, he staged a frontal assault on Egypt’s nascent democracy. The question now is whether the Brothers will prevail, both in the streets and by means of Egypt’s new constitution (which they largely wrote). If they do, will the West withdraw its support for Egyptian democracy in the name of “stability”? It would be a bad mistake. The question of what to do about Iran’s nuclear program will also return with a vengeance in January, after US President Barack Obama’s second inauguration and Israel’s general election, and will demand an answer within a few months. The new Middle East bodes poorly for the coming year. But one thing has not changed: it is still the Middle East, where it is nearly impossible to know what might be waiting around the corner. i About the author Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany’s strong support for NATO’s intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960’s and 1970’s, and played a key role in founding Germany’s Green Party, which he led for almost two decades.

Source: 133

> Shanghai:

A Global Financial Centre by 2020 report from Singapore/Shanghai

Private banking opportunities in high growth Asia.


rom Shanghai’s magnificent $700-a-night Jumeirah Himalayas Hotel to the $30m waterfront homes of Singapore’s exclusive Sentosa Cove development, Asia is becoming the new playground of the rich. The extraordinary growth of the region’s economies in the past 15 years has created fortunes for thousands of business dynasties and turned entrepreneurs into millionaires and billionaires almost overnight. More recently, the en masse shift from private to public ownership of Asian corporates, with postIPO share-price run-ups that went far beyond ‘exuberant’, has built upon those fortunes and created even more millionaires. Foreign investors clamouring to grab a slice of the action have seen capital inflows grow exponentially in step with IPO fever, while an epic stock-market performance has produced cash-rich corporates helping to fuel faster growth as part of a virtuous circle. Added to this, booms in real estate and export manufacturing, and savings and reserves that are the envy of the rest


of the world, have seen the region’s economies catapulted up the wealth ladder. The meltdown of global credit markets and subsequent downturn saw as much as $2trn wiped from the portfolios of Asia’s super-rich during 2008-09. While the economies of Europe and North America face years of stagnation, Asia suffered only the briefest correction to its inexorable rise. GDP is forecast to grow at a blistering 8.5% this year, slightly up on 2012. The Asian Development Bank’s predicted rebound appears to be correct for 2013, and if so Asia would resume its upward trajectory. It is little surprise, then, that Asia Pacific has overtaken North America as the region with the most high-net-worth individuals (HNWIs). The region accounted for almost half of the 150,000 individuals around the world who achieved high-net-worth status in 2011 and the 2012 figures look like they will show an increase in this share, with Asia Pacific home to more | Capital Finance International

than 30% of the global total of 11 million. This share is now larger than in 2007, prior to the credit crisis. The liquid, investable wealth held by these HNWIs fell by 1% in 2011 to $10.7trn out of a total global figure of $42trn, the report finds. By comparison, the wealth of HNWIs in Europe and North America dropped by 1% and 2.3% respectively. Crucially, both remain below 2007 levels while Asia Pacific is up 13%. Asia has more high-net-worth individuals than North America these days With Asia home to almost a third of those with investable assets of more than $1m, and more than 562,000 holding combined wealth of $2.7trn in China alone, competition among Asian financial centres to attract these funds is heating up. But it is not just pure investment and bank deposits, or even shopping dollars they are seeking. Asia’s capitals are vying for the opportunity to manage the assets of the newly wealthy class, offering advice, planning and management services to help HNWIs maintain, protect and get the maximum returns from

Winter 2012 - 2013 Issue

their wealth. Although Japan has the largest share of both HNWIs and HNWI wealth in the region, Hong Kong, Singapore and Shanghai are growing the fastest (with HNWI wealth up 35%, 23% and 13% respectively in 2010). And these three centres are emerging as the pre-eminent locations for wealth management in the region, if not the world. The shift of the global-wealth centre of gravity to the East is underscored by a number of recent high-profile defections of super-rich individuals from the US and Europe to Asia, most notably Facebook co-founder Eduardo Saverin. The 30-year-old renounced his US citizenship and became a permanent Singapore resident in March. The move, just weeks before the socialnetworking behemoth’s IPO in May, means no taxes on his 4% stake in Facebook, if he ever sells his shares, as Singapore residents are exempt from capital gains tax. The scions of some of Europe’s wealthiest dynasties, such as the Spinolas of Genoa, have relocated to the East in the past few years to oversee ‘family offices’, managing an estimated $15bn of assets brought with them, according to Campden Wealth in London. Hundreds of thousands of other citizens are offshore clients of private banks in Singapore and Hong Kong. John Koh, founder and managing director of Wealth Management Resource Centre (WMRC), says: “A large part of what’s driving the success of private banking in Asia is not just that there’s a lot of wealth, but that compared to financial centres such as New York and London, Singapore and Hong Kong have been much more nimble

“Asia is becoming the new playground of the rich.” and aggressive in courting this portion of the business, which was until recently dominated by the Swiss.” INSEAD’s 2011 index of the world’s leading centres of business and wealth-creation opportunity placed Singapore and Hong Kong in third and fourth places respectively. According to the researchers in Fontainebleau, Singapore leapfrogged Hong Kong, rising from seventh place in a year, while Hong Kong dropped one place. With $1.1trn of overseas clients’ assets under management, Singapore is poised to unseat Switzerland as the premier centre for wealth management However, Singapore is at pains to warn those looking to hide their assets that they are not welcome. Through the introduction and strict enforcement of new financial reporting and antimoney-laundering controls, the city-state has managed to get itself removed from the OECD’s ‘grey’ list of jurisdictions deemed to be one stop short of a tax haven. The jockeying adds weight to signs of a fierce battle for Asia’s riches that is developing between Hong Kong, Singapore and Shanghai. Long-time rivals for the title of Asia’s top financial centre, Singapore and Hong Kong now appear to have

elected to settle the matter with a straight fight to be crowned Asia’s wealth-management capital. Hong Kong’s financial authorities have embarked on a major drive to develop the sector in a bid to counter Singapore, where wealth management has long been a key initiative of national development. Both are striving hard to build up capacity, diversify their offering and stimulate growth in the sector by both encouraging existing providers to expand operations and attracting new entrants. Enter Shanghai. As home to China’s capital markets, most of its domestic and foreign banks and a population of potential high-networth clients estimated to number more than 300,000 and growing, wealth management is an important, growing segment of its economy. And a race is on between the big-name private banks to unlock its potential. China has vowed to turn Shanghai into a global financial centre by 2020 The Swiss giant UBS became the first foreign bank in China with full licences to arrange and underwrite bond and share flotations and conduct securities brokerage operations and asset management. Kathryn Shih, CEO of UBS Wealth Management, Asia Pacific, makes no bones about it: “China is the second-largest wealthmanagement market in Asia, and represents one of the most important sources of new business opportunities for UBS anywhere in the world,” she says. “The establishment of UBS Securities allows us to offer domestic wealth-management services via trading outlets not only in Shanghai but also in Beijing, Guangzhou, Shenzhen and

Hong Kong: Victoria Harbour | Capital Finance International


“A large part of what’s driving the success of private banking in Asia is not just that there’s a lot of wealth, but that compared to financial centres such as New York and London, Singapore and Hong Kong have been much more nimble and aggressive in courting this portion of the business, which was until recently dominated by the Swiss.” Hangzhou, all on China’s ‘Gold Coast’.”

6% in the Americas.

The renminbi’s lack of full convertibility, controls on the movement of currency in and out of the country, and regulation that is too restrictive in some areas, too light-touch in others, have hampered the city’s development as a wealthmanagement centre. That could be about to change: China’s State Council has stated three times its intention to develop Shanghai into a global financial centre by 2020. Then in January 2012, as part of the country’s 12th Five-Year Plan, a scheme was unveiled to build Shanghai into a global centre for innovation, transaction, pricing and clearing of RMB-denominated financial products by 2015.

Significantly, Shanghai has a large professional managerial class with far fewer entrepreneurs than Guangzhou or even Beijing. These professionals tend to be less aggressive in their investing and consequently favour managed portfolios that include the asset allocation and diversification that is typical of wealth management - services that earn all-important administration and asset fees for private banks and wealth-management providers. This is in line with the more sustainable revenue model of Swiss private banks, as opposed to Hong Kong and Singapore’s sectors, which rely more on commissions from selling investment products. Given China’s enviable track record of delivering on the economic goals it sets itself, the phenomenal economic growth, and the fact that the city already has more HNWIs than Hong Kong and Singapore combined, the challenge from Shanghai should not be underestimated. WMRC’s Koh says: “When you look at what China has achieved with its economy in a relatively short period of time, if it says Shanghai will be a global financial centre by 2020 then it probably will be.” Koh, who has offices in Singapore and Hong Kong, is monitoring developments in Shanghai and could set up shop there if the demand is strong enough.

Justin Ong, Asia Pacific private banking leader at PwC, says the city offers a potentially potent cocktail: the lowest market penetration of private banking and wealth management in the region combined with the highest growth potential. “Wealth management is going to be big in Shanghai,” he says, “but for it to compete internationally, Shanghai has first to become a leading international financial centre. I am not convinced that the central and local authorities will be able to deliver on their promises any time soon.” Citi Private Bank’s head of Asia Pacific managed investments, Roger Bacon, believes it is a twohorse race for now, and that the main factor holding Shanghai back is a lack of experienced, qualified personnel with a global investmentmanagement background. “There is a mismatch between an investment-management community that is based in the West and the demand for their skills, which is increasingly in emerging markets,” he says. “While you can manage perfectly well with only English in Hong Kong and Singapore, Shanghai is another matter as the vast majority of your clients will need you to communicate with them in Mandarin.” This is borne out by the fact that $2.2trn of assets in Asia Pacific is managed by advisers with less than five years’ experience (the industry average is 10 years). At the same time the region’s private banks and wealth-management providers say they expect increasing business, onshore and offshore, from HNWIs in other parts of the world to have boosted 2011 revenue growth by 20% in Asia, compared with 8% in the EMEA region and


Citi’s Bacon sees the shortage of internationally experienced, Mandarin-speaking wealth managers being resolved as Chinese who have studied and worked abroad gradually return home to take up positions in the financial sector. Most bankers and analysts agree that Shanghai has a long way to go to catch up with Hong Kong or Singapore. “The main problems it has,” says PwC’s Ong, “is that currency controls restricting movement of wealth offshore and that wealth management has only existed for about five years and is quite immature, only offering a basic service.” Having said that, he believes the sector will grow rapidly but will fail to challenge its neighbours in the near term because of a lag in Shanghai’s capabilities.” To develop a deep, broad, financial centre you always get back to one question: how sophisticated are the investors? You can have a lot of money but it doesn’t mean you know what to do with it.” | Capital Finance International

Global financial institutions, battered by the events of the past four years and now by the Eurozone debt crisis, see wealth management as a rare growth opportunity. Coupled with strong economic growth prospects, the region’s wealth market is proving irresistible and more global banks are entering it, a trend that is good for HWNIs but worrying for existing players. Even so, half of all private banks in the region still expect the assets they manage for their clients to grow by as much as 30% between 2011 and 2013. Singapore is the destination of choice for establishing headquarters, with the city-state seen as consolidating its edge over Hong Kong as the region’s private-banking hub (though most institutions also have operations in Hong Kong). A large part of Singapore’s appeal, is that its private-banking sector is a well-established and distinct industry with its own infrastructure and regulatory framework, whereas Hong Kong’s is more an extension of its retail banking sector. There’s also the political risk presented by Hong Kong’s limited autonomy from China. However, Hong Kong’s unique selling point is its renminbidenominated financial markets - including bonds and equities - and its status as a settlement centre for renminbi transactions which allow overseas investors access to the Chinese market, within the security bubble afforded by the territory’s well-regulated financial infrastructure. Shanghai aims to compete on all these fronts, but Hong Kong has a head-start of almost two decades having floated almost 650 Chinese companies on its bourses, raising more than $400bn since listing its first mainland company in 1993. (Interestingly, while Asia Pacific’s HNWIs increased in 2011, they fell by almost 8% in Singapore and 17% in Hong Kong, the latter due largely to falls in the stock market. The declines compare to a rise of more than 5% in China.) The People’s Republic has until 2020 to prove naysayers wrong. But don’t count her out yet. It’s extraordinary how the conventional phases of economic development have been compressed here: seven years in China seem like 70 years anywhere else. Just look what the republic has achieved since it was founded in 1949. i

Winter 2012 - 2013 Issue | Capital Finance International


> Capital Finance International on .CO Internet:

Thanks for giving us Space, Juan By CFI


here were very good reasons for the Industrial Revolution taking place in Britain. Of course, natural resources were plentiful but that was equally true elsewhere in Europe and the world at large. The same can be said of people with big ideas since many of the best engineers and scientists of the time were residents of continental Europe. So the question is this: What allowed entrepreneurship to flourish in Britain, facilitating the Industrial Revolution and bringing so much change and progress to the world? In some ways the industrial revolution can be seen as the birth place of modern entrepreneurship - when smart ideas could translate into large scale businesses over


relatively short periods. The differentiating factors that enabled the revolution in Britain were simple. The British, more so than their European counterparts, believed in the rights of the individual to create wealth and there was a legal system that backed up those rights. The size of the economy was not fixed and capital markets encouraged investments. The government allowed for locally planned commercial infrastructure, did not micromanage people and ideas and maybe above all else believed in free international trade. We are now living through an information revolution whose birth can be traced to Britain with the invention of the computer and the internet - but now entrepreneurship | Capital Finance International

is truly global. There is a new generation of global entrepreneurs and Juan Diego Calle is an interesting example. We here at CFI became aware of Juan because he had managed to make DOT CO a top level domain available to global business. He is providing a simple and effective solution to the next generation of entrepreneurs looking for an alternative to DOT COM (which has become overcrowded). We made the switch to becoming a DOT CO allowing us to simplify our domain to This probably would not have been possible without Juan’s entrepreneurial drive. There is much debate as to whether entrepreneurs are born with their skills or learn them. In Juan’s case there is little doubt that

Winter 2012 - 2013 Issue

“One has to wonder how long it will take before DOT CO finds itself in the same place that DOT COM is in now, that is to say out of space.“ | Capital Finance International

he came into the world with the entrepreneurial gift. Born and raised in Bogotá, Colombia his first business venture was selling sandwiches to fellow students. The young Juan quickly came to understand the need for scalability, employing a friend to keep up with demand. Security in Bogotá in the early nineties was not good (although thankfully the position is now greatly improved) and the young Juan was forced to flee the country with his parents, brother and sister. They relocated to Miami. The children went into the US education system and his father continued operating his Colombian business out of Miami. The security situation in Bogotá improved after a couple of years and his parents returned, but Juan and his siblings remained in the United States. At high school he started another business this time creating custom-built stereo systems. But it was at the University of Miami as part of a university business project that Juan identified an internet opportunity – for a new search engine. Raising capital from friends and family, Juan was drawn into the dot-com bubble. The business failed at first, but showing the tenacity that is a must for all true entrepreneurs, it was rebuilt with his partners and the team created one of the largest searchadvertising networks in Latin America - which in 2005 was acquired by Yahoo for an undisclosed sum. After the company was sold, Juan enrolled at Harvard taking up the OwnerPresident Management programme. While studying, he ventured into real estate which proved to be a largely disappointing experience, but Juan’s understanding of digital real estate - in the form of premium domain names – proved to be a boon. It was probably this that triggered his interest in commercialising domains. Hearing from a colleague that the Colombian government was considering how best to commercialise the DOT CO domain beyond Colombia, Juan realised how appealing a .co suffix would be to businesses looking for a global address. By this time the supply of meaningful DOT COM suffixes was almost exhausted. It took two years of hard negotiations to finally strike a deal with the Colombian government - having seen off competition from the far larger Versign - and in August 2009, the Colombian Ministry of Communications awarded the contract to Juan’s company .CO Internet. Juan’s intuition - another essential ingredient of an entrepreneur - has been proved to be correct with the .co suffix gaining momentum as the world continues to globalise. One has to wonder how long it will take before DOT CO finds itself in the same place that DOT COM is in now, that is to say out of space. Like their British industrial revolution predecessors, entrepreneurs such as Juan see the world as their oyster. And so, if he does run out of space he will probably be smart enough to create some more. But in the meantime, we here at in common with many other businesses across the world are very thankful to entrepreneurs like Juan. i


> Nataly Marchbank & Hasinah Essop, PwC:

Foreign Direct Investments in RSA


here are many jurisdictions internationally which are popular with multinational groups for the purposes of establishing holding and headquarter companies, for instance Luxembourg, the Netherlands, Switzerland and Singapore. Closer to home, Mauritius has established itself as a favourable jurisdiction for these purposes, especially for investments into African countries. Until recently, the South African tax and


exchange control system has prevented South Africa from being suitable for this purpose. Although one may not necessarily assume that South Africa’s position at the very bottom of the African continent would be an advantage in terms of international business opportunities, it does make the country a very good trans-shipment point between the emerging markets of Central and South America and the newly industrialised nations of South and Far East Asia. South Africa also has world-class infrastructure and | Capital Finance International

is ideally placed for access to countries in the Southern African Customs Union (“SACU”), and the Southern African Development Community (“SADC”), an alliance of 15 countries with a combined population of over 180 million. In common with almost every business jurisdiction, both on- and offshore, South Africa has hopes of becoming the e-commerce hub of its hemisphere. It seems South Africa has set its sights on attempting to rival the likes of Mauritius

Winter 2012 - 2013 Issue

in becoming an investment destination of choice for the African continent. The groundwork has now been laid, with the new headquarter company (“HQC”) regime in place. It seems there are some enticing benefits that the HQC regime could offer foreign multinationals, like the readily available wide network of tax treaties and investment protection agreements that South Africa has entered into. For both international and domestic investors, there are many investment opportunities available in the modern South Africa. The country is the world leader in several specialised manufacturing areas: it produces and exports more gold than any other international competitor, and also exports considerable amounts of coal; and it leads in the field of mineral processing to form ferroalloys and stainless steels. Several other areas, such as tourism, agriculture and livestock development, construction, and the service industry, continue to grow and seem likely to attract substantial foreign investment over the next few years. In order to promote South Africa as an attractive and suitable holding company and headquarter jurisdiction for investments into, inter alia, the rest of Africa, the HQC regime was introduced by the legislature in 2010. The reason for this newly introduced piece of legislation was that; the South African legislature recognised that there were some barriers when foreign multinationals were directly investing in SA. The obstacles experienced by foreign multinationals were, inter alia, the exposure to South African Controlled Foreign Company (“CFC”) rules; tax on dividends and Transfer pricing issues. The new HQC regime that came into operation for tax years commencing on or after 1 January 2011, seems to have opened some attractive possibilities for foreign direct investments into South Africa and via South Africa. The newly introduced legislation defines a HQC as a South African resident company that, on meeting three requirements, elects to be treated as an HQC for tax purposes.

Cape Town

“It seems South Africa has set its sights on attempting to rival the likes of Mauritius in becoming an investment destination of choice for the African continent.” | Capital Finance International

Requirement one: Shareholder test The first of three requirements is that each shareholder must hold at least 10% of the equity shares and voting rights in that company. Requirement two: Asset test The second requirement is that at the end of each tax year, 80% or more of the cost of the total assets of the company (excluding cash and demand deposits) must be attributable to (i) any interest in equity shares in; (ii) any amount loaned or advanced to; or (iii) any intellectual property that is licensed by that company to, any foreign company in which the HQC (holds at least 10% of the equity shares and voting rights (referred to hereunder as a “qualifying foreign company”).


Requirement three: Income test In addition to the above requirements, where the gross income of that company exceeds ZAR5million (approximately GBP400,000) 50% or more of the total receipts and accruals for that tax year must consist of dividends, interest, royalties or fees from a qualifying foreign company; or proceeds from the disposal of any interest in equity shares of a qualifying foreign company or of any intellectual property licensed to such qualifying foreign company. What are the tax benefits of the HQC regime? 1. The foreign subsidiaries of a HQC will not constitute CFCs in relation to the HQC (i.e. their net income would not be attributable to the HQC and taxable in South Africa in the hands of the HQC). 2. Dividends declared by a HQC will not be subject to tax on dividends. Profits can hence be repatriated to foreign shareholders without any tax leakage. 3. Interest paid on certain financial assistance to a HQC will be exempt from the future interest withholding tax, which will come into operation in 2013. 4. Disposals of shares held by a HQC should qualify for an exemption from capital gains tax. 5. A HQC may use its functional currency for tax reporting purposes and thus avoid potential tax exposures on currency fluctuations were it required to record its transactions in ZAR for tax purposes. 6. Certain financial assistance to a HQC is exempt from thin capitalisation rules, and transfer pricing rules do not apply to financial assistance by a HQC. 7. There is no limitation (with regard to thin capitalisation) on the amount of debt funding that is raised for back-to-back loans to its foreign holdings. However, interest deductions will be ring-fenced such that the HQC will only be allowed interest deductions to the extent that it receives interest income. Any excess interest expense shall be carried forward indefinitely. 8. Significantly relaxed exchange controls may apply to a HQC, provided certain requirements are met. Exchange control regulations may, in future, exclude HQCs from their ambit.

by foreign multinationals. The HQC regime was introduced to attract non-residents wanting to establish a launch pad into the rest of Africa and using South Africa as an alternative. The pertinent question is whether South Africa is offering a better regime than Mauritius. The comparison with Mauritius indicates that South Africa has more tax treaties (approximately 68 in force) and investment protection agreements compared to that of Mauritius, which is a favourable position to be in. However, the following must be considered when comparing the two countries: 1. The all or nothing approach in respect of the requirements to qualify as a HQC renders these requirements extremely onerous. 2. Items such as interest, royalties, rentals, exchange gains and other forms of income accruing to the HQC are subject to tax at 28% in South Africa, while Mauritius offers an effective 3% rate. 3. South Africa levies capital gains tax while Mauritius limits the circumstances in which capital gains tax applies.

Disadvantages of the HQC regime 1. Any management fee, interest and royalty income of a HQC remains fully taxable in South Africa at 28% but related expenses such as interest on back to back loans are deductible. 2. The withholding tax on royalties paid from South Africa to a non-resident will still apply to a HQC. It should, however, be noted that this tax can be reduced to nil in terms of many of SA’s treaties.

Conclusion It would appear that the government is serious about making South Africa attractive to investors into Africa while being conscious of its position as a member of the G20 and of the views of the OECD. National Treasury has done well to devise a HQC tax regime that reflects a careful balance between providing a facility for the free flow of capital to and from target investments and creating a tax regime that will not be accused of being a harmful tax practice.Bearing in mind South Africa’s other advantages as a launch pad to Africa, its offers the following: 1. Most modern city of all the other African countries; 2. It has sophisticated banking, accounting and legal systems in place; 3. An ease of communications as there are no language barriers in South Africa since nearly everybody speaks English; 4. Wide range of entertainment on offer that is world-class and renowned; 5. Wide range of sport on offer such as golf; cricket and rugby; 6. One of the best places in the world for viewing African wildlife; 7. Offers a unique mix of culture and beautiful landscapes; 8. With frequent, direct flights now available, it is easier than ever to get to South Africa; 9. South Africa has an incredible biodiversity; and 10. South Africa has a great climate all year round.

South Africa: is it more attractive than Mauritius? Because of, inter alia, its favourable tax regime, Mauritius is currently the most utilised holding company jurisdiction for investments into Africa

The new tax regime combined with the attributes listed above alongside South Africa’s extensive tax treaty network, makes South Africa a very attractive place for establishing regional headquarters. i

142 | Capital Finance International

about the authors Nataly Marchbank, is a qualified professional accountant (CPA (SA)) and master tax practitioner (MTP (SA)), with a specialism in Tax. She has a Higher Diploma in Tax and a Masters degree in South African and International tax. She has been in the consulting environment for over 12 years, advising a variety of multi-national clients on tax related matters. Her work experience includes the position of Senior Manager in International tax at PwC.

Hasinah Essop is a qualified chartered accountant (CA(SA)), with an Honours degree in Tax. She has been in the audit and tax environment for over 5 years, working both in the Dubai and the Johannesburg (South Africa) offices of PwC. She also held the position of associate lecturer at the University of the Witwatersrand. She is currently a manager in the International tax department of PwC South Africa.

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