Summer 2013

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Capital Finance International

Summer 2013

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President of the European Council, Herman Van Rompuy:

Stimulate Innovation

also In this issue // World Bank: Incentives in Finance // UN: Global Value Chains EuroGroup: Banking Union // EBRD: European Growth IMF: Middle East Summer // OECD: Services in Manufacturing

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Europe Needs to Stimulate Innovation Says President of the European Council, Herman Van Rompuy

A crucial issue for Europe’s future is that of innovation. And innovation is more than just Research and Development. It is the ability not to only produce new ideas but to also bring them to the markets and translate them into growth. In short: how to turn new ideas into prosperity and jobs? The next


overarching priority should therefore be to set up a European innovation ecosystem. We need a long-term commitment for innovation and I will work in the coming months to push forward this idea. It’s also essential to take a wider, more integrated view: making sure all our instruments and incentives work together to encourage | Capital Finance International

investment and support entrepreneurship, to allow new ideas to grow into new companies or to help existing companies grow further. An instrument as pre-commercial public procurement should be used together with grants and with venture capital.” says, ‘Well spoken, Mr President!’

Summer 2013 Issue

Letter from the Chairman Germany is exporting unemployment (see the Michael Pettis article) and blocking progress. The wounds from Europe’s impasse - in terms of lost initiative, erosion of human capital and the loss of faith in the fairness and equity of the system - will be felt for many years to come. The Troika are urging the Club Med states to tax harder, rationalise the private sector (sack people) and shrink the public sector (sack even more people). With no private sector stimulus or declining growth to pick up the slack and create jobs, unemployment is rampant.

Cherished Reader,

At the G8 the talk was about heavier taxation (tackling avoidance). The EU is caught in the headlights of the financial transactions tax. It would be much more productive to focus on creating the best business environment for SMEs and innovation, lowering taxes on labour and investment returns as well as making large public (EU) investments in infrastructure and new sources of energy.

In one of the important topics covered in this issue of our magazine, we consider what the future holds for Europe in a changing world with generally sluggish growth.

Expansionary fiscal and monetary policies coupled with microeconomic measures do indeed create jobs as evidence from the United States and Japan shows.

Clearly, Europe is dithering – with no leadership or game plan, a greying population and no economic growth. The Eurozone is flat lining with the UK economy, for example, smaller today than it was six years ago.

The Club Med disease is spreading. France will soon have to own up to cooking the statistics books to conceal their sad state of affairs and confess that the state has been holding back entrepreneurship and job creation – allowing the country to miss out on the productivity potential of a generation.

With Europe’s only real economic power house Germany aging rapidly the long term prognosis looks even worse. Imagine a future European crisis without a strong Germany. The future of Europe is in the hands of its greying population but growth can only be achieved by its youth. There must be effective plans now to combat unemployment and in particular youth unemployment. The grey voter has to realise that with the lion’s share of European pensions being dependent on taxing the young, investment in youth productivity is their best insurance policy. Current plans to combat unemployment are mostly lip service or self-serving band aids: consider, for example, the EU initiative for Spanish youth to take up apprenticeships in Germany.


Meanwhile, the BRICS/N11/MIST/CIVETS are not sitting still, but moving fast to fill the void and create new alliances. A new Europe-US trade agreement could perpetuate these frontiers and create demarcation lines for this new age where emerging economies further integrate independently of the old world. They are building new institutions, including for trade, clearing, settlement, and transfers. The old world still has the critical leadership when it comes to innovation, invention and intellectual property. However, more should be done. For instance, Europe really should lessen its dependence on fossil fuels in particular coal. Why not get fracking? New technologies, such as

fusion and the DESERTEC project, are available for development. Europe should be the IP owner and first adopter of clever and economically viable new technology in the mission critical power sector. Europe is bloated with transfer income (buying votes) and complacency. Now in Brazil, the masses demand that the state spends more on them. The state is already doing a very great deal. Over recent years, transfer income (e.g. pensions, unemployment support, and social security) has grown as part of the budget at the expense of front line services (e.g. education and healthcare) and investments in infrastructure. In fact, Brazil forgot to invest in education and productivity when the times were good. The story was so strong that the Brazilians still believe their own hype. Brazil favours protectionism for the domestic industry with low productivity as a result. She taxes business, capital and labour to fund all that transfer income. Add to that corruption, layered government, red tape and you have a tough business environment that may not be able to keep up with the expectations of the masses. With China and the Tigers taking the foot a little off the accelerator, suddenly there is overcapacity in commodities and bubbles, like yesterday’s success story Eike Batista, have a tendency to burst. Not only Brazil, but also the other BRICS economies are slowing. China has deliberately engineered a slower, more balanced higher quality growth. India grew by only 5% last year. Brazil is growing at half that rate. Russia is growing at 3-4%. Other important population rich emerging economies which in the past have done so well (such as Turkey, Indonesia and Mexico) are also experiencing weaker growth. For dynamic fast-growing economies think Africa with Nigeria as the shining star. And the Middle East is creating new non-oil based growth (see the IMF article). As the emerging economies are catching up with the old developed world, convergence is also of minds. The Brazilians are becoming rather French.

Tor Svensson Chairman Capital Finance International | Capital Finance International


> Letters to the Editor

“ “ “ “

It is wonderful that the Khan Academy (Special Feature on Salman Khan, Spring Issue) is able to provide free online education with massive support from the likes of Bill Gates. However, one worry I have is that the very teachers that are most likely to substitute such material for their own lectures are those least able to make good use of the freed-up time. D. Andrew Nairobi I was pleased to see my hero Freeman Hrabowski on the cover of your Spring issue. There is something rather powerful and not in the least bit disrespectful about sitting in the back of church doing maths homework while listening to Martin Luther King. Hrabowski and his young friends certainly taught Bull Connor a thing or two. We need many more environments where it is ‘cool to be smart’ – and cool to be appreciative of minorities. G. King Baltimore I was pleased to meet Enrique Gomez Junco (Founder of Optima Energia, Mexico) in your Spring issue. He is an inspiring individual and clearly a highly gifted entrepreneur. I admire Junco as a successful businessman full of ambition who recognises that given a second chance he would do a number of things quite differently. He is likely to play a major role in reducing carbon emission in Latin America. V. Carlos Lima What is the alternative, Tor Svennson, (Chairman’s Letter, Spring Issue) to reducing the overblown public sector? There are far too many public employees in the UK and wasted resources directed to those that could work but chose not to. There is no substitute for a rebalancing in size of the public and private sectors. Austerity during these tough times is more than a solution – it is a necessity. J. Paulson London

8 | Capital Finance International

Summer 2013 Issue

“ “ “

Francois Hollande went to Japan in early June to announce that the Eurozone crisis is over. The truth of the matter is that the problems have only just begun. There have been six quarters of flat growth and rising unemployment – factors that benefit only the extremist political parties. Tor Svensson’s analysis (Chairman’s Letter, Spring Issue) has got it just about right. E. Gallo Lyons I treasure the iconoclast and Ross Jackson’s article (Tackling the Global Crisis, Spring Issue) makes for an entertaining read. But what of the babies at risk of being thrown out with the bath water? Are none of our institutions worthy of their existence? Jackson asks too much; we live in a world of incremental change and reform and there is little point in calling for so many dramatic revisions that are clearly not going to be actioned. O. Anthony Lagos In a perfect world I would fully support the idea of harnessing solar energy from North Africa but it is time the Desertec team put their undoubted skills and energy into something more practical and secure. Europe cannot allow itself to be dependent on energy from a politically unstable region. It is a key role of government to ensure energy security. I notice that CFI seems to have covered Desertec in the past three issues so maybe now you could consider an article on shale gas. With Europe burning increasing quantities of coal (and effective carbon capture proving expensive) perhaps what is needed to hit CO2 targets, remain competitive and have energy security is a rapid push to exploit shale gas. J. Motya Krakow | Capital Finance International


Editor Chris North


Assistant Editor Sarah Worthington


Executive Editor George Kingsley

World Bank: Incentive Audits – A New Tool to Prevent Crises

Production Editor David Graham

(12 – 14)

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

UNCTAD: Capturing Value in Global Value Chains

Distribution Manager Len Collingwood

(193 – 194)

Subscriptions Maggie Arts

Eurogroup: Banking Union – Key Milestone on the Road to Recovery

Commercial Director Jon Gerben

(16 – 19)

Publisher Mark Harrison

Chairman Tor Svensson

EBRD: Generating Growth in Europe – The EBRD’s Role

Capital Finance International 43-45 Portman Square London W1H 6HN United Kingdom

(26 – 27)

T: +44 203 137 3679 F: +44 203 137 5872 E: W:

in the private sector in Albania. Its nancial sector and small-medium tructure, and developing natural olicy dialogue with the Albanian in key public sector projects, along nor-funded projects in the country.

At a glance

13.3 MW, these utilities will generate up to 66.2 GWh of electricity per year, and help offset over 45,000 tonnes of CO2 annually. 10

n 2012, the Bank continued to support the Albanian financial sector by providing

(116 – 119)

Number of operations signed


Net cumulative business volume

€702 million Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers

IMF: Middle East and North Africa – Defining the Road Ahead

Total project value

OECD: Services and Competitiveness in Manufacturing (20 – 24)

€2,524 million Cumulative disbursements

€590 million | Capital Finance International


Summer 2013 Issue


As World Economies Converge World Bank

Nouriel Roubini



Michael Pettis

Millennium bcp


Mohamed El-Erian




Grant Thornton

64 – 73

Editor’s Heroes

Ten Men and Women Who are Making a Real Difference

74 – 131

Africa & Middle East Orlean Invest West Africa



MIGA (World Bank)

Marina Securities


Dateline Energy



LEX Africa

Carbon X

Zurich Insurance Group

Cirrus Oil

Eko Support Services


132 – 143 2013 Awards: Rewarding Global Excellence

144 – 154

Latin American Review

Ernst & Young

156 – 165

Ten Outstanding Female Business Leaders

168 – 194

Global Perspectives

World Bank

Berggruen Institute

Norton Rose Fulbright


Grant Thornton


PwC | Capital Finance International



> The World Bank:

Incentive Audits – A New Tool to Prevent Crises By Martin Čihák and Aslı Demirgüç-Kunt

Misaligned incentives played a key part in the run-up to the global financial crisis - and should be a focus of financial regulation.


he global financial crisis has highlighted the destructive impact of misaligned incentives in the financial sector. Breakdowns in incentives are very damaging in the financial sector, given its leverage, interconnectedness, and systemic importance. Unfortunately, much of the regulatory and supervisory reforms address the broken-down incentives only indirectly at best.


Regular “incentive audits” could help in bringing the incentive issues front and center. In current regulatory set-up, incentives are an after-thought Economists often disagree on policy advice. On some basic issues, however, there is actually a rather broad agreement within the profession. One area of agreement relates to the role | Capital Finance International

of incentives in the financial sector. A large and growing number of economists point to misaligned incentives playing a key role in the run-up to the global financial crisis. What are these misaligned incentives? They include incentives for bank managers to boost short-term profits and create banks that are “too big to fail,” for regulators to exercise forbearance

Summer 2013 Issue

and withhold information from others in stressful times, and for credit rating companies to keep issuing high ratings for subprime assets. Incentives are important in many economic activities, but breakdowns in incentives are particularly damaging in the financial sector, given its leverage, interconnectedness, and systemic importance. Despite the broad agreement among economists, regulators and supervisors have often focused on other things. Substantial time and effort was devoted, for example, to increasingly complex methods of calculation of banks’ minimum capital requirements. Underlying this increased complexity is the belief that crises could be avoided if the regulations were more comprehensive and extensive. However, in the United States, where the global financial crisis started, the pre-crisis regulations were already quite complicated and supervisory resources were extensive. Internationally, the complexity of the banking rules had already increased significantly before the crisis with the introduction of Basel II. Nevertheless, private risk-taking at public expense reached unprecedented levels. Regulatory complexity has increased further in response to the crisis. The often-quoted example from the United States is the Dodd-Frank Act with some 2,300 pages and 400 new rules and mandates. Data from the World Bank’s recent Global Bank Regulation and Supervision Survey ( financialdevelopment) suggest that regulatory complexity has been on the rise world-wide. The increasing complexity of regulation is increasing the pressure on supervisory capacity, which is a particularly important concern for smaller and lower income countries. Given that the focus has been on other things, such as capital adequacy calculations, incentive breakdowns have been addressed only indirectly at best. In financial regulation and supervision, incentive breakdowns have been left as an afterthought. Observers, including the World Bank’s Global Financial Development Report 2013, have been calling for more vigorous steps to address incentive issues.

“Breakdowns in incentives are very damaging in the financial sector, given its leverage, interconnectedness, and systemic importance.” | Capital Finance International

The incentive audit proposal In a recent World Bank paper, joint with Barry Johnston, we have proposed “incentive audits” as a pragmatic approach to reorient financial regulation so that it has at its core addressing incentive misalignments on an ongoing basis. The proposal is based on the recognition that ever more complicated rules, or even more supervisory discretion or resources, will not address the fundamental problems, unless there is an appropriate alignment of incentives. To the contrary, introducing simpler rules that take into account the incentives of market participants and regulators and accompanied by increased


High level questions: -market structure, - government safety nets - legal and regulatory framework Key elements that motivate and guide financial decision making: contract design, banking powers, banking relationships, structure of ownership and liabilities, industrial organizations, existence of guarantees, and the adequacy of safety nets. Specific areas, including: ownership and control structures; institutional framework for oversight; adequacy of data and idisclosures on risk exposures; implicit and explicit guarantees; corporate governance culture, risk management and compensation; incentive compatibility of financial regulations; and issues posed by financial innovation. Figure 1: The design of incentive audits.

“While the typical regulation-based approaches focus on capital and liquidity buffers, the incentive-based approach would seek to identify and correct distortions and frictions that contribute to the buildup of excessive risk.” transparency are less likely to be circumvented by market participants and easier for supervisors to monitor and enforce.

tools and include such measures as elimination of tax incentives that encourage excessive borrowing.

The incentive audits would be aimed at addressing the buildup of systemic risk directly at its source. While the typical regulationbased approaches focus on capital and liquidity buffers, the incentive-based approach would seek to identify and correct distortions and frictions that contribute to the buildup of excessive risk. For example, the buildup of massive risk concentrations before the crisis can be attributed largely to incentive failures in the monitoring of exposures and network risks due to conflicts of interest and moral hazard. It also reflects regulatory incentives that encouraged risk transfers. Bigger buffers help, but with more complex capital and liquidity charges there is a danger of creating incentives for circumvention and making enforcement more difficult. To address systemic risk effectively, it is crucial to tackle the underlying incentive failures that give rise to the risk—which is exactly what the incentive-based approach would do. The remedies go beyond narrowly defined prudential

An incentive audit would entail an analysis of structural and organizational features that affect incentives to conduct and monitor financial transactions. It would consist of a sequenced set of analyses proceeding from higher-level questions on market structure, government safety nets, and the legal and regulatory framework to more detailed questions aimed at identifying the incentives that motivate and guide financial decisions. This sequenced approach would make it possible to drill down and pinpoint factors that lead to market failures and excessive risk taking. (Figure 1).


Practical issues Is it feasible to perform incentive audits? Indeed. In fact, while the incentive audit is a novel concept, analyses of incentives have been done successfully in practice. One example is a report issued in 2010 by a special parliamentary commission examining | Capital Finance International

the roots of the financial crisis that erupted in Iceland in 2007. This meticulous and publicly available report notes the overly rapid growth of the three major Icelandic banks as a major contributor of the crisis, and goes into great depth in documenting the underlying “strong incentives for growth”, which included the banks’ incentive schemes as well as the high leverage of the major owners. The report then proceeds to map out in detail the network of conflicting interests of the key bank owners who were also the largest debtors of these banks. Other examples of recent analytical work on incentives in the financial sector include papers by Prof. Charles Calomiris on the incentive failures that led to the U.S. financial crisis and his evaluation of impacts of reform proposals on market and supervisory incentives (www0.gsb. Some of the recent assessments under the Financial Sector Assessment Program by the World Bank and the International Monetary Fund incorporate an analysis of incentives ( ZRV7QA8TS0), even though not formalized as an “incentive audit”.

Summer 2013 Issue

“Is it feasible to perform incentive audits? Indeed. In fact, while the incentive audit is a novel concept, analyses of incentives have been done successfully in practice. ” To be effective, incentive audits would have to be performed regularly, and their outcomes used to address incentive issues by adapting regulation, supervision, and other measures. In Iceland, the analysis of incentives was part of a “crisis postmortem,” an after-the-fact examination. However, it is feasible to do such analyses ex ante. Indeed, much of the information used in the parliamentary commission’s report was available before the crisis, and the analysis could have been performed with modest resources. But before the crisis the supervisors chose to rely on whether banks’ capital ratios exceeded a statutory minimum and appeared robust in narrowly defined stress tests. This case also underscores the need to ensure that the institution performing the audits has its own incentives properly aligned so that it acts on a timely basis. The detailed design of an incentive audit would need to evolve with experience and practice, but the key issues to be covered in the audit would include the following: • Ownership and control structure of financial and non-financial firms, including financial system infrastructure. This analysis should cover unregulated activities where financial activity is significant. It should examine group structures and important interconnections and channels of control;

• Institutional framework for oversight of financial systems, including the responsibilities, independence, resources and accountability of the supervisory and regulatory bodies; and the role, liability and funding sources of selfregulatory bodies and agencies responsible for due diligence in financial systems (credit rating agencies, accounting firms) -- to help identify conflicts of interest and potential moral hazard; • Adequacy of financial statistical data and information disclosures on the risk exposures of financial institutions, and the adequacy of the analysis and early warnings based on financial information -- to identify significant information gaps that would weaken market discipline or effective surveillance of financial systems; • Role of implicit and explicit guarantees in the financial system and the role and effectiveness of crisis management, resolution and bankruptcy provisions, including potential systemically important and too-big-to-fail financial institutions -- to identify potential moral hazard; • Corporate governance culture, risk management and compensation practices especially in systemically important financial firms -- to identify the role of internal procedures in promoting and mitigating risk taking; • Incentive compatibility of financial regulations and their potential role in contributing to or reducing systemic risk; and • Incentive and monitoring issues posed by financial innovation. Depending on the stage of development and structure of the financial system in a particular country, a more detailed and prioritized assessment of incentives in certain areas would be warranted. For example, in countries where market discipline is underdeveloped, greater weight would be placed on the incentives and instruments of the supervisory authorities and on the institutions’ internal governance and control mechanisms in mitigating systemic risk. Similarly, in countries where too-big-tofail problems cannot be resolved in the shortterm, greater weight would be placed on the supervisory processes and internal controls. In countries where market discipline is relatively more effective, greater attention would be placed, for example, on the adequacy of information disclosures, the conflicts of interest in the agencies responsible for due diligence, and sources of moral hazard.

About the Authors Martin Čihák and Aslı Demirgüç-Kunt work at the World Bank as Lead Economist and Director of Research, respectively. The views expressed here are those of the authors and do not necessarily represent those of the World Bank or its affiliated organizations. For details of the incentive audits proposal, see the World Bank Policy Research Working Paper 6308.

Martin Čihák

Aslı Demirgüç-Kunt

Conclusion Incentive audits can be helpful in preventing financial crises. They are no panacea, of course, because financial markets suffer from issues that go beyond misaligned incentives, in particular limited rationality and herd behavior. Incentive audits therefore need to be complemented by other tools and assessments. But better identifying and addressing incentive misalignments is a key practical step, and incentive audits could help. They would provide an organizing framework, placing the identification and correction of incentive misalignments front and center. i | Capital Finance International


> Thomas Wieser, President of the Eurogroup Working Group:

Banking Union – Key Milestone on the Road to Recovery Financial market fragmentation, differing conditions of market access and growing divergences in financing costs across Europe - especially within the euro area have become a serious impediment to economic growth. The banking union can help the EU reverse this trend, further strengthen its single market and overcome the recession.


he recent global economic and financial crisis had a huge impact on many people’s notions, beliefs and expectations. Individuals, economies and governments have been struggling to get to grips with a changing reality and market volatility. However, about five years after the outbreak of the crisis, after many reforms and adjustments, we are not yet out of the woods: the EU economy is stagnating, and the euro area is even in a mild recession. The magic word is growth, but the answer to the question of how to bring it about is not so straightforward. Neither more public spending to increase domestic demand, nor expansionary monetary policy will do the trick. The growth must come from within, and this can only happen if we boost investment, re-launch business activity and improve the competitiveness of our economies. At present, this is easier said than done. The global financial and economic crisis lead to financial market fragmentation… The corporate sector, especially small and medium enterprises, lack financing. In many member states, non-performing loan ratios have continued to increase and evergreening of loans has become more widespread. The progress of deleveraging, which should have enabled restructuring and resolution of banks, so that viable parts of the industry could continue their activity, was too slow. In such an environment, coupled with bleak growth prospects and more stringent capital requirements, banks have become more hesitant to lend to each other, as well as to the corporate sector and the households. Given the devastating experience of the crisis and shaken confidence, our economies found themselves in a negative spiral - with on the one hand reduced and more expensive lending, and on the other an even steeper fall in equity funding.


“The magic word is growth, but the answer to the question of how to bring it about is not so straightforward.” While these trends could be observed across the EU and the euro area, their extent differed from country to country. The widening of spreads of government securities’ yields of individual euro area countries, once acquired as secure assets bearing relatively comparable low risks, further aggravated this process. Speculation of a possible break up of the euro area or an exit of one or the other of its Member States introduced a new phenomenon - the redenomination risk premium, which put further pressure on the borrowing cost not only for governments but also the corporate and household sectors in most vulnerable countries. On the other hand, national regulators have partly been encouraging banks to invest in domestic debt to increase stability. This strengthened already growing interdependence between banks and governments at the expense of inter-bank, private and cross border lending. The situation is much more challenging in the countries and regions that have been suffering most from the crisis and would therefore most need support. A perfectly functioning single market with absolutely free movement of capital would have prevented or at least slowed down such fragmentation, and we can see quite some room for improvement here. There is no single silver bullet to get us out of the present situation, but the banking union could be a key milestone on our road to recovery. … and put a heavy burden on the taxpayer Governments have done much to help the banking sector and the real economy to pick up, | Capital Finance International

stepping in with capital injections, loans and guarantees. In the short run, this was necessary to prevent an even deeper crisis, but in the long run, the aim is to ensure a healthy financial sector through credible regulation and stronger, more effective supervision. This will reduce the pressure on public finances, alleviate the burden on the taxpayer and support recovery. Better regulation and supervision will help us reverse this negative trend… A lot has already been done in this respect. We have been strengthening the regulation and supervision of our financial sector, we established several committees of supervisors at EU level. The European Banking Authority (EBA) focuses on the banking sector, the European Insurance and Occupational Pensions Authority (EIOPA) on insurance and pension schemes, and the European Securities and Markets Authority

Pictured: Former Eurogroup President Mr Juncker and Mr Wieser Copyright: The Council of the European Union.

Summer 2013 Issue

Copyright: The Council of the European Union.

“But to benefit from them as much as possible we must take another step forward: towards a banking union with a single supervisor and a single resolution mechanism.� (ESMA) on the functioning of financial markets. These three agencies, together with the European Systemic Risk Board (ESRB), which is carrying out overall macro-prudential oversight, cooperate closely with national authorities and EU institutions to ensure financial stability in the EU. Further to the EBA-led stress tests and the EBA capital exercise in 2011 and 2012, many banks have been recapitalised and/or restructured, and their balance sheets deleveraged. However, this process is still ongoing, and several challenges still lie ahead of us. We must further improve regulation and strengthen supervision. Banks that risk becoming non-viable will have to be restructured sooner and the use of public money avoided as much as possible. How can this be done? The basis is the single rulebook, agreed at the EU level and implemented by member states. It consists of several elements. A set of rules on capital requirements and resolution, known to experts as CRD IV, will transpose the international Basel III agreement into EU legislation. It will ensure that banks at all times hold sufficient own funds to meet potential losses. Should the worse come to the worst, deposits up to EUR 100 000 are already guaranteed across the EU. The new directive on deposit guarantee schemes will further harmonise and simplify the rules in this area and improve the financing of the existing guarantee schemes. The future bank recovery and resolution directive will set standards for the orderly restructuring and resolution of banks. In the future, this process will start early, i.e. as soon as the supervisor detects that a bank risks

becoming non-viable unless appropriate action is taken. Banks will be obliged to make resolution plans. For cases where a bank must be resolved, the new directive will set the framework for the pecking order, specifying which stakeholders (among different categories of shareholders, bondholders and depositors) should participate in the resolution, or in other words, be bailed-in, in what order, and to what extent. Furthermore, resolution funds will be established, financed by contributions from the banks, to be activated in such cases. Should government intervention nevertheless be needed, the State and the taxpayer will move to the end of the chain.

‌ and the banking union will enable us to enjoy the full benefit of the single market These rules will be implemented at national level by all EU countries. But to benefit from them as much as possible we must take another step forward: towards a banking union with a single supervisor and a single resolution mechanism. That way, implementation of the commonly agreed rules and monitoring of that implementation will also be unified across the member states. This will strengthen confidence and improve efficiency when handling crossborder cases. It is indispensable for the euro area and will be open to non-euro area countries.

Pictured: Mr Wieser next to current Eurogroup President, Mr Dijsselbloem. Copyright: The Council of the European Union. | Capital Finance International


Copyright: The Council of the European Union.

Reaching an agreement on all these elements within the complex EU legislative process is one thing; sequencing is another. The capital requirements directive will enter into force in January next year, while the negotiations on the deposit guarantee schemes and bank recovery and resolution are still ongoing. We already have an agreement on the Single Supervisory Mechanism. In the second half of next year, the European Central Bank (ECB) is expected to take over the task of supervision, cooperating with national authorities. The biggest banks, considered to be of systemic importance and together representing a majority of the banking sector, will be placed under direct ECB supervision, whereas national supervisors will stay involved, in close cooperation with the ECB, for the smaller banks. The process will start with an asset quality review and balance sheet assessment of the banks that will be moved under the umbrella of the ECB. If a capital injection from the public sector is needed and warranted for a euro area bank supervised by the ECB at this stage, the European Stability Mechanism could be activated to cover a part of it directly. A single resolution mechanism is the next piece of this structure. Allowing for the negotiation process and the time needed for implementation, it might still take a few years until all the elements of the single resolution are in place, i.e. until the directive is transposed and the mechanism operational. In the meantime, we will bridge the gap by implementing the framework that already exists. Any bank that receives assistance from the sovereign must already have undergone restructuring in line with the EU state-aid rules. In other words, the European Commission must


approve the restructuring plan and government assistance. These rules are currently being amended to be brought closer to the framework that will eventually be put in place with the forthcoming directive on recovery and resolution. In addition to supervision and resolution, a single deposit guarantee scheme could be the last building block of the banking union, but it is not yet on the horizon. If regulation, supervision and resolution are all in place and work properly, the need for the actual use of deposit guarantees would be rather limited. Close harmonisation of the rules and functioning of national schemes should be sufficient at this stage. A well-integrated single market for the financial sector, ensuring a level playing field for banks across the EU, will help boost confidence. Borrowing conditions, which currently diverge widely across individual countries and regions, will converge, and cross-border lending will be stimulated. A healthy financial sector is crucial for promoting investment and growth. However, there is no time to wait for the banking union to be completed; we must work in parallel in several areas to improve the financing conditions for the economy, at EU as well as national level. We are currently improving the use of existing schemes, such as the EU Structural Funds, lending by the European Investment Bank and the European Investment Fund. We are furthermore exploring possibilities for setting up new initiatives. All these processes must work hand in hand. Only then can we expect to see the benefits of what we are doing now before the last element of the banking union is completed. i | Capital Finance International

“The biggest banks, considered to be of systemic importance and together representing a majority of the banking sector, will be placed under direct ECB supervision.�

Summer 2013 Issue

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 economic policy coordination. 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 policies 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. 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. 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.

about the author Thomas Wieser is the Brussels-based President of the Eurogroup 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. | Capital Finance International



Services and Competitiveness in Manufacturing – The Case of Textiles and Clothing By Hildegunn Kyvik Nordüs

What is competitiveness? Competitiveness is a widely used concept but it is not well defined and it may mean different things to different people. At one extreme is the World Economic Forum’s competitiveness index which covers 12 pillars including the overall institutional framework, macroeconomic performance, infrastructure, health, education, technology, market size and efficiency in a number of markets. At


the other extreme competitiveness is defined simply as relative unit labour cost. Measures of competitiveness that go together with a high or rapidly growing level of income and welfare must capture the ability to specialize in products that sell on the basis of quality and brand recognition. Such products fetch a price premium in the market and brand loyalty implies that their sales are quite | Capital Finance International

resilient to market fluctuations. Countries that specialize in a few brands with international recognition typically export a high share of output while importing other brands of the same product. Branded products are found in all sectors, not least in textiles and clothing. Entry barriers are relatively low in this sector and it continues to be a first rung on the industrialization

Summer 2013 Issue

ladder for poor countries. Yet, we find highly competitive up-market segments in a number of high-income countries. For instance, Italy and France produce up-market fashion, Spain produces middle-market fast fashion, and Sweden produces smart textiles for sportswear. Since most countries produce and trade textiles and clothing, it is an interesting sector for studying the relationship between services and competitiveness. Figure 1 shows that, as one would expect, rich countries obtain higher export prices. But also note that the countries that both export and import clothing fetch higher prices in the market. This is a general observation going beyond this small sample of major clothing exporters. How are services related to competitiveness? Services inputs such as design, marketing through social networks, market monitoring, R&D and logistics are essential for creating brand value. Marketing and market monitoring, in turn, depends on adequate telecommunications networks. Real time information on consumer choices and perceptions are essential, particularly in fast fashion where collections change in response to how well or otherwise they sell. Branded goods are typically produced within global value chains where a number of activities are performed by subcontractors. This structure allows entrepreneurs in poor countries to enter an industry before their country has developed sufficient infrastructure and capacity to support the entire supply chain, provided that the activity can be effectively connected to the rest of the supply chain (Baldwin, 2011). Being part of a supply chain means importing inputs from upstream activities and exporting to downstream firms or the final consumer. Trade barriers both for goods and services in these circumstances seriously get in the way of competitiveness. Against this backdrop, it is evident that competitiveness in manufacturing depends on access to essential services support, particularly in telecommunications, transport and of course reliable electricity supply and a business environment where contracts can be easily entered into and enforced. Table 1 shows the performance of four selected major clothing exporting countries on services indicators and policy indicators.

“The by far most important of the backbone services is, perhaps somewhat surprisingly, reliable electricity supply.� | Capital Finance International

Telecoms and reliable electricity are crucial – and complement each other So which services are most important for competitiveness in the clothing sector? The services sectors for which comparable indicators across countries are available are transport (transport costs and time for exports and imports), telecoms (number of lines per 100 inhabitants; mobile and wired) financial services (interest rate spread and bank credit as share of GDP) and electricity (loss during transmission and distribution).






6 5







20 0

Export price index

USD bill


1 China Exports

France Imports




Export price index

Figure 1: Trade in clothing and export price index, 2010.

Unfortunately, it is more difficult to find comparable data on the performance of business services, which are also important. For the countries that are included in the OECD inputoutput database, however, there is a positive relationship between the relative importance of business services in the production process of an industry and the price fetched in advanced export markets for its products (NordĂĽs and Kim, 2013). The by far most important of the backbone services is, perhaps somewhat surprisingly, reliable electricity supply. Electricity losses, which tend to be a symptom of underlying problems in the sector, is strongly associated with lower export volumes, lower export prices, more volatile trade flows (i.e. shorter duration of bilateral trade relationships) and a lower degree of product differentiation [The degree of product differentiation is measured by the Grubel-Lloyd index of intra-industry trade]. Although the negative effect on competitiveness of unreliable electricity supply is stronger the richer the country, it is very important also for low-income and middle-income countries as well. The second most important service included in the analysis is telecoms. The higher is the density of the telecoms network, the larger, more diversified and resilient are exports, and the higher are the prices obtained in export markets. The effect of better telecommunication networks,

particularly mobile, on the competitiveness in the clothing sector, is larger the poorer the country. Interestingly, reliable electricity supply and a high density of telecoms networks are complementary. Thus, the competitiveness-enhancing effect of rolling out more telecommunication lines or mobile connections is higher the more reliable is electricity supply. The complementarity between reliable electricity and sophisticated telecoms reflects a rapidly proliferating industrial internet where sensors monitor and control manufacturing processes and supply chain management systems, particularly in high-income countries. The third most important indicator of services quality for competitiveness in the textiles and clothing sector is time for exports and imports. The longer it takes for a container to get through the logistical and administrative hurdles at the port, the less the country in question exports clothing, and the less differentiated are its exports. Poor countries typically produce lowend standard products. For them, the next step on the quality ladder is fast fashion. Keeping up with the whims of fashion is rewarded with higher export prices. But this is not possible if the goods must wait for weeks and months at the port. Therefore, the impact of reducing time for exports and imports on competitiveness in the clothing sector is higher the poorer the country. Financial services also play a role for competitiveness in the clothing sector, but

Electricity loss (% of generated) Time for exports Time for imports Mobile lines per 100 inhabitants Broadband lines per 100 inhabitants Average tariff rate FDI restrictiveness index, services Number of procedures to enforce a contract

China 4.9 21 24 64 9.4 12.6 0.5 34

France 6.1 9 11 101 33.9 4.4 0.03 29

India 24.4 17 20 61.4 0.9 66.5 0.4 46

Italy 7.1 20 18 150 21.6 4.4 0.05 41

Table 1: Services and policy indicators, latest year available (2009-2011). Source: World Development Indicators, OECD and WITS.

22 | Capital Finance International

the impact is much smaller than that of the network industries. As noted, barriers to entry are relatively low in clothing, and lack of readily available external credit at low costs may not be an insurmountable obstacle in this sector, although of course a well-functioning financial market does help. Policy and competitiveness Fast fashion designers and marketers tend to reside in major markets and contract a number of tasks to producers in low and middle income countries. The ease at which such contracts can be entered and enforced is important for becoming part of global value chains in the clothing sector. Improving the legal framework as measured by the number of procedures to enforce a contract has a huge impact on competitiveness in poor countries. The more cumbersome is contract enforcement, the lower the export volume, the less diversified are exports and the lower are the prices obtained in the export market. These findings suggest that eliminating red-tape and strengthening contract enforcement bolster local firms’ incentives to innovate and move up the value chain. In addition easier contract enforcement could institute market confidence such that lead firms in international production networks or global value chains more willingly source specialised differentiated inputs on a longer-term contractual basis from local firms. Import tariffs are almost as important as contract enforcement. The higher the import tariffs on textiles and clothing, the less competitive is a country’s exports. As is well known, imports of intermediate goods and services are part and parcel of global value chains. If imports face tariffs and other cost or time-raising impediments, entrepreneurs in the local economy will find it difficult to gain contracts with lead firms (or tier one or two firms) in global value chains. The backbone services inputs that are crucial for the functioning of global value chains are largely traded through commercial presence. FDI restrictions in services are consistently associated with less product differentiation in the clothing sector. Furthermore, the positive impact on competitiveness of lifting FDI restrictions is stronger in poor countries. Liberalising the transport and telecoms sectors, particularly in low and lower middle-income countries could improve their connectivity to the rest of the world and help them move away from reliance of price competition alone. In a nutshell, the most important policy measures in low and lower middle income countries are more effective contract enforcement, lower tariffs, and a more liberal investment regime, particularly in backbone services. Such reforms do not require large investments and they do not tax government capacity and scarce resources very much, although political capital might be put on the line.

Summer 2013 Issue | Capital Finance International


“Goods and services are increasingly bundled both in production and consumption which explains the strong linkages between services performance indicators and competitiveness in manufacturing. Therefore, it may be worth exploring how trade policy could be designed to ensure that firms face a similar policy environment whether they engage in services or goods trade – or both.” In addition improving the reliability of electricity supply, creating a more conducive environment for investing in telecoms, particularly mobile, and reducing time for exports would help developing countries entering into global value chains in clothing as well as other sectors that can be easily fragmented, notably the electronics sector. Also for upper middle income and high income countries the low-hanging fruits for gaining competitiveness in manufacturing would be elimination of tariffs and simplification of contract enforcement. However, ensuring that regulation provides the right incentives for investment in telecommunications while keeping the telecoms market competitive and not least investing in smart electricity grids are equally important, but also more costly. Concluding remarks Goods and services are increasingly bundled both in production and consumption (Fracois and Woerz, 2008, Lodefalk, 2013a,b), which explains the strong linkages between services performance indicators and competitiveness in manufacturing. Therefore, it may be worth exploring how trade policy could be designed to ensure that firms face a similar policy environment whether they engage in services or goods trade – or both. Interestingly, in low-income countries competitiveness is most sensitive to services quality and well-functioning services markets in low-technology industries, notably textiles and 24

clothing. In middle-income countries services are most important for competitiveness in medium-technology sectors, such as chemicals and parts of the electronics industry, while in high-income countries the impact of services quality and policy is highest in medium and hightechnology industries (Nordås and Kim, 2013). This suggests that better services contribute to moving up the value chain in industries where a country already has technological capacity and comparative advantage, but better services alone may not stimulate product differentiation in sectors where a country is far from the competitive edge – at least not in the short run. Finally, product differentiation often involves product development and marketing based on real-time observations of consumer behaviour and targeted advertising, which require the accumulation and handling of enormous amounts of information. The strong linkages between competitiveness in manufacturing and the density of telecoms networks allude to this and raise issues regarding cross-border transmission and storage of information. Striking a balance between open markets and protection of privacy and intellectual property rights is therefore gaining prominence in international services trade policy discussions. i

OECD, Trade and Agriculture directorate. The article draws on Nordås and Kim (2013). For more info: | Capital Finance International

References Baldwin, R. (2011), “Trade and industrialisation after globalisation’s 2nd unbundling: How building and joining a supply chain are different and why it matters”, NBER Working Paper No. 17716, December. Francois, J. F. and Woerz, J. (2008), “Producer Services, Manufacturing Linkages, and Trade”, Journal of Industry Competition and Trade, 8, pp. 199-229. Lodefalk, M. (2013a), “Servicification of manufacturing – evidence from Sweden”, International Journal of Economics and Business Research, forthcoming. Lodefalk, M. (2013b), “The Role of Services for Manufacturing Firm Exports”, Review of World Economics,(forthcoming). Nordås, H.K. and Y. Kim (2013), “The role of services for the competitiveness in manufacturing”, OECD Trade Policy Papers no 148.

About The Author Hildegunn Kyvik Nordås joined the OECD in 2005 where she leads a project on services trade restrictions, their measurement and impact. Before joining the OECD she worked at the research division in the WTO Secretariat, and she has held positions as senior researcher and research director at Christian Michelsen Institute, Norway. Her areas of research and analysis are international trade, economic growth and economic development. She has published a number of journal articles and book chapters in these fields. In addition she has led a number of projects providing technical assistance and policy advise in developing countries, including developing a macroeconomic model with the Planning Commission of Tanzania. She has taught international economics and development economics at the University of Bergen, Norway, public finance at the School of Government at the University of Western Cape, South Africa, and she has been a visiting scholar to Stanford University, USA. Ms Kyvik Nordås holds a Ph.D. in economics.

> EBRD (European Bank for Reconstruction and Development):


Generating Growth in Europe – The EBRD’s Role By Suma Chakrabarti

Foreign direct investment in emerging Europe is increasingly integrating local March 2013 firms to global supply chains. Evidence shows that foreign banks increased access to finance and the efficiency of local financial systems in the EBRD region. The EBRD is one of the largest investors in the private sector in Albania. Its At a glance Emerging needs cross-border finance. While the EBRD strongly promotes main areas ofEurope focus are supporting the financial sector and small-medium production enterprises, improving infrastructure, and developing natural of operations signed the development of local deposit bases, many countries inNumber our region will need resources. The Bank is also engaged in policy dialogue with the Albanian 63 access to foreign savings for some government, with the potential to invest in key time. public sector projects, along with the implementation of numerous donor-funded projects in the country.

ive years since of the global economy Highlights 2012 plunged into the deepest crisis for


decades, growth and of recovery remain The Bank signed a total 12 projects elusive. Thus the pursuit €69 of renewed in Albania in 2012, totalling million, growth has become the 70 pereconomic cent of which were in the challenge of our time. private sector.

Net cumulative business volume

€702 million

market access lowers the costs of innovation and Total project value exporting. Crucially, trade integration highlights 13.3 MW, these utilities will generate upthe importance of local economic institutions. to 66.2 GWh of electricity per year, andTechnology adoption is unlikely in environments property disbursements rights and an unstable Cumulative help offset over 45,000 tonnes of CO2 with weak business climate.

“In Europe at the heart of the debate on how to reignite growth is integration.” annually.

In Europe at the heart of the debate on how to In the transport sector, the EBRD reignite growth is integration. Sceptics point to provided additional financing of crisis. the contagion effect exposed by the Euro €7.5 million for the completion of the – Another example – reaching beyond Europe isnew the road rapid between spread of the mortgages crisis theUS cities of Levan of 2007 through the highly integrated global and Vlore in south-western Albania. financial system turning it into an international The road was open to the public in July credit crunch.

€2,524 million €590 million

flows. The result was a closing of the gap with In 2012, the Bank continued to supportThis also applies to finance. Prior to 2008, Portfolio the West which the EBRD has been proud to policy makers often viewed cross-border and the Albanian sector bygoods, providing promote. It was not financial only the free flow of multinational banking as a natural element of funding to of micro-credit but long-term also the establishment an institutional economic integration and a driver of growth. framework that enabled with the the Evidence shows that foreign banks increased institutions aimingconvergence, at increasing Number of active operations EU role as anchor. Today, 12financial of these countries are access to finance and the efficiency of local of non-bank institutions, members of the European Union and Croatia will financial systems in the EBRD region. It is supporting their lending to SMEs and join later this year. therefore universally accepted that financial 2012 and has significantly improved improving corporate governance and development and economic development go Operating assets accessibility in the Riviera. credit management The hand-in-hand. In the face of that, it Albanian would be easy to turn Integration was the driver ofprocedures. change. So, where one’s back on integration and retreat inwards, did Bank it to runcommitted out of steam?aWhen 2007 credit €5.0the million small To improve the safety the power precisely the response whichofbrought depression crunch it was Europe that suffered as credit much Given this background, policymakers had little andhit, medium-sized enterprises sector share ofofportfolio infrastructure the Wars. BankBut signed a is that as anywhere. The Euro was meant to build on the doubt, ifPrivate between the two World the truth any, about the benefits integration. line to Veneto Banca, €1.3 million credit integration isn’t the problem. The realKESH’s problem is success of the single market, another step down Just as in the Asian crisis of 1997, this belief has €12.7 million loan to support €1.1But million line to been challenged but it remains true. Emerging that integrationplan has not enough and its the line road to of NOA, integration. it wascredit incomplete, investment forgone the far safety upgrade Fondi Besa and €1.0 million credit line Europe to quality has been insufficient, in particular in the equipped with a common monetary policy but needs cross-border finance. While the at the Komani hydropower dam, the financial sector. not Credins a common fiscal policy. As a result some EBRD strongly promotes the development of Leasing. largest hydropower plant in Albania. countries have been able to rack up huge debts local deposit bases, many countries in our region This project is part ofintegration an overalldelivered andIn thedown natural resources the From 1945 onwards, drag the whole Eurozonesector economy. will need access to foreign savings for some time. economic gains.programme In Europe, it was an engine for investment co-financed by EBRD extended the second tranche In November 2012, we at EBRD announced growth. The European Single Market which came Emerging Europe felt the pain – even though a new Joint Action Plan with the European the World Bank, KfW and SECO. The of €19.2 million to Bankers Petroleum into being in 1992 serves as a prime example, many countries are not members of the Euro Investment Bank Group and the World Bank EBRD projects 2008-12 EBRD continued to support private to support in the remediation and both with its achievements and its shortcomings. – through the import of financial instability Group Volume which will more than EUR30 billion (€see millions) Number of projects sector investment in renewable redevelopment of the Patos-Marina channeled to emerging Europe in the next two After the Iron Curtain came down in 1989, and rapid deleveraging. West European banks 120 12 energy through Western Balkans oilfield, largest in Albania. In the integration in Europethe intensified rapidly. active in the the region cut back their lending and years, at a time when the pains of Eurozone bank Sustainable Energy Direct Funding construction materials sector Bankdeleveraging may be felt at ever greater scale. some closed their operations. The credit the crunch 100 EBRD continue to facilitateInregional a destroyer of economic growth. In these 10 Facility (WeBSEDFF). 2012 integration the Bank became provided additional equity support of and export-led growth. We target our lending to circumstances, it is hardly surprising that some In emerging Europe, integration also takes the extended a €6 million loan to finance the €4.4 million to Antea Cement Factory, a SMEs and refinance corporate clients with key governments prefer to seek national solutions. form of 80 lowering barriers to trade. There is a 8 construction of the Ternove hydropower greenfield cement plant built two yearsthorny road roles in their markets. In 2012, we signed more ahead of Europe for closing the gap plant inproject north-east Albania and business a ago with produce 1.5 million than one every day for a total However, it iscapacity time to to restate the case for between institutional and financial integration. 60 6 €5.2 million forbillion. the construction of integration. tonnesInternational of cementtrade annually and locatedBut possible volume of almostloan EUR9 not only benefits solutions like the European Stability consumers; it also encourages firms’ innovation Mechanism are being developed and positive the Verbe-Selce hydropower plant near about 30 km north of Tirana. 40 We a rapidintransition in the former and helps them to grow. Foreign direct investment steps towards deeper integration will support 4 thewitnessed city of Korçë south-east Albania. Communist-ruled countries of Eastern Europe to in emerging Europe is increasingly integrating the long-term growth prospects of the whole With a combined generation capacity of a free market with increasing trade and capital local firms to global supply chains. Greater continent. 20 2

€439 million 44

€351 million 54%

26 | Capital Finance International

0 '08






Summer 2013 Issue

Suma Chakrabarti

The second dimension of integration concerns fostering trade within emerging Europe. The benefits of regional integration are many. The most important one might be the reduction of non-tariff trade barriers through the elimination of border controls and improved cross-border infrastructure. Trade creation increases consumer choice and a larger market reduces the costs of innovation for producers. Regional integration helps build cross-border value chains and larger and more efficient markets. It also presents an opportunity to build stronger economic institutions. The EBRD continues to support these developments, first with continued investments, matching its money with policy dialogue aimed at economic restructuring, diversification and improving corporate governance. Our crisis response is very closely coordinated with other IFIs. In November 2012, we at EBRD announced a new Joint Action Plan with the European Investment Bank Group and the World Bank Group which will see more than EUR30 billion channeled to emerging Europe in the next two years, at a time when the pains of Eurozone bank deleveraging may be felt at ever greater scale. In addition we continue to facilitate regional integration and export-led growth. We target our

lending to SMEs and refinance corporate clients with key roles in their markets. In 2012, we signed more than one project every day for a total business volume of almost EUR9 billion. Secondly, the EBRD believes in a further intensification of reforms against the backdrop of slow export growth and a credit squeeze. We will continue to push for reforms via our investments, policy advice and technical cooperation. We assist transition countries in boosting their exports base and capacity in developing a knowledge-based economy driven by innovation and skills acquisition and in building a high quality institutional environment that is attractive to businesses. We will continue to support growth not only through project financing, but also through expert advice and guidance. Thirdly, the EBRD will continue cooperating with other IFIs and the private sector to enhance its local currency and local capital markets initiative launched in May 2010. In order to maintain economic recovery, investment growth in the real economy will need to rely on continued growth of the financial sector. This crucially depends on a sound banking system and supportive local capital markets, which should strengthen domestic savings. i | Capital Finance International

About the Author Sir Suma Chakrabarti, born in 1959 in West Bengal, India, is the sixth President of the European Bank for Reconstruction and Development (EBRD). The Bank’s Board of Governors elected Sir Suma as President of the EBRD for the next four years, from July 3, 2012. He replaces Thomas Mirow, the President since 2008. Sir Suma has extensive experience in international development economics and policy-making, as well as in designing and implementing wider public service reform. Most recently he held the position of Permanent Secretary at the British Ministry of Justice and was its most senior civil servant. Prior to this, from 2002, he headed the UK’s Department for International Development -- formerly the Overseas Development Administration (ODA) -- where he worked closely with economies undergoing substantial reform in eastern Europe, the former Soviet Union and the Middle East and North Africa. Sir Suma is notable for playing a key role developing the UK’s successful Know-How Fund for Central and Eastern Europe and worked with the European Commission in improving its programmes in the Middle East and North Africa. 27

> Nouriel Roubini:

De-Risking Revisited


EW YORK – Until the recent bout of financial-market turbulence, a variety of risky assets (including equities, government bonds, and commodities) had been rallying since last summer. But, while risk aversion and volatility were falling and asset prices were rising, economic growth remained sluggish throughout the world. Now the global economy’s chickens may be coming home to roost. Japan, struggling against two decades of stagnation and deflation, had to resort to


Abenomics to avoid a quintuple-dip recession. In the United Kingdom, the debate since last summer has focused on the prospect of a tripledip recession. Most of the eurozone remains mired in a severe recession – now spreading from the periphery to parts of the core. Even in the United States, economic performance has remained mediocre, with growth hovering around 1.5% for the last few quarters. And now the darlings of the world economy, emerging markets, have proved unable to reverse their own slowdowns. According to the IMF, | Capital Finance International

China’s annual GDP growth has slowed to 8%, from 10% in 2010; over the same period, India’s growth rate slowed from 11.2% to 5.7%. Russia, Brazil, and South Africa are growing at around 3%, and other emerging markets are slowing as well. This gap between Wall Street and Main Street (rising asset prices, despite worse-than-expected economic performance) can be explained by three factors. First, the tail risks (low-probability, high-impact events) in the global economy – a eurozone breakup, the US going over its fiscal

Summer 2013 Issue

cliff, a hard economic landing for China, a war between Israel and Iran over nuclear proliferation – are lower now than they were a year ago. Second, while growth has been disappointing in both developed and emerging markets, financial markets remain hopeful that better economic data will emerge in the second half of 2013 and 2014, especially in the US and Japan, with the UK and the eurozone bottoming out and most emerging markets returning to form. Optimists repeat the refrain that “this year is different”: after a prolonged period of painful deleveraging, the global economy supposedly is on the cusp of stronger growth. Third, in response to slower growth and lower inflation (owing partly to lower commodity prices), the world’s major central banks pursued another round of unconventional monetary easing: lower policy rates, forward guidance, quantitative easing (QE), and credit easing. Likewise, many emergingmarket central banks reacted to slower growth and lower inflation by cutting policy rates as well. This massive wave of liquidity searching for yield fueled temporary asset-price reflation around the world. But there were two risks to liquidity-driven asset reflation. First, if growth did not recover and surprise on the upside (in which case high asset prices would be justified), eventually slow growth would dominate the levitational effects of liquidity and force asset prices lower, in line with weaker economic fundamentals. Second, it was possible that some central banks – namely the Fed – could pull the plug (or hose) by exiting from QE and zero policy rates.

“Even in the United States, economic performance has remained mediocre, with growth hovering around 1.5% for the last few quarters.”

This brings us to the recent financialmarket turbulence. It was already evident in the first and second quarters of this year that growth in China and other emerging markets was slowing. This explains the underperformance of commodities and emerging-market equities even before the recent turmoil. But the Fed’s recent signals of an early exit from QE – together with stronger evidence of China’s slowdown and Chinese, Japanese, and European central bankers’ failure to provide the additional monetary easing that investors expected – dealt emerging markets an additional blow. These countries have found themselves on the receiving end not only of a correction in commodity prices and equities, but also of a brutal re-pricing of currencies and both local- and foreign-currency fixed-income assets. Brazil and other countries that complained about “hot money” inflows and | Capital Finance International

“currency wars,” have now suddenly gotten what they wished for: a likely early end of the Fed’s QE. The consequences – sharp capital-flow reversals that are now hitting all risky emerging-market assets – have not been pretty. Whether the correction in risky assets is temporary or the start of a bear market will depend on several factors. One is whether the Fed will truly exit from QE as quickly as it signaled. There is a strong likelihood that weaker US growth and lower inflation will force it to slow the pace of its withdrawal of liquidity support. Another variable is how much easier monetary policies in other developed countries will become. The Bank of Japan, the European Central Bank, the Bank of England, and the Swiss National Bank are already easing policy as their economies’ growth lags that of the US. How much further they go may well be influenced in part by domestic conditions and in part by the extent to which weaker growth in China exacerbates downside risks in Asian economies, commodity exporters, and the US and the eurozone. A further slowdown in China and other emerging economies is another risk to financial markets. Then there is the question of how emerging-market policymakers respond to the turbulence: Will they raise rates to stem inflationary depreciation and capital outflows, or will they cut rates to boost flagging GDP growth, thus increasing the risk of inflation and of a sudden capital-flow reversal? Two final factors include how soon the eurozone economy bottoms out (there have been some recent signs of stabilization, but the monetary union’s chronic problems remain unresolved), and whether Middle East tensions and the threat of nuclear proliferation in the region – and responses to that threat by the US and Israel – escalate or are successfully contained. A new period of uncertainty and volatility has begun, and it seems likely to lead to choppy economies and choppy markets. Indeed, a broader de-risking cycle for financial markets could be at hand. i

About the Author Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at NYU’s Stern School of Business. Copyright: Project Syndicate, 2013.


> Michael Pettis: Europe’s Crisis Caused by Excess German Savings, Not Thrift Countries are not households One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings. By coincidence there was recently a very interesting debate on the subject involving several economists, and it is pretty clear from the debate that even accounting identities can lead to confusion. The difference between household and national savings matters because of the impact of national savings on a country’s current account, as I discuss in a recent piece in Foreign Policy. In it I argue that we often and mistakenly think


of nations as if they were simply very large households. Because we know that the more a household saves out of current income, the better prepared it is for the future and the more likely to get rich, we assume the same must be true for a country.

misallocated for much longer periods of time than investment funded by external financing). Saving in itself, however, does not create wealth. It is productive investment that creates wealth. Domestic savings simply represent a postponement of consumption.

But countries are not households. What a country needs to get wealthier is not more savings but rather more productive investment. Domestic savings matter, of course, but only because they are one of the ways, and probably the safest, to fund domestic investment (although perhaps because they are the safest, investment funded by domestic savings can also be

In a closed economy, total savings is equal to total investment or, to put it differently, whatever we don’t consume we invest (if we produce something that we neither consume nor invest, we effectively write its value down to zero, so the balance remains). In an open economy, if a country saves more than it invests it must export the excess savings. It must also export the excess production. | Capital Finance International

Summer 2013 Issue

Notice that by definition if a country saves more than it invests, total consumption plus total savings must be greater than total consumption plus total investment. The former is the sum of the goods and services it creates, whereas the latter is the sum of goods and services it absorbs. That country, in other words, supplies more goods and services than it absorbs, and so it must export the excess. What is more, by exporting excess savings, the country is providing the funding to foreigners to purchase its excess production. This is why the current account and the capital account for any country must always add up to zero. Excess savings has to do with income inequality. As more and more wealth is concentrated into the hands of fewer people, consumption rises more slowly than production, largely because the wealthier a person gets, the smaller the share he consumes out of his income. Notice that because savings is simply total production of goods and services minus total consumption, this forces up the national savings rate. This was a very important insight. Excess savings is not a result of old-fashioned thrift but rather a consequence of structural distortions in the economy. The consequence of this “thrift”, furthermore, was not greater wealth but rather structural imbalances in the global economy. In a closed economy there are four ways of resolving the imbalances caused by an increase in the savings rate. First, and most obviously, investment can rise by the same amount.

Berlin: Brandenburg Gate

“But countries are not households. What a country needs to get wealthier is not more savings but rather more productive investment.”

The private sector, however, may be reluctant to increase investment if it believes the consumption share is declining over the long term, in which case the government can sponsor the increase in investment, for example in infrastructure, so that savings and investment balance at a higher rate. This is sustainable only as long as there are productive investments that can be made, but as consumption declines, the reason for investing should decline too. The purpose of investment today after all is to create consumption tomorrow. The second way to resolve the imbalance is if the government or the labor unions take steps to redistribute income downwards. As middle class and poor households retain a greater share of total GDP, consumption will automatically rise relative to production (the savings rate declines), even if middle class and poor households save a greater share of their higher income. The savings | Capital Finance International

rate declines to the point at which savings and investment are once again balanced domestically and everything a country makes it consumes or invests. The third way to resolve this in a closed economy – albeit only temporarily – is to fund a consumption boom among the not-so-rich. The fourth way to resolve the savings imbalance in a closed economy is to force up unemployment (this is what Karl Marx said would eventually happen). As income inequality grows, and so consumption grows more slowly than production, companies are forced to cut production and fire workers. Fired workers of course produce nothing, but they still consume, either out of savings, welfare payments, or handouts from friends and families. This causes total savings to drop so that once again it balances investment, but of course in an economy with rising unemployment, profits are likely to drop, and with lower profits comes reduced investment, so more workers need to be fired and the process can become self-reinforcing. Open economies have another option But we do not live in closed economies. Most of us live in open economies (although the world itself is a closed economy), so there is actually a fifth way to resolve domestic savings imbalances. If domestic savings rates are so high that the country cannot invest it all profitably, it can export those savings, which means automatically that it imports foreign demand for its excess production. Its net export of savings (less net returns on earlier investment) is exactly equal to its net export of goods and services. In an open economy, in other words, a country’s total savings matters because to the extent that it exceeds investment, it must be exported, and it must result in a current account surplus. Here is where the confusion so many analysts, including economists, have about the difference between national and household savings. Household savings represent the amount out of household income that a household chooses not to consume, and so can be affected by cultural or demographic factors, the existence and credibility of a social safety net, the sophistication of consumer finance, and so on. The national savings rate, on the other hand, includes not just household savings but also the savings of governments and businesses. It is defined simply as a country’s GDP less its total consumption. While the household savings rate may be determined primarily by the cultural and demographic preferences of ordinary households, the national savings rate is not. Indeed in some cases the household share of all the goods and services a country produces, which is primarily


a function of policies and economic institutions, is the main factor affecting the national savings rate. National savings, in other words, may have very little to do with household preferences and a lot to do with policy distortions. In China, which has by far the highest savings rate in the world, part of the reason for the high national savings rate of course is that Chinese households save a relatively high proportion of their income.

“The German savings rate rose because policies aimed at restraining wage growth and generating employment at home reduced household consumption as a share of GDP.”

But while China’s savings rate is extraordinarily high, the Chinese household savings rate is merely in line with those of similar countries in the region, and in fact lower than some. Chinese households are not nearly as thrifty as their national savings rate implies. The reason for China’s savings rate is so extraordinarily high is the very low household income share of GDP. At roughly 50% of GDP, Chinese households retain a lower share of all the goods and services the country produces than households in any other country in the world. This is a consequence of policies Beijing put into place many years ago that goose GDP growth by constraining the growth in household income. As a result of these policies, the household share of China’s total production of goods and services has been falling for thirty years, and fell especially sharply in the past decade. It isn’t surprising, consequently, that as households earn a declining share of what China produces, they also consume a declining share. Because savings is simply GDP less total consumption, and most consumption is household consumption, the fall in the household income share of GDP is the obverse of the rise in China’s extraordinarily high savings rate. Many factors explain this very low household income share in China, including most importantly financial repression, whose characteristics typically include artificially low deposit rates, which, by reducing the amount of money that a saver should earn on his bank deposit, transfers part of his income to borrowers, who are able to borrow very cheaply. In China, this implicit transfer is extremely high, perhaps 5 percent of China’s GDP or more. Of course the more money that is transferred in this way, the less disposable income the household depositor has, and so he is forced to reduce both his nominal savings and his nominal consumption. We cannot easily predict how this reduced interest rate will affect the household savings rate, but it is pretty easy to figure out how it will affect the national savings rate. If the transfer is substantial, it will reduce the share of GDP retained by households. Unless households reduce their savings rate by more than the reduction in the household share of GDP, it must automatically force up the national savings rate.

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Confusing thrift with inequality Chinese household savings are not by any definition “monumental”, and they most certainly did not cause the global financial crisis, nor does anyone seriously claim that they did. Chinese household savings rates are high, but not exceptionally high, and because household income is such a low share of GDP, Chinese household savings as a share of GDP, which is what really matters, are even lower than the household savings rate would imply. Chinese household savings are not the problem. It is China’s national savings rate which is “monumental” and which drives China’s current and capital account imbalances, and the national savings rate is monumentally high because the national consumption rate (which consists mostly of the household consumption rate) is extraordinarily low. The important lesson from this article is that national savings represent a lot more than the thriftiness of local households, and as such it has a lot less to do with household or cultural preferences than we think. In fact many factors affect the savings rate of a country, including demographics, the extent of wealth inequality, and the sophistication of consumer credit networks, but when a country has an abnormally high savings rate it is usually because of policies or institutions that restrain the household share of GDP. This has happened not just in China but also in Germany. In the 1990s Germany could be described as saving too little. It often ran current account deficits during the decade, which means that the country imported capital to fund domestic investment. A country’s current account deficit is simply the difference between how much it invests and how much it saves, and Germans in the 1990s did not always save enough to fund local investment. But this changed in the first years of the last decade. An agreement among labor unions, businesses and the government to restrain wage growth in Germany (which dropped from 3.2 percent in the decade before 2000 to 1.1 percent in the decade after) caused the household income share of GDP to drop and, with it, the household consumption share. Because the relative decline in German household consumption powered a relative decline in overall German consumption, German saving rates automatically rose. Notice that German savings rate did not rise because German households decided that they should prepare for a difficult future in the eurozone by saving more. German household preferences had almost nothing to do with it. The German savings rate rose because policies aimed at restraining wage growth and generating employment at home reduced household consumption as a share of GDP. Germany: Frankfurt | Capital Finance International


Germany: Cologne Cathedral and Hohenzollern Bridge

As national saving soared, the German economy shifted from not having enough savings to cover domestic investment needs to having, after 2001, such high savings that not only could it finance all of its domestic investment needs but it had to invest abroad by exporting large and growing amounts of savings. As it did so its current account surplus soared, to 7.5 percent of GDP in 2007. Between 2000 and 2007, Germany’s current account balance moved from a deficit of 1.7 per cent of gross domestic product to a surplus of 7.5 per cent. Meanwhile, offsetting deficits emerged elsewhere in the eurozone. By 2007, the current account deficit was 15 per cent of GDP in Greece, 10 per cent in Portugal and Spain, and 5 per cent in Ireland. Employment policies and the savings rate It is tempting to interpret Germany’s actions as the kind of far-sighted and prudent actions that every country should have followed in order to keep growth rates high and workers employed, but it turns out that these policies did not solve unemployment pressures in Europe. Germany merely shifted unemployment from Germany to elsewhere. Germany’s export of surplus savings was simply the flip side of policies that forced the country into running a current account surplus. To explain, let us pretend that Europe consists of only two countries, Spain and Germany. As we have already shown, forcing down the growth 34

rate of German wages relative to GDP caused the household income share of GDP to drop. Unless this was matched by a decision among German households to become much less thrifty, or a decision by Berlin to increase government consumption sharply, the inevitable consequence had to be a reduction in the overall consumption share of GDP, which is just another way of saying that the German national savings rate had to rise. During this period, by the way, and perhaps as a consequence of restraining wages, Germany’s Gini coefficient seems to have risen quite markedly, and the resulting increase in income inequality also affected savings adversely. As German savings rose, eventually exceeding German investment by a wide margin, Germany had to export the difference, which its banks did largely by making loans into the rest of Europe, and especially those countries that were financially “shallower”. Declining consumption left Germany producing more goods and services than it could absorb domestically, and it exported excess production as the automatic corollary to its export of savings. Of course the rest of the world had to absorb excess German savings and run the current account deficits that corresponded to Germany’s surpluses. This was always likely to be those eurozone countries that joined the monetary union with a history of higher inflation and | Capital Finance International

currency depreciation than Germany – countries which we are here calling “Spain”. As monetary policy across Europe was made to fit German needs, which was looser than that required by Spain, and as German savings were intermediated by German banks into Spain, the result was likely to be higher wage growth, higher inflation, and soaring asset prices in Spain. In fact this is exactly what happened. Spain and the other peripheral European countries all saw their trade deficits expand dramatically or their surpluses (many were running large surpluses in the 1990s) turn into large deficits shortly after the creation of the single currency as their savings rates shifted to accommodate German exports of its excess savings. The way in which the German exports of savings were absorbed by Spain is at the heart of the subsequent crisis. As long as Spain could not use interest rates, trade intervention, or currency depreciation to block German exports, it had no choice but to balance the excess of German savings over investment. This meant that either its investment would have to rise or its savings would have to fall (or both). Both occurred. Spain increased investment in infrastructure and in real estate (and less so in manufacturing, probably because German growth occurred at the expense of the manufacturing

Summer 2013 Issue

“But lower German savings don’t mean that German families should become less thrifty, only that the average German household should be allowed to retain a much larger share of what Germany produces.”

sectors in the rest of Europe), but it seems to have done both to excess, perhaps because of the sheer amount of capital inflows. After nearly a decade of inflows larger than any it had ever absorbed before, Spain, like nearly every country in history under similar circumstances, ended up with massive amounts of misallocated investment. But this was not all. If the savings that Germany exported into Spain could not be fully absorbed by the increase in Spanish investment, the only other way to balance was with a sharp fall in Spanish savings. There are two ways Spanish savings could have fallen. First, as the Spanish tradable goods sector lost out to German competition, Spanish unemployment could rise and so force down the Spanish savings rate (unemployed workers still must consume). Second, Spain could have reduced household savings voluntarily by increasing consumption relative to income. Higher Spanish consumption would cause enough employment growth in the services and real estate sectors to make up for declining employment in the tradable goods sector. Raising consumption Not surprisingly, given the enormous optimism that accompanied the creation of the euro, the latter happened. As German money poured into

Spain, helping ignite a stock and real estate boom, ordinary Spaniards began to feel wealthier than they ever had before, especially those who owned their own homes. Thanks to this apparent increase in wealth, they reduced the amount they saved out of current income, as households around the world always do when they feel wealthier. Together the reduction in Spanish savings and the increase in Spanish investment (in infrastructure and real estate) was enough to absorb the full extent of Germany’s export of excess savings. But at what cost? The imbalance created within Europe by German policies to constrain consumption forced Spain into increasing consumption and boosting investment, much of the latter in wasted real estate projects (as happened in every one of the deficit countries that faced massive capital inflows). There are of course no shortage of moralizers who insist that greed was the driving factor and that Spain wasn’t forced into a consumption boom. “No one put a gun to their heads and forced them to buy flat-screen TVs”, they will say. But this completely misses the point. Because Germany had to export its excess savings, Spain had no choice except to increase investment or to allow its savings to collapse, with the latter either in the form of a consumption boom or a surge in unemployment. No other option was possible. | Capital Finance International

To insist that the Spanish crisis is the consequence of venality, stupidity, greed, moral obtuseness and/or political short-sightedness, which has become the preferred explanation of moralizers across Europe begs the question as to why these unflattering qualities only manifested themselves after Spain joined the euro. Were the Spanish people notably more virtuous in the 20th century than in the 21st? It also begs the question as to why vice suddenly trumped virtue in every one of the countries that entered the euro with a history of relatively higher inflation, while those eastern European countries with a history of relatively higher inflation that did not join the euro managed to remain virtuous. The European crisis, in other words, had almost nothing to do with thrifty Germans and spendthrift Spaniards. It had to do with policies aimed at boosting German employment, the secondary impact of which was to force up German national savings rates excessively. These excess savings had to be absorbed within Europe, and the subsequent imbalances were so large (because German’s savings imbalance was so large) that they led almost inevitably to the circumstances in which we are today. For this reason the European crisis cannot be resolved except by forcing down the German savings rate. And not only must German savings rates drop, they must drop substantially, enough 35

Spain: Madrid

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“This means that Spain and Europe are expecting to recover by exporting unemployment, but to whom?” to give Germany a large current account deficit. This is the only way the rest of Europe can unwind the imbalances forced upon the region in a way that is least damaging to Europe as a whole. Only in this way can countries like Spain stay within the euro while bringing down unemployment. But lower German savings don’t mean that German families should become less thrifty, only that the average German household should be allowed to retain a much larger share of what Germany produces. If Berlin were to cut consumption taxes, or cut income taxes for the lower and middle classes, or force up wages, total German consumption would rise relative to GDP and so national savings would fall – without requiring any change in the prudent behavior of German households. To ask Spanish households to be more “German” by saving more is not only impractical in an economy with 25 percent unemployment (it is hard for unemployed workers to increase their savings), it is counterproductive. Lower Spanish consumption can only cause even higher Spanish unemployment, until eventually Spain will be forced to abandon the euro and so regain control of its ability to absorb or reject German imbalances. This abandonment of the euro will be driven by the political process, as those in the leadership (of both main parties) who refuse to countenance talk of leaving the euro lose voters to more radical parties until they, too, come around. The global constraints The problem with this argument may be, however, that the global conditions that allowed Germany to grow by exporting savings to Spain cannot be

replicated. If Spain were to make its workers more competitive by reducing wage growth relative to GDP growth, it would implicitly be forcing up its savings rate to generate employment. To whom would Spain export those savings? The world is awash in excess savings, and unlike in pre-crisis days, there are no countries with booming stock and real estate markets willing to fund another consumption binge. This means that Spain and Europe are expecting to recover by exporting unemployment, but to whom?

The implications of the attempt to force the eurozone to mimic the path to adjustment taken by Germany in the 2000s are profound. For the eurozone it makes prolonged stagnation, particularly in the crisis-hit countries, highly likely. Moreover, if it starts to work, the euro is likely to move upwards, so increasing risks of deflation. Not least, the shift of the eurozone into surplus is a contractionary shock for the world economy. Who will be both able and willing to offset it?

In fact this is the great worry that Martin Wolf expresses in the conclusion of a recent article:

The eurozone is not a small and open economy, but the second-largest in the world. It is too big and the external competitiveness of its weaker countries too frail to make big shifts in the external accounts a workable post-crisis strategy for economic adjustment and growth. The eurozone cannot hope to build a solid recovery on this, as Germany did in the buoyant 2000s. Once this is understood, the internal political pressures for a change in approach will surely become overwhelming.”

“A big adverse shock risks turning low inflation into deflation. That would aggravate the pressure on countries in crisis. Even if deflation is avoided, the hope that they will grow their way out of their difficulties, via eurozone demand and internal rebalancing, is a fantasy, in the current macroeconomic context. That leaves external adjustment. According to the IMF, France will be the only large eurozone member country to run a current account deficit this year. It forecasts that, by 2018, every current eurozone member, except Finland, will be a net capital exporter. The eurozone as a whole is forecast to run a current account surplus of 2.5 per cent of GDP. Such reliance on balancing via external demand is what one would expect of a Germanic eurozone. If one wants to understand how far the folly goes, one must study the European Commission’s work on macroeconomic imbalances. Its features are revealing. Thus, it takes a current account deficit of 4 per cent of GDP as a sign of imbalance. Yet, for surpluses, the criterion is 6 per cent. Is it an accident that this happens to be Germany’s? Above all, no account is taken of a country’s size in assessing its contribution to imbalances. In this way, Germany’s role is brushed out. Yet its surplus savings create huge difficulties when interest rates are close to zero. Its omission makes this analysis of “imbalances” close to indefensible.

As long as it is part of the euro Spain has no choice but to respond to changes in German savings rates. There is nothing mysterious about this process. It is simply the way the balance of payments works, and thrift has nothing to do with it. If Germany does not take steps to force down its savings rate by increasing the household share of GDP, then either all of Europe becomes like Germany, in which case growth slows to a crawl and some other country – maybe the US? – will be forced to resolve Europe’s demand deficiency either through higher unemployment or through higher debt, or Europe must break apart to free Spain and the other peripheral countries from German savings imbalances. I don’t imagine the rest of the world can absorb demand deficiency from a Germanic Europe, and if Europe tries to force it the result will almost certainly be an eventual collapse in trade relations, so either Germany rebalances or Europe breaks apart. It is hard for me to see many other options. i

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


> Mohamed A. El-Erian:

Ireland and the Austerity Debate


UBLIN – Both sides of the austerity debate that is now gripping economists and policymakers cite Ireland’s experience as evidence for their case. And, however much they try to position the country as a poster-child, neither side is able to convince the other. Yet this tug-of-war is important, because it illustrates the complex range of arguments that are in play. It also


demonstrates why more conclusive economic policy making is proving so elusive. Here is a quick reminder of Ireland’s sad recent economic history. Lulled into complacency and excess by ample supplies of artificially cheap financing, Irish banks went on a lending binge. Irresponsible risk-taking and excessive greed outpaced prudential regulation and supervision. | Capital Finance International

The banking system ended up fueling massive speculation, including a huge run-up in realestate prices, only to be brought to its knees when the bubbles popped. Unlike the many Irish households that lost jobs and part of their wealth, the banks were deemed to be “too big to fail,” so Ireland’s political elites intervened with state funding.

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Ireland: Dublin

But, by under-estimating both the domestic and international aspects of the problem, the authorities transformed a banking problem into a national tragedy. Rather than restoring the banks to financial health and ensuring responsible behavior, the Irish economy as a whole was dragged down. Growth collapsed; unemployment spiked. Lacking opportunities, emigration increased – a vivid reminder of how economic crises have wreaked havoc on the country’s demographics throughout its history. Investors withdrew in droves from what was once deemed the “Celtic Tiger.” The government had no choice but to request a bailout from the “troika” – the International Monetary Fund, the European Central Bank, and the European Commission – thereby transferring an important component of national economic governance to an ad hoc, fragile, and sometimes feuding group of institutions. While other struggling eurozone members also turned to the troika, Ireland stands out in at least two notable ways. First, two democratically-elected governments have steadfastly implemented the agreed austerity programs with little need for waivers and modifications – and thus without the associated political drama. Second, despite enduring considerable pain, Irish society has stuck with the program, staging few of the street protests that have been common in other austerity-hit countries. All of this puts Ireland in the middle of three important issues raised in the austerity debates: whether orthodox policy, with its heavy emphasis on immediate budget cuts, can restore conditions for growth, employment gains, and financial stability; whether the benefits of eurozone membership still outweigh the costs for countries that must restructure their economies; and how a small, open economy should strategically position itself in today’s world.

“Lulled into complacency and excess by ample supplies of artificially cheap financing, Irish banks went on a lending binge.”

Austerity’s supporters point to the fact that Ireland is on the verge of “graduating” from the troika’s program. Growth has resumed, financial-risk premia have fallen sharply, foreign investment is picking up, and exports are booming. All of this, they argue, provides the basis for sustainable growth and declining unemployment. Ireland, they conclude, was right to stay in the eurozone, especially because small, open economies that are unanchored can be easily buffeted by a fluid global economy. “Not so fast,” says the other side. The critics of austerity point to the fact that Irish GDP has still not returned to its 2007 level. Unemployment remains far too high, | Capital Finance International

with alarming levels of long-term and youth joblessness. Public debt remains too high as well, and, making matters worse, much more of it is now owed to official rather than private creditors (which would complicate debt restructuring should it become necessary). The critics reject the argument that small, open economies are necessarily better off in a monetary union, pointing to how well Switzerland is coping. And they lament that eurozone membership means that Ireland’s “internal devaluations,” which involve significant cuts in real wages, have not yet run their course. The data on the “Irish experiment” – including the lack of solid counterfactuals – are not conclusive enough for one side to declare a decisive victory. Yet there is some good analytical news. Ireland provides insights that are helpful in understanding how sociopolitical systems, including economically devastated countries like Cyprus and Greece, have coped so far with shocks that were essentially unthinkable just a few years ago. On my current visit, most of the Irish citizens with whom I have spoken say that the country had no alternative but to follow the path of austerity. While they appreciate the urgent need for growth and jobs, they believe that this can be achieved only after Ireland’s finances are put back on a sound footing. They also argue that, given the banks’ irresponsibility, there is no quick way to promote sustained expansion. They are still angry at bankers, but have yet to gain proper retribution. Ireland’s accumulation of wealth during its Celtic Tiger period, when the country surged toward the top of Europe’s economic league table, has also been an effective shock absorber. This, together with fears about being left out in the geopolitical cold (despite the country’s historical links with Britain and America), dampens Irish enthusiasm for economic experiments outside the eurozone. Indeed, Irish society seems remarkably hesitant to change course. Right or wrong, Ireland will stick with austerity. Efforts to regain national control of the country’s destiny, the Irish seem to believe, must take time. In some of Europe’s other struggling countries, however, citizens may well prove less patient. i

About the Author Mohamed A. El-Erian is the CEO and co-CIO of PIMCO, and the author of When Markets Collide. Copyright: Project Syndicate, 2013.


> European Policy Centre:

Can Europe Handle Its Welfare State in the Future? By Hans Martens


ecent years have seen massive demonstrations from Athens via Madrid and Paris to London against cuts in welfare services or changes to retirement age, and it has indeed led to governments being very unpopular and in high risk of losing the next elections – whatever colour the government has. The policies we have seen recently, but surely they are temporary and a consequence of the economic and fiscal crises? No, in reality they are the beginning of a long journey, where Europeans will discover that events in the 1960s will now make their mark on the future daily life in European countries. The introduction of the pill in the mid-sixties lowered the birth rates very rapidly across Europe – because of the effects of the pill itself, but also combined with the already then developing welfare state which lead to reasoning on why it would not be necessary to have so many children to take care of you in old age. Simultaneously


“The bad news is that nobody actually started to think about the sustainability of what was established.” a lot of progress was made in other parts of the medical system leading to a rapid increase in life expectancy. During the period from the end of the Second World War, then trend was different. Fertility was very high – leading to the so-called baby-boom generation. This generation has probably been one of the largest, best educated, best employed and highest tax paying generations ever. That generation was the foundation for developing the European welfare state as we know it today with | Capital Finance International

all of its nice “gifts” to our populations. That has all been good, but the bad news is that nobody actually started to think about the sustainability of what was established. Baby boomers are now on retirement or on their way to retirement, and they of course expect a good life also in their retirement time, and they are likely to live quite long in retirement as the average retirement age is low in Europe and as life expectancy has been rising rapidly. While pension systems were originally designed to give people some income in the few years they were in retirement before they died, we are now talking about sustaining the lives of a very large part of the European population for 25-30 years or more. Demographic developments vary across Europe, but the general picture is that the population is shrinking. Some differences are shown in the table (Table 1, right).

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Country Bulgaria Germany Spain France Poland Ireland Italy UK

Population 2008 7,642 82,179 45,283 61,876 38,116 4,414 58,529 61,270

Births 2,739 32,251 23,164 40,885 14,910 3,785 25,453 42,359

Deaths 4,941 51,693 28,060 35,273 22,418 2,308 37,412 34,660

Net Migration 43,9 8,067 11,525 4,312 530 860 11,820 7,708

Change -2,158 -11,420 +6,629 +9,924 -6,977 +2,337 -139 +15,406

Population 2060 5,485 70,759 51,912 71,800 31,139 6,752 59,390 76,676

developments in populations, which is not the theme of this article, but what will for example the huge drop in the German population mean for Germany’s (and Europe’s economy?), and what will it mean for Germany’s relative influence in Europe and beyond? Size matters, of course, but the more intricate problem in Europe is the composition of the population. The relative size of the workforce against to the part of the population outside of the work force – or in other words – the relation between those that pay into the system and those that takes out.

Table 1: Eurostat’s demographic forecast in 2008.

90 80 70

60 50 40 30 20

10 0 Poland



Germany 2010






Figure 1: Dependency ratios. Source: Eurostat, 2008.

The figures are forecasts and so the result will not be exactly as predicted, but the trend is clear enough. The certainty about birth and death figures can be expected to be fairly accurate, whereas the migration figures are much more uncertain, and very much influenced by policies. As polices towards migration are becoming stricter and stricter, we should actually expect

the net migration figures to be much lower than forecasted. To get an idea of how much that will mean, take a look at Spain. If net migration were to become zero, Spain would have a population of around 40 million in 2060 instead. There can be good reasons to begin thinking about the political power consequences of the

This can be measured by the so-called dependency ratio, where the working population is set to be those between 15 and 65 years of age. There are a couple of things to note here. Firstly the working age in Europe does not start when people are 15. Today and in the future people will start working much later, which means that statically we are overvaluing the workforce. The other issue is that the assumption is that all between 15 and 65 are actually working and paying taxes. But there is no guarantee that even with a shrinking work force everybody will actually be in work, and entering the future demographic environment with unemployment will again make the situation worse. With these caveats, have a look at the dependency ratios for the same European countries as in the table (Figure 1, left).

Paris | Capital Finance International


Madrid: Cibeles Fountain

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The dependency ratios of today are already having an effect on the sustainability of the government finances and thus the welfare states across Europe. They have just become much more visible because of the crises and the subsequent rise in unemployment, but as the worst effects of the crises may fade away the effects from demographics will grow. If we have difficulties in living with today’s dependency ratios, how can we live with ratios approaching 100? It will increase the tax burden to an impossible level. It will simply not be a sustainable situation. But how can we avoid it? And more precisely, how can reforms be made in democratic systems when the European electorate is so hostile to reforms of public services (and don’t forget that the average age of the European voter is fairly high!)? There is no quick fix. But the first thing that should be done is to improve on dependency ratios by making more people over 65 active and contributing to society rather than being beneficiaries. This can be done by scrapping the pre-retirement schemes, and also by raising retirement age. A fair deal would be to (at least) link retirement age to life expectancy as it has been done in some countries already. But there is of course still the problem of how can we employ people longer, when we can’t even employ the existing workforce. There is a general answer to that involving economic growth

“If there is no understanding, the necessary policies could lead to chaos.” and competitiveness (see below) and a specific answer, which is to create an attractive labour market with clearly different characteristics than the “normal” labour market of people over a certain age. A very interesting study on such “second career labour markets” has been done by the European Policy Centre and the Bertelsmann Foundation (have a look here: cfi. co/epc0713). A second way would be to maintain or increase the levels of migration, but that would require that Europe changes its generally immigrationnegative mood, and also that Europeans become much better at labour market integration. Thirdly productivity should be boosted, so we get more output per employee, but there are no signs at all that a revolution in productivity is around the corner – even the very long corner. But productivity could without any doubt be improved in Europe’s public sectors, and that would help, if we could produce more services for the same or less input. But this would require that we begin to look at what the public sector produces and not only at what it costs, as is the case today. And it would also require that public

sector workers and their unions would look favourable at efficiency reforms! There are many challenges in dealing with the demographic future, and many problems have not been discussed here, but no part of these problems should be left out of the discussion. And our political leaders need in particular to begin to understand and discuss this issue and also to give voters an honest explanation for why reforms are necessary. If there is no understanding, the necessary policies could lead to chaos and political unrest and instability. And then one final thing: If Europe ever should be able to overcome the negative demographic trends, it needs to reform, become more competitive and get growth going again. Without creating lots of new jobs, it does not help to delay retirement and increase immigration, and as I have previously written, it requires a lock start of the economy right now, and that can only be done on the basis of private-public-partnerships. A New Deal policy for Europe with large scale investments in infrastructure will require private investments, and here demographics can help. The baby boomer generation has huge money invested in pension funds. What would be more natural than let these pension funds invest in PPP projects and help younger Europeans back into work – and at the same time help getting Europe’s economy grow again, so a good return on the pension schemes can be secured. A winwin-win situation, it seems to me. i

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


> The Centre for European Policy Studies (CEPS):

Unemployment is the Scourge, not Youth Unemployment Per Se By Mikkel Barslund and Daniel Gros

The Misguided Policy Preoccupation with Youth. Key points Unemployment is one of the key economic issues in large parts of Europe – especially in the South – which has been in recession for the last 4-5 years. In countries like Greece, Spain, Portugal and Italy, youth unemployment rates have risen to levels that are often reported as “alarming” or “shocking” in the media. This has prompted European institutions into a flurry of activity. The Commission has launched a number of initiatives over the last year focused predominantly on young unemployed people. A further string of new measures and the speeding up of already agreed initiatives is expected to be the outcome of the European Council meeting on June 27-28th. Some of these are sensible structural measures – such as building apprenticeship programmes and assisting in better school-to-work transitions – which are likely to have a positive impact on youth unemployment in the longer term. However, most others are found wanting, or even counterproductive. This Policy Brief argues that too much effort and political capital is being spent by the Commission and member states on being seen to be doing something quickly about youth unemployment when, in fact, the structural measures proposed will only have long-term effects. Expectations of immediate relief are running well above what can be delivered, especially at the EU level. Given the macroeconomic situation, no policy option will deliver a significant dent in either youth unemployment or unemployment in general. The EU policies on the table that are supposed to have an immediate effect, such as increased lending from the European Investment Bank to SMEs for the hiring of young people, will only have a very marginal impact on youth unemployment. Moreover, this impact will come mostly to the detriment of older unemployed persons excluded from such a scheme.

young workers de facto at the expense of older workers or, even worse, policies that subsidise older workers for not taking young people’s jobs, will proliferate.


We end by highlighting the much-neglected policy option of encouraging labour mobility within the internal market. Although the Commission is ‘upgrading and modernising’ its tools, much more could be done in this area – to the benefit of the individuals concerned, the member states, and European integration in general.

In fact, it is not at all clear that young people suffer more from being unemployed than older people, or even disproportionately more than older unemployed individuals. In particular, it is not clear that the much-publicised notion 35




25 21 20 15 10 5






10 9 10 10

15 16 16 13 14 14 13 13 13 13 12 12 11 11



5 0

Figure 1: Unemployment ratios (ages 20-24), 2012. Source: Eurostat.

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2000


2002 EU27

Given the perceived need to ‘be seen to be doing something’, we fear that policies subsidising

of a ‘lost generation’ with permanent ‘scars’ is relevant only to the young generation.







2007 Spain





Figure 2: Youth unemployment rates relative to total unemployment rates, 2000-2012. Source: Eurostat. | Capital Finance International

2011 UK


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The current unemployment situation The headline conventional youth unemployment numbers that are widely reported do indeed paint a bleak picture of the current situation for youth. Spain and Greece are often portrayed as having half of the young population between the ages of 15 and 24 unemployed. But people familiar with labour market statistics know that the true picture is different, because most young people of this age are in school or further education and therefore are not seeking work for good reason. ‘Youth’ (un)employment data refer to those aged between 15 and 24. But this age group consists of two sub-groups with very different characteristics. ‘Teenagers’ (15 to 19 year-olds) should mostly still be in school; if not, they are likely to be very low skilled and thus would have difficulty finding a full-time job even in normal times. Fortunately, this group is rather small and has been declining in size over time. Unemployment among those aged between 20 and 24 should be more troubling. Members of this cohort who are seeking full-time employment have typically completed upper secondary education, but have decided not to pursue a university education (or have completed their university studies early). That is why one should look at the unemployment ratio – the percentage of the unemployed in the reference population – rather than at the unemployment rate (Figure 1). Indeed, this indicator paints a much less alarming picture than that created by the headline youth unemployment rate of more than 50% in Spain, or even the 66% recently reported in Greece. The youth unemployment rate in Greece does not mean that two-thirds of young Greeks youth are unemployed. Only 9% of Greek teenagers are labour-market participants; two-thirds of that number cannot find a job. The unemployment ratio among teenagers in Greece is thus less than 6%. But this statistic is not reported widely, probably because it is much less alarming. Moreover, one should look at youth unemployment in the context of the overall labour market. In some countries, youth unemployment is much higher relative to overall unemployment. Italy constitutes the most egregious case, with a youth unemployment rate over three times higher than the overall unemployment rate. But this is not a recent phenomenon – the situation was the same even before the outbreak of the crisis. By contrast, the youth unemployment rate in Germany is ‘only’ 1.5 times higher than the overall unemployment rate. In fact, Figure 2 shows that for most countries, youth unemployment has been rather stable relative to overall unemployment. In this sense, the current situation is not special; in all recessions, youth unemployment increases in many countries by twice as much as general unemployment. | Capital Finance International


45 38 39

40 33



30 25 20 15

16 14 15 15

17 17 17 17

19 19 19 19 19

24 22 23 23 20 21 21 21


27 28

10 5 0

Figure 3: Youth unemployment as percentage of total unemployment, 2013q1. Source: Eurostat.

Finally, one must ask how much youth unemployment contributes to total unemployment. Looking at the problem in this way reveals a completely different picture from that usually presented. In those countries where the problem makes the biggest headlines (the Eurozone’s south, with Greece and Spain supposedly the worst cases), youth unemployment accounts for less than a quarter of overall unemployment (Figure 3). By contrast, youth unemployment contributes relatively much more (about 40%) to overall unemployment in countries like Sweden and the UK. One could argue that the latter two should worry more about their youth unemployment than Spain or Greece. Unemployment is one of the most significant risks that individuals and households face, and because of the current macroeconomic situation, unemployment is much higher than normal in many parts of Europe. This is the situation for all age groups and it does not warrant age-specific policies which, given weak overall demand, will to a large extent only shift employment around among age groups. Such policies are only relevant if one is confident that certain age groups suffer more from unemployment than others. Which generations are ‘lost’? Is unemployment worse for the young? The fear of permanent scarring of young jobless people – turning them into a ‘lost generation’ – is one of the most persuasive arguments in favour of promoting policy measures that target youth unemployment specifically. If the first labour market experience is crucial for subsequent labour market participation and earnings, there might be a case for policies promoting youth employment at the expense of employment of other age groups. This could be the case if, for example, the period immediately after graduation is formative for the rest of one’s career. The Commission is increasingly mentioning scarring and the fear of a ‘lost generation’ together with the youth unemployment situation as an argument in its communications. 46

The notion of ‘scars’ from unemployment comes from a large body of academic literature that looks into the short- and long-term effects of unemployment spells on subsequent labour market outcomes, in particular, on labour market participation rates and earnings. The main question this literature seeks to address is the counterfactual of what would, on average, have happened with subsequent earnings and labour market participation had a given individual not been unemployed for some period at an earlier stage. [This is no easy question to approach, because those unemployed at any given point in time are likely to differ from those employed in many observable and unobservable ways. To appreciate this, take as an example two persons who differ in their earnings today and where one was unemployed five years ago. This difference could be due to the disadvantage one got from being unemployed, but it could just as well be that he or she was unemployed because he or she – by way of character – was less motivated to find a job. However, the same motivational difference might also explain the differences in earnings today. Thus, the two persons would have had the same earnings difference today if some public policy had put the less motivated one into a job five years earlier and she or he would have avoided the unemployment spell.] The key point of relevance for public policy in the current situation is to what extent scarring is worse for younger than older cohorts, i.e. the relative effect rather than the precise magnitude. Unfortunately, much of the literature on this issue does not look at the effect for different cohorts, but rather only at the impact on one cohort (which, in the majority of cases, is a young one). The predominant view in the literature is that unemployment has negative long-term effects and, when this is investigated as part of the research question, the effects are worse for older (prime age) cohorts. In general, the scaring effect varies greatly from | Capital Finance International

Summer 2013 Issue Berlin: Skyline | Capital Finance International


study to study. In one study the scarring effect leads to a wage penalty of 8-13% after six years (with higher initial wage drops); other studies show larger scarring effects and a few show no permanent scars at all, since the initial effect on wages disappears after six years. Generally, results span the range from no long-term effect to wage penalties of up to 30-40% six years (or longer) after being unemployed. [It is important to keep in mind that our argument relies on the fact that younger workers do not seem to be harder hit by unemployment compared to older workers.] There are also indications that the scarring effect is smaller for studies of continental European countries compared to the US and the UK. This suggests that the US experience does not translate exactly to Europe. There are two important qualifiers to note in relation to the findings in the literature. The first is that the average impact of scarring is likely to be smaller than that which can be inferred from published studies. This is due to publication bias – it is very difficult to get a study published which does not find a scarring effect, thus it is likely that studies that failed to find scarring stayed in the drawer. Second, the credibility of the studies depends on how well they can estimate the right counterfactual. Even if a study is carefully done using state of the art statistical methods, it can be very difficult to judge if a convincing counterfactual has been estimated. Our reading of the literature suggests that the loss of firm-specific capital (of which older workers have more than younger workers) is important to understand the magnitude of the scarring effect. Another important characteristic could be that of mobility. Older workers will more often have stronger attachments to their local area via their family relations, such as children’s schooling and spouse’s employment. Younger workers, on the other hand, are on average likely to be more mobile and have smaller fixed costs from moving for a new job. In sum, the evidence suggests that unemployment spells indeed have long-term negative effects on labour market outcomes; however, there is little evidence to back the claim that young people are more vulnerable to those effects than are other age groups. Thus, ‘scarred generations’ might be a more accurate term to use. This severely weakens the case for measures aimed particularly at jobless youth as opposed to more general measures benefiting all age groups. Furthermore, young people rarely have the same amount of family responsibilities (towards offspring or parents), but instead are often able to rely on their family for backup. Against this background, the focus on ‘solving youth unemployment’ is misguided. While there is no doubt that the current unemployment situation is causing a lot of hardship around 48 | Capital Finance International

Summer 2013 Issue

Europe, it is hardly a solution to shift this hardship from young to older cohorts. Current policy initiatives without short-term effects, or only shifting the burden The Commission has been increasingly active in presenting initiatives to combat youth unemployment. Last December saw the Youth Employment Package, and this March the Youth Employment Initiative was unveiled. Some of the elements of these packages have been agreed upon, while others are grinding their way through the system and are waiting for financing to come through in the next budget cycle. Those initiatives which aim at structural improvement are to be applauded. Strengthening vocational and educational training systems – the Commission’s call for member states to “modernise and improve their education systems” in order to reduce skill mismatches and address the problem of early school leaving – always makes sense. The Commission is very well placed to advance mutual learning on these topics via the open method of coordination, and it should certainly take this up as part of its core work programme. However, the Commission should spell out that such structural initiatives will not deliver immediate results. Indeed, some of these are practically irrelevant to the unemployed young population of today. The Youth Guarantee – the poster child for efforts so far – was proposed as part of the Youth Employment Package in 2012 and was adopted by member states. It guarantees unemployed youth (up to the age of 25) access to employment, education or high-quality traineeships within four months of becoming unemployed. The European Social Funds will provide funding for this (starting from early 2014), with additional funding coming from the Youth Unemployment Initiative (also to be made available in 2014). At this stage, the details of implementation, which will naturally vary from country to country, are unclear, but that it will impose an immense administrative burden in areas affected by high youth unemployment is certain. At the same time, the Commission recognises that there are already problems in general with the quality of traineeships. With many young coming out of education and work scarce, it is difficult to see this being implemented and having an impact in practice. In addition, with the Youth Employment Initiative’s focus on areas with high rates of unemployment, there is a fear that the Youth Guarantee will help subsidise work that is by no means sustainable in the longer term. There is also the risk that it may help to replace genuine employment of older or younger workers. All this will further stretch overburdened public employment services, adding an extra layer of rules governing the unemployed, and dividing the services offered along age groups. More recently, plans have been aired which would facilitate lending from the European Investment Bank to SMEs in a way that would | Capital Finance International




25000 Spain


Italy Greece


Poland Romania



0 2003









facilitating the matching of employers with employees, the EURES platform. EURES is the main tool available to the Commission and it therefore seems reasonable to “upgrade and modernise it” as set out in late 2012. However, it is lacking in ambition – exemplified by the fact that EURES apparently results in only 50,000 placements a year – and upgrade work will only begin in 2014. Related to the EURES platform is the ‘Your first EURES job’ initiative (springing from the Youth Opportunities Initiative), which currently involves four countries: Denmark, Germany, Spain, and Italy. For employees, it provides support for matching and funds for interview trips and moving costs, while on the employer side there is support for recruitment and training costs. The scheme is limited to 18-30 year-olds. The initiative is currently being piloted and the target for 2012-13 is 5,000 placements. It is fair to say that it will not make a big impact.

Figure 4: Youth immigration flows to Germany (aged 18-25).w Source: Eurostat.

“incentivise the hiring of young people”. While the immediate effect on youth unemployment of such a proposal would depend on the amount of funding made available and the exact implementation mechanism, it is unlikely to have a large impact because of the lack of aggregate demand in areas affected by high youth unemployment. Subsidising youth entry into the labour market can be justified if there is a structural mismatch between the minimum wage (whether statutory of effectively negotiated) and the productivity of young people which prevents them from becoming employed. However, this should not be addressed by a temporary facility that is aimed chiefly at SMEs, and should ideally be tailored to a skill set (i.e. low-skilled workers) rather than depending on age. Again, there is a substantial risk that this will crowd out genuine jobs of older workers and simply shift the burden of unemployment. One of the biggest risks of the focus on youth unemployment, and the need to be seen to be doing something about it when there is not much that can be done, is that various temporary specialised subsidisation schemes will proliferate. These are costly, difficult to administer, create undesirable division between age groups and have little long-term rationale. Labour mobility – promoting the internal market While unemployment is high in southern Europe

Greece Italy Spain Portugal

and the short-term macroeconomic outlook is poor, the opposite is currently the case in Germany. Unemployment is at its lowest level for decades and there are reports of labour shortages at the regional level in some occupations. Furthermore, Germany is expected to grow at a fast enough pace next year that further jobs will be added. This, combined with the demographic outlook for Germany where large cohorts are about to retire, offers a unique opportunity for mobile labour to seek opportunities in the north. The German labour market is large and the national labour force will shrink considerably in the next ten years. That the potential exists for labour mobility is evidenced by the large numbers of Polish and Romanian people who have arrived in Germany in recent years (Figure 4). The influx of people from Spain, Portugal, Italy and Greece, on the other hand, is meagre in comparison; although this has grown considerably relative to the preceding two years, it was from a very low base (Table 1). Both the federal and regional governments, together with German employers’ organisations, are now trying to tap into the workforce potential in southern Europe. The Commission’s approach to fostering this mobility has been too cautions. Stating the obvious that the decision to move “remains a personal decision for the individual concerned”, it has chosen to promote its online tool for

Average 20052009




Difference: Average 20052009 and 2012

Change 2011/12






10,300 (↑43%)






12,000 (↑40%)






9,200 (↑45%)






3,600 (↑43%)

Table 1: Youth immigration to Germany (all age groups). Source: Bundesamt für Statistik Deutschland, 2013.

Note: Figures represent immigration flows of non-Germans from partner countries

50 | Capital Finance International

The Commission’s lack of ambition in this area is puzzling, since labour mobility and the internal labour market should be one of its children. The current situation calls for the Commission to use its considerable strength and know-how in bringing partners and stakeholders together to facilitate the necessary infrastructure to allow better matching across borders of workers and employers – over and above what is being done as part of EURES. The proposed revival of the Youth Employment Action Teams, which will be active in areas with very high youth unemployment, should be matched with selected employer organisations to explore mutual opportunities. The question is then: where does this leave the sending countries? First, it has to be pointed out that individuals who find a job abroad are better off personally. Second, by moving they relieve the immediate strain on public resources in sending countries due to savings on health care expenditures, unemployment benefits and other social expenditures, and to reduced strain on retraining and educational facilities. There might also be a non-negligible value from an increased stream of remittances. Further down the road when southern economies pick up speed again, most are likely to come back – and they will have skills and experience, thereby contributing beyond what would have been possible had they stayed in the first place. Conclusions This Policy Brief carries four main messages. First, the relationship between overall unemployment and that of youth is by no means special to this recession and the total number of youth unemployed is much smaller than generally assumed. Second, the notion of a lost generation is misconceived. The empirical literature shows that there might indeed by a ‘scarring’ effect in the sense that a prolonged spell of unemployment leads to lower earnings later, but it applies across

Summer 2013 Issue

all cohorts. If there is any difference between youth and the others, it is that older workers are likely to suffer more.

Germany: Munich Cathedral

The third message is that there really is no case for a specific focus on ‘solving youth unemployment’. The proposals being churned out by the European institutions are likely to have little short-term impact and to the extent that they do, the impact might be detrimental to other cohorts. We fear that the need to be seen to ‘be doing something about youth unemployment’ will allow ever more expensive schemes to proliferate that will subsidise the employment of young workers at the expense of others, resulting in ever more distorted labour markets. The final message is that encouraging labour mobility remains the one policy option which has some promise in the current situation of lopsided European labour markets, but it is approached too cautiously by the Commission. More should be done to facilitate labour mobility. i

This article was first published by the Centre for European Policy Studies (CEPS) as a CEPS Policy Brief on 26 June 2013. It is republished here with the kind permission of CEPS.

About the Authors Daniel Gros and Mikkel Barslund are respectively Director and Research Fellow at the Centre for European Policy Studies (CEPS). CEPS is an independent Brussels based think tank conducting policy research on the challenges facing Europe. Find out more at

Daniel Gros

Mikkel Barslund | Capital Finance International


> Millennium bcp:

Capital and Liquidity Levels Restored and Now at Historic Highs As Portugal’s largest listed bank in terms of assets, and focused on the retail market, Millennium bcp is a mirror of the Portuguese economy, in good times and bad. With Europe’s recent economic difficulties, and the need for Portugal to seek financial assistance in 2011, the economy suffered and the challenges for the banking system rapidly intensified. eacting swiftly to these developments, Millennium bcp, led by Chairman of the Board of Directors Antonio Monteiro and Chief Executive Officer Nuno Amado, initiated a comprehensive restructuring of the bank, with an initial effort to reinforce capital levels and increased liquidity, followed by renewed focus on international operations as well as on recovering profitability in the domestic Portuguese market.


The first challenge was to improve Millennium bcp’s risk profile and boost its capital levels, as well as securing a comfortable and sustainable liquidity position. Following a successful capital increase of EUR500 million entirely subscribed by shareholders and the issuance of EUR3 billion contingent capital bonds subscribed by the state, Millennium bcp now boasts one of the highest Core Tier 1 capital levels compared with euro zone peers, at 12.1%, and well above the new regulatory requirements. This capital reinforcement was central to the effort to strengthen Millennium bcp’s fundamentals, part of the bank’s ambitious strategic vision built on three pillars: strengthening capital and liquidity, creating the conditions to ensure growth and profitability at home and abroad, and then delivering sustainable growth.

“In Mozambique, Millennium bim is clear market leader, with nearly 30% share of the banking and insurance markets.” Exchange and the sixth largest bank in terms of assets. In Mozambique, Millennium bim is clear market leader, with nearly 30% share of the banking and insurance markets. And in Angola, Banco Millennium Angola is a strong and growing presence on the local market, with nearly 100 branch offices guaranteeing national coverage, and contributing to remarkable growth in the customer base and deposits. These international operations have delivered consistent profitability and solid growth, and remain key factors in the overall strategic approach that Millennium bcp is taking. The sale in June 2012 of Millennium’s bank in Greece is also important, as it reduces Millennium’s exposure to the risk of that market and eliminates

To date the efforts made by Millennium bcp, and the results obtained, show that the strategic path set out by management is the correct one. With capital and liquidity levels restored and now at historic highs, and with a restructuring program in Portugal to adjust the bank’s activity to the challenging economic environment, the prospects for a return to sustainable and profitable growth over the medium term are steadily improving. International operations are also key to Millennium bcp’s story. The bank provides universal banking service under the Millennium brand in a number of European and African markets with great potential. In Poland, Bank Millennium is listed on the Warsaw Stock 52 | Capital Finance International

a loss-making operation that weighed heavily on the bottom line in recent years. As a result of the sale, Millennium will take a near 5% stake in Piraeus Bank, the acquirer of its Greek operation, which will likely be sold down gradually after an initial lock-up period. Clearly, the corporate governance model used by Millennium bcp creates a stable and effective management structure that ensures flexibility as well as rigorous oversight. This model, adopted in 2012, is a crucial factor in Millennium’s success at home and abroad, particularly in an economic environment characterized by weak economic activity. Millennium’s governance model features a diverse Board of Directors, including independents, shareholder representatives and non-executives, and an Executive Commission that is responsible for the day-to-day management of the bank. The current Board of Directors comprises twentytwo members, of whom fifteen are non-executive officers and seven are executive officers. The majority of the directors qualify as independent; only seven do not meet the requirements. Of

Summer 2013 Issue

these, five are connected with entities with holdings that exceed 2% of Millennium’s share capital and two were appointed by the State for the duration of the public support. Antonio Monteiro, a Portuguese Ambassador who has represented the country at the United Nations, in Italy and in France among many other high-level posts, serves as Chairman of the Board, while Nuno Amado, former CEO of Santander’s Portuguese unit, serves as Chief Executive Officer. The governance model also features rigorous management oversight by the non-executive directors and through a set of committees including the Risk Assessment Committee, the Corporate Governance Committee, the Nominations and Evaluations Committee and the Remuneration and Welfare Board. In terms of investor relations the Millennium bcp has taken great strides in increasing proximity to shareholders, and the proactive management of this relationship has resulted in an overall growth in the number of shareholders rising to nearly 186,000 at the end of the first quarter of 2013. In a situation that is atypical for Portugal, Millennium bcp’s shareholder structure continues to be very dispersed. Just six shareholders own qualified holdings (defined as more than 2% of the total share capital) and only one shareholder holds a stake above 5%. Retail Shareholders account for nearly 50% of the share capital. This means that investor attention as well as media attention is often intense, as shareholders participate actively in the corporate life of Millennium bcp. There is, of course, a close relationship between the Board of Directors and the main Institutional Shareholders, and over the past year the IR has strived to further improve the relationship with retail investors. In particular, a toll-free line was established in 2012 to provide information to shareholders about Millennium bcp’s activity, and that line was frequently used, at times rising to more than 100 calls per day. The IR team’s investor information line was particularly useful in September, when Millennium bcp carried out a EUR500 million capital raising effort reserved for shareholders. The impressive success of that operation, with offers placed for more than twice the number of new shares on offer, is testament to Millennium bcp’s strategy of transparent and regular communication with shareholders and the public at large. As part of the recapitalization plan, Millennium bcp issued EUR3 billion worth of contingent convertible bonds, or CoCos. These were subscribed by the Portuguese Government and must be repaid by June 2017. Millennium’s strategic plans foresees the initial reimbursement

Chief Executive Officer: Nuno Amado

coming in 2014, supported by profit growth in international operations and a gradual return to sustained profitability in Portugal. Part of the path to profitability in Portugal focusing on costs, and management’s strategic plan aims to cut EUR100 million out of Millennium’s cost structure. Part of that effort requires “right sizing” Millennium bcp’s operations to ensure that the distribution network is as lean and efficient as possible, and the management team’s determined focus on cost reduction has already started to pay off. Millennium was able to cut 10% of its employee base in Portugal in 2012 – nearly 1,000 people – through an intense negotiating round that focused on mutuallyagreed exits and early retirements, as well as natural turnover. This process was achieved with a minimum of social turbulence within the company, despite Portugal’s weak economic backdrop. In addition more than 40 branch offices were shuttered, and back-office operations were centralized at Millennium’s office park complex in Tagus Park just outside of Lisbon, bringing business lines, marketing teams, IT services and other essential units closer to management, facilitating regular contact and improving | Capital Finance International

company communications. Europe’s economic distress has raised many new challenges for financial services companies all over the euro zone. Portugal, with its decision to ask for financial assistance from the “Troika” of international lenders in 2011, presents a particularly difficult environment, as the austerity measures required to comply with the country’s 78 billion bailout package have resulted in soaring unemployment, negative gross domestic product growth, and a resistance among companies and individuals to take on any new risk, resulting in an economy that is stagnating. But within these confines there will always be those companies that look beyond the immediate moment and see a brighter future, and in Portugal Millennium bcp is clearly one of those leaders. By strengthening its corporate governance, by improving its transparency and communication with shareholders, by focusing on getting its house in order on costs, by taking full advantage of its diverse geographic presence in high-potential markets, by avidly increasing its commitment to all customers – from private banking and affluent clients to the vast retail market – and by striving to remain an innovative, market-challenging and proactive universal operator, Millennium bcp has set the foundation for future success. i 53

> European Federalist Party:

How Europe Exited its Crises – Is There a Federal Future for Europe?


By Ms. Hasmik Hovsepyan

PARTI FE DE RALISTE Over the past four years some of us may have forgotten that the financial crisis E U ROP ÉEN

did not start in Europe, but in the USA. If it makes sense to ask ourselves where it all started, it is even more relevant for us to understand what happened on this side of the Atlantic. It is in fact in Europe that the crisis (or the crises) has found a fertile ground to develop and unravel the Eurozone. “Spread”, “bailout”, “rating E U ROPÄISCHEN agency” have become terms that Europeans have become acquaintedFÖDE with,RALISTISCHE while PARTE I austerity policies have hit them as it has not happen for decades.


n addition, the crisis came at a time of extreme volatility in global, European and national politics and has arguably contributed to accelerate some trends which were already starting to appear at the beginning of the century. The consolidation of Asia as the new engine of economic growth; the rise of new economic powers such as the BRICS; the negotiations of extensive Free Trade Agreements in an attempt to benefit from access to growing markets and to US to maintain an upper hand in setting global standards (among the others the EU and South Korea FTA and the on-going negotiations between EU and Canada, and the EU and the USA). Domestically the EU is also facing new tensions: a sharp rise of euroscepticism and of nationalist movements has been registered in many European countries, including Italy, France, Germany, Hungary and the UK, with the UK arguing for a referendum on its own EU membership in 2017. Separatist movements are getting stronger in several regions including Scotland, Catalonia and Flanders. Last but not least, socio-economic challenges are increasingly evident, with unprecedented rates of youth unemployment, an ageing population and the European welfare systems increasingly under pressure. Together these external and domestic challenges, mixed with the aftermath of the Eurozone crisis in all its facets, constitute an explosive mix. As we are approaching a key electoral year, with the elections of the European Parliament as well as with national elections in several countries including Germany, it is about time to draw some lessons from what happened in Europe and to envisage a possible way to move forward.


The European crisis, an unidentified flying object As a first step we may wish to understand better which type of crisis is affecting Europe. Apart from the Irish case, on this side of the Atlantic the financial crisis has soon turned into a debt crisis, or, more precisely, into a banking crisis for some countries (e.g. Spain and Cyprus) and in a sovereign debt crisis for others (e.g. Greece and Italy). At the same time, if we look at what debt actually represents and if we look at the weaknesses of our banking sector, we could argue that it is not only about accumulation of debt or of risky investments. We are instead

market lost confidence in the sustainability of the Eurozone but not in the sustainability of the “dollar-zone”. And this despite the fact that the US overall debt burden is significantly higher than that of the Eurozone (in April 2013 the Eurozone debt/GDP ratio was at 90,6% while the US debt/GDP ratio was 107%). It follows that the institutional setting put in place in Maastricht to run the monetary union was sufficient at a time of economic growth, but has proved to be inadequate for times of economic stagnation or recession. It follows that EU’s inability to deal effectively and systematically

“If at the national level member states are less and less able to tackle global challenges, at the European level, the EU does not yet have the competencies and the institutional tools to take the relay.” confronted with first and foremost a confidence crisis in the future of Europe and in our ability to remain competitive in this new century. Investing in Greek, Spanish, Italian or German bonds, in fact, means to trust that each government will be able to pay their debt back in 1, 5 or 10 years time. Such confidence started to fade and this situation was exacerbated by our institutional weaknesses, and more precisely by the fact that the Eurozone countries have a monetary union but not have an actual political and banking union. It follows that, differently from what happened in the US - where the various states have imbalances comparable to that of the countries using the euro - the financial | Capital Finance International

with the crisis is at the heart of the European crisis. In other words what we are facing an institutional crisis which could not be tackled by the existing European institutions on the basis of existing treaties. It follows that through an unprecedented number of high level meetings and summits, our heads of states have attempted to manage the consequences of the crisis in a “trial and error” mode and always in a climate of emergency. This was partly due to the lack of an ambitious vision for a post-crisis Europe, and party to the lack of democratic legitimacy to amend the founding treaties and the related fear of having to go through a new ratification process (including referenda in certain countries). The

Summer 2013 Issue

result was that the measures adopted have often been piecemeal solutions, arriving too late, and lacking a comprehensive master plan (e.g. the implementation of the banking union is yet to be finally agreed). More importantly, the intergovernmental process through which the decisions have been taken has further reduced the democratic legitimacy of the European decision-making process. It follows that the structural crisis slipped into a democraticdeficit crisis at European level. In fact, the only democratically elected European institution and co-legislator together with the Council of the EU – the European Parliament – had no role in managing the crisis. Similarly, the European Commission, representing the EU interest was largely side-lined. On the contrary, a key role was played with by European Council and by a few member states in a fully intergovernmental manner, by the Troika - composed by the IMF, the ECB and the European Commission -, and by the ECB which played a crucial role in avoiding the rise of crisis-hit countries borrowing cost, but without any democratic mandate. At domestic level the democratic crisis evolved instead into a political crisis which translated into the appointment of technical governments in countries such as Italy and Greece, and in the rise or strengthening of nationalistic and eurosceptic movements in several EU Member States. Europeans are less and less engaged in national politics convinced of its inability to deliver on the promises of employment and welfare. At the same time, they are increasingly unhappy with the European Union. If the latter was initially perceived as a successful example of European solidarity, the crisis has shadowed such image. In addition Europeans are frustrated by the inaction of the European institutions in areas in which they would expect “Europe” to act but in which, paradoxically, the European institutions have still limited competence. In other words, we are confronted with a double expectations-capability gap – and double frustration for the citizens. If at the national level member states are less and less able to tackle global challenges, at the European level, the EU does not yet have the competencies and the institutional tools to take the relay. Is there a way out? From the situation outlined above, it is clear that Europe has been hit by a multiple set of crises, which have been aggravated by the current global challenges and by the current titling of the global economy towards the East. What Europe needs probably the most is to find its place in this new global context, picture itself in this new century and give itself a vision of how Europe should look like in 50 years’ time. This vision, however, must be framed taking into consideration the fact that the world will not wait Europe to change, and will continue changing anyway. Clearly tackling the structural crisis is crucial to increase the resilience of the EU vis-à-vis future economic and financial

Are you in favour of or opposed to include a preliminary consultation between European institutions and national political institutions in the drafting process of national budgets? There is a difference between the euro zone (70%) and the non-eurozone (56%).

Source: Eurobarobeter EB77.2

Would electing indirectly the President of the European Commission through the European elections improve citizens’ intention to vote? All ages together. Source: Eurobarometer EB/EP 77.4

Are you in favour of or opposed to include a preliminary consultation between European institutions and national political institutions in the drafting process of national budgets? There is a difference between the euro zone (70%) and the non-eurozone (56%).

Source: Eurobarobeter EB77.2 | Capital Finance International


In your view, which of the following measures should be a priority? Max 4 answers. Source: Eurobarobeter EB77.2

Are you in favour or opposed to the creation of Eurobonds? Source: Eurobarobeter EB77.2

Intention to vote at the next European Parliament Elections for young people between 17 and 30 years old. Source: Flash Eurobarometer 375

56 | Capital Finance International

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crises. At the same time it is increasingly urgent to face also the political and democratic crises to avoid that the whole of the European project unravels. Both the structural crisis on the one hand, and political and democratic crisis on the other hand, require us to think of what the European Union is today, if it is delivering what the citizens need, and what it ought to be in the coming decades in order to tackle today’s and tomorrow’s challenges. In other words, we need to face yet another crisis, probably the sneakiest one, and yet the most important one: the EU’s identity crisis which resembles a lot to a “mid-life crisis”. Such crisis however, will not be solved if each national political party keep worrying exclusively of the results of next elections. The time-span must be much longer. Over the past few years an increasing number of high level politicians have come forward, even though often timidly, with some vision for the future. Jose Manuel Barroso and Carl Bildt rehearsed Delors’ demand for the creation of a “Federation of Nation States”, Angela Merkel called for a “political union” while Tony Blair, Nicolas Sarkozy as well as Christine Lagarde and Wolfgang Schauble argued for some sort of “fiscal union” and the need for an “economic government”. From these words it comes across quite clearly that in the eyes of several of our leaders the solution to solve the current instability is “more Europe”. That is indeed true, to date, however, they have failed to provide a clear vision of how such vision shall be delivered, not least because of the fear of the disapproval of their increasingly Eurosceptic electorate. In particular, the key question remains on who should take part in defining what this “more Europe” should entail. Shall it be the continuation of a top-down approach? Or shall we move towards a bottom-up approach? In recent years we have assisted to the strengthening of several pro-European organisations all over Europe, and more and more people are calling for the creation of true European political parties, able to bring forwards the demands of Europeans as a whole. The European Federalist Party is currently the only bottom-up political party with sections in 18 countries and which was not born as a mere topdown alliance of national parties. This is because of the consideration that the major political shift towards “more Europe” which most agree it is needed (especially for the Eurozone) requires the full participation of the European citizens. This is the only way to ensure that the people feel “owners” of the project of European integration. This is also necessary in order to free all those positive and productive energies that are currently idle in the society – not least because of the crisis - and which could significantly contribute to a new “European Renaissance”.

By taking part in the next European Parliament Elections the EFP is putting high on the agenda the debate on the future of Europe, with the result that many political parties are starting to engage in such debate. Its objective is to create a critical mass of pro-Europeans belonging to the wider political spectrum and to put forward not only a clear vision for tomorrow’s Europe but also to provide practical proposals. The political programme, which is being developed through a pan-European effort with contributions from citizens all over Europe, is putting the emphasis on what Europeans are asking Europe to deliver. A Europe where citizens have a clearer say on what it is decided in Europe. A Europe where it is easier to do business also for SMEs thanks to the opportunity for businesses operating in more countries to go through a simplified administrative and taxation procedures and the opportunity to use English in certain local administrations. A Europe where workers employed in different Member State benefit from the same minimum standards, from simplified transferability of social rights and from the full recognition of professional qualifications. A Europe that has the ability to support the development of tomorrow’s technologies and tackle environmental and climate change challenges. A Europe that

is able to act effectively on the global scene, and manage effectively migration and asylum policies. Of course to do so requires Europe to have a true European budget funded primarily through own resources as it was the case in the early days of the European construction. Indeed, the reduction of existing duplications and the expected economies of scale would reduce the tax burden for the citizens (e.g. military spending, bureaucracy). To conclude, yes, Europe is in crisis. It faces a “debt crisis”, a “banking crisis”, a “confidence crisis”, an “institutional crisis”, a “democraticdeficit crisis”, a “political crisis”, and an “identity crisis” or “mid-life crisis” and all these in a global and domestic context which is cleary unfavourable to Europe. In Chinese the word “crisis” is literally translated with two distinct characters 危机 (pronounced: Wéi jī). These two characters when taken individually mean, respectively, “danger” and “opportunity”. If we bring this understanding to the European context we can argue that there are many opportunities behind all those crises listed above, and if we play our cards well, Europe may grow stronger out of the crisis. i

About the Author Pietro De Matteis is the co-President of the European Federalist Party, the only bottom-up and panEuropean political party with sections in 18 European countries. An economist by training, he obtained a PhD in international studies from the University of Cambridge and carried out research in China and in the USA. He has lived in several European countries and has worked for various European Institutions. The positions expressed in this article are personal.

Contacts E-mail: Website: Twitter: Facebook: | Capital Finance International


> European Environment Agency:

Carbon Taxes – The Often Overlooked Approach to Carbon Pricing By Stefan Speck and Mike Asquith


Over the last decade carbon pricing has gained prominence as a key means of controlling greenhouse gas emissions. Carbon pricing policies — either in the form of carbon taxes or emissions trading schemes — have been introduced or are under discussion in various regions and countries, including the European Union, New Zealand, South Korea, China, Japan, Australia and a number of states in the US. According to the latest World Bank data, carbon pricing covers 7% of global greenhouse gas (GHG) emissions (World Bank, 2013). International emission trading is also possible


between countries under the Kyoto Protocol in the form of joint implementation projects and clean development mechanism projects. While emissions trading has dominated much of the discussion of carbon pricing policies, carbon markets today face considerable pressure, especially in Europe. The carbon price of the EU emissions trading system (EU ETS) dropped below EUR4 per tonne CO2 at the beginning of 2013 from a high of EUR30 in 2008. Slumps in carbon prices of this sort greatly weaken the incentives for companies to invest in low-carbon | Capital Finance International

technologies, thereby jeopardising the transition to a low-carbon economy. Carbon taxation schemes potentially offer a valuable means of offsetting some of the limitations of emissions trading approaches. Having already existed for more than 20 years in the Nordic European countries, they have a long track record showcasing their effectiveness in reducing CO2 emissions (Speck et al., 2006; Barker et al., 2009). European experience also demonstrates that they can work either in isolation or alongside an emissions trading scheme.

Summer 2013 Issue

Two approaches to carbon pricing The basic aim of carbon pricing is to ensure that the prices that society pays for energy products reflect not just the expense of extracting, processing and distributing fuels but also the social and environmental costs of the resulting GHG emissions. This incentivises energy consumers to reduce their reliance on carbon fuels by adopting more energy-efficient technologies and by shifting to alternative energy sources. Both approaches to carbon pricing — emissions trading and carbon taxation — offer advantages and disadvantages. Carbon markets operate by establishing a limit for the GHG emissions of an entire sector and enabling participants to trade their individual emissions entitlements, thereby creating the incentives to reduce emissions at the lowest cost to industry and society as a whole. From the perspective of the regulator, this quantity-based approach has the major benefit of guaranteeing certainty over emissions reductions and the achievement of environmental policy objectives. As the EU ETS example illustrates, however, it offers no guarantees about the burden on industry, which can fluctuate significantly, making it hard to plan investments. In contrast to emissions trading, carbon taxes offer a price-based policy approach. They operate by directly increasing the cost of fuels containing carbon, thereby incentivising reduced consumption of such fuels and a shift in the energy mix. In large part, the advantages and disadvantages of carbon taxes mirror those of emissions trading schemes: a carbon tax’s precise impact on emissions is hard to gauge in advance (making it a crude tool for achieving specific policy targets) but it will provide certainty regarding the carbon price. An additional benefit of carbon taxes is that they can apply to all energy consumers — large and small — whereas emissions trading operate among large, industrial energy users. The EU ETS, for example, covers approximately 45 % of EU GHG emissions.

“While emissions trading has dominated much of the discussion of carbon pricing policies, carbon markets today face considerable pressure, especially in Europe.” | Capital Finance International

Carbon taxes – the current situation European countries have pioneered the introduction of carbon taxes. The first examples were implemented at the beginning of the 1990s in the Nordic European countries, often in addition to existing energy taxes. Although the final user of energy products may not be aware of the difference between energy and carbon dioxide taxes, it is an important distinction. Whereas energy taxes aim to deter energy consumption in general, carbon taxes incentivise a shift in the energy mix, away from carbon-intensive energy sources. Carbon taxes are beneficial because they encourage society to use fossil fuels in ways that balance the economic benefits they deliver and the associated environmental and social harms.


“The UK government decided in its 2011 budget to introduce a carbon floor price, which came into effect on 1 April 2013. The aim is to foster investment in low-carbon electricity generation technology by reducing uncertainty about future EU ETS carbon prices.” In theory, efficiency and cost-effectiveness are maximised if carbon taxes are set at a uniform rate for all energy products. British Columbia (BC), Canada, adopted such an approach when it introduced a carbon tax in July 2008 with the clear aim of reducing greenhouse gases. The tax, currently set at CAD 30 (EUR24.2) per tonne CO2, is designed such that almost all fossil fuels consumed in the province are subject to it (Sustainable Prosperity, 2012). In many instances, however, carbon tax rates vary between different energy products and energy users. For example, Finland levies a carbon tax of EUR60 per tonne of CO2 on transport fuels, compared to a rate EUR30 on energy products used for heating. For its part, Sweden levies a carbon tax of about EUR118 per tonne of CO2 for all energy products — the highest rate in the world — but allows various exemptions, notably for all industrial installations subject to the EU ETS. Two key sets of concerns explain such variation: social equity and commercial competitiveness. Households rely on energy to provide for their basic needs, and measures that increase the cost of energy (such as carbon taxes) are likely to hit poorer families hardest since spending on energy will often account for a relatively large proportion of their earnings. Similarly, there are obvious problems with applying uniform national carbon tax rates to businesses in EU countries, since it would imply a double burden on sectors already covered by the EU ETS. This obviously raises concerns about international competitiveness, as well as potentially providing distorted incentives for GHG emissions mitigation. Innovative carbon pricing schemes Certainly, it appears easier to establish carbon taxation schemes pursuing specific theoretical rationales in jurisdictions such as British Columbia, where they do not have to coexist with other instruments such as emissions trading. At the same time, however, the advantages of carbon markets suggest that they will continue to play an important role in achieving European GHG mitigation targets and global climate


policy objectives. This reality has driven the development of innovative new carbon pricing systems that aim to combine the benefits of both price-based and quantity-based approaches. In 2008, Switzerland launched a CO2 levy on a limited number of energy products, such as heating oil and natural gas. The levy rate increases over time if pre-defined quantitative emission reduction targets are not achieved. The rate was initially set at CHF 12 (EUR10) in 2008 and currently stands at CHF 36 (EUR30). The latest changes in the Swiss CO2 law may see further increases to a maximum rate of CHF 120 (EUR100) in 2018 if clearly defined reduction targets have not been reached. The UK government decided in its 2011 budget to introduce a carbon floor price, which came into effect on 1 April 2013. The aim is to foster investment in low-carbon electricity generation technology by reducing uncertainty about future EU ETS carbon prices. Fuels used to generate electricity are subject to the carbon floor price, set at GBP 16 (EUR20) per tonne of CO2 in 2013, increasing to GBP 30 (EUR38) per tonne in 2020 (both rates are in 2009 prices) (Bowen, 2011). The approach is comparable to a carbon tax as it establishes a minimum price for allowances under EU ETS, thereby reducing price volatility for electricity generating companies in the UK. A mixed approach of this sort offers obvious advantages — conferring carbon price stability in the short run, while ensuring that GHG emission reduction targets are achieved in the medium to long term. Using shadow carbon prices in corporate planning The development of carbon pricing has been very rapid and this trend appears likely to continue in the years ahead. A recent report by Sustainable Prosperity (2013) indicates that Canadian energy sector firms are already integrating shadow prices for carbon (i.e. estimates of the carbon price needed to achieve environmental policy goals) into their internal corporate financial analysis | Capital Finance International

Summer 2013 Issue

and decision-making, despite the fact that they are not yet exposed to carbon taxes or emissions trading obligations. The investment, planning and technological choices of the firms surveyed are increasingly informed by the shadow carbon prices employed, which ranged from CAD 15 (EUR11) per tonne CO2 to CAD68 (EUR50). While these prices are a multiple of the current EU ETS price in Europe, they are comparable to the CO2 tax applied in British Columbia.

About the Authors Stefan Speck and Mike Asquith work in the Integrated Environmental Assessments Programme at the European Environment Agency.

The driving force behind this move is a desire to prepare for the risks and opportunities that may arise when anticipated expansion of carbon pricing occurs, both within and across jurisdictions. Such planning can also help carbon-intensive companies to assess the vulnerability of their operations to the cost of carbon. Carbon pricing and innovation — the green economy Carbon prices can only provide a clear signal for firms to invest in low carbon technologies if they are stable and high enough to make these investments economically advantageous. This reality means that it comes as no surprise that energy companies such as Shell, GDF Suez and E.ON have supported structural reforms to the European market. In 2012, the European Commission started a debate on long-term structural changes to the EU ETS, as well as shortterm policy measures, such as the postponement of auctioning of 900 million allowances from the years 2013–2015 until 2019–2020. The aim of this move would be to rebalance supply and demand, reducing price volatility without significantly affecting competitiveness. While it is extremely hard to judge the ideal carbon price, it seems clear that current EU ETS prices are inadequate and fail to deliver a clear long-term price signal needed to incentivise investment in emission reduction technologies and renewable energies. Crucially, the lifespan of energy infrastructure implies that low carbon prices not only hamper low-carbon investment today but also risk locking-in existing carbonintensive energy systems for decades to come. Some estimates suggest that a carbon price of between EUR20 and EUR40 is required for such technologies to become competitive (Business Green, 2012). Other research concludes that a global carbon price in the range of between $100 (EUR81) and $200 (EUR162) is necessary to have a substantial impact on climate change in the absence of technology breakthroughs (WBCSD, 2012). Carbon taxation — implemented alone or in a hybrid scheme with quantity-based systems — has an important role to play in ensuring that carbon prices are high enough to foster the needed investments in low-carbon technology. i | Capital Finance International

Stefan Speck

Mike Asquith

The views expressed in this paper are those of the authors and should not be attributed to the European Union nor to the European Environment Agency, its Executive Director or its Management Board.

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 the Founder of Dr. A. Klagsbald & Co. Law Offices, Israel:

Dr. Avigdor Klagsbald


r. A. Klagsbald & Co. Law Offices is one of Israel’s leading law firms, founded by Dr. A. Klagsbald, who is among Israel’s most highly esteemed litigators. The firm engages in litigation in all legal forums, as well as in arbitration, mediation, national commissions of inquiry, etc. Dr. A. Klagsbald and his team frequently represent prime ministers, ministers, senior public figures, leaders of the Israeli business community, leading international and Israeli corporations, and prominent Forbes 400 individuals. The firm provides its clients with professional counsel and representation in a broad variety of legal issues, while employing extensive knowledge and expertise, rich method of work and creative thinking. Method of Work With over 30 years of experience in litigation, Dr. Klagsbald personally spearheads his team in every case taken by the firm, each working team ranging from two to four lawyers, depending on the complexity of the case and the client’s needs. Dr. Klagsbald’s team is result-oriented, employing strategic thinking, creativity, team work and inter-disciplinary skills to achieve the best possible results for the client. The relatively small number of cases handled by the firm at any given moment guarantees the client the full attention of the team working on the case. Areas of Practice Complex civil disputes – The firm handles complex legal actions in connection with transactions in various fields, represents international corporations in proceedings held by or against them in Israel, and assists foreign counsels in cases conducted by or against the firm’s clients overseas. Dr. Klagsbald’s rich experience in managing complex litigation, serves the firm, particularly in complex civil cases, and in representing prominent figures in the Israeli business community in civil aspects of family disputes. Dr. Klagsbald and his team have handled complex control battles in large companies, disputes between shareholders and proceedings against officers, minority oppression cases, claims to enforce and to invalidate share purchase agreements, and other complex disputes involving the fabric of the corporate relationship. The firm provides comprehensive support in connection with such disputes, in which context Dr. Klagsbald appears in various legal forums, attends board meetings in Israel and overseas, and takes part in management meetings. White-collar crimes – The firm counsels whitecollar criminal suspects and defendants (including mega corporations and senior members of the business community), from the 62

investigation stages to the hearing and on to precedential judicial rulings. Dr. Klagsbald is responsible for the acquittal of persons accused of serious securities law offenses. The firm also advises corporations damaged by white-collar crimes and assists them with the related criminal and civil proceedings. Antitrust – Dr. Klagsbald is responsible for key precedents in antitrust law. The firm counsels its clients on civil and criminal aspects of restrictive trade practices, mergers and monopolies and represents such corporations vis-à-vis the various authorities and in court. Administrative law, constitutional law and commissions of inquiry – Dr. Klagsbald has rich academic experience in these legal fields: Dr. Klagsbald has lectured on constitutional law at leading academic institutions. He is the author of the book Tribunals of Inquiry (2001) and has published many articles in these fields in leading journals. This academic experience was put to action in representation of leading market players, including large telecommunication companies. Dr. Klagsbald has led numerous precedent setting high-profile legal battles. Dr. Avigdor Klagsbald Dr. Klagsbald is a graduate of Tel Aviv University (LL.B., LL.M., Ph.D.) and the author of Tribunals of Inquiry (2001). He has also authored the following publications: The Commission on the Scope of Immunity of the State President (1979), TAU Law Review, 7, 238; Letter of Relief and a License for Freedom (1983), 9 TAU Law Review, 211; The Kahan Commission of Inquiry (1983), Public Law, 211; Criminal Offense and Early Prevention (1991), 2 Criminal Law 1983; A Public Office, a ‘Criminal Record’ and Administrative Evidence (1995), Law, 93; Restriction of the Right of Argumentation before Commissions of Inquiry (1998), Law and Government 751; and Inconsistency with a Basic Law (2006), Israel Bar Law Review 293and From the Rubinstein Case to the Rubinstein Book: On the updated interpretation of section 4 of the Basic Law: The Knesset (2012) , Law and Business Law Review, 183. Dr. Klagsbald has lectured at various law schools (including Tel Aviv University), is a member of a forum of lecturers on constitutional law, and is a lecturer, | Capital Finance International

participant and panel chair at conferences and seminars on all branches of the law. During his career, Dr. Klagsbald has handled numerous high profile and landmark cases setting precedents in the areas of corporate law, antitrust, bids and tenders, constitutional law, “white collar” and economic criminal law. In addition, since 2003, Dr. Klagsbald serves as an arbitrator on behalf of the State of Israel in arbitration proceedings in Switzerland. Amir Shraga Mr. Shraga is a graduate of Tel Aviv University (LL.B.) and has lectured at various law schools. Mr. Shraga clerked for the Hon. Justice (Ret.) Eliezer Goldberg at the Supreme Court of Israel. In 1998, Mr. Shraga joined Dr. Klagsbald’s team. Mr. Shraga represented various corporations in complex ownership and control disputes, key figures in the global business community in all tribunals and arbitration proceedings. Galia Cohen Ms. Cohen is a graduate of the Hebrew University of Jerusalem (LL.B.) and of Tel Aviv University (LL.M.). In 2000, Ms. Cohen joined Dr. Klagsbald’s team. Ms. Cohen has represented leading Israeli and international corporations and provided legal counsel to companies and public figures in civil proceedings and in complex criminal proceedings. Gal Levita Mr. Levita is a graduate of Tel Aviv University (LL.B., LL.M.) and Yale University (LL.M.). Mr. Levita clerked for the Hon. Chief Justice (Ret.) Aharon Barak at the Supreme Court of Israel. In 2008, Mr. Levita joined Dr. Klagsbald’s team. Mr. Levita has represented foreign and domestic clients in complex civil disputes, and has advised them with respect to proceedings conducted outside of Israel. i

Address: Gibor Sport Building, 24th Floor 7 Menachem Begin St., Ramat Gan 52681 Tel: 972-3-6110700 Fax: 972-3-6110707 E-mail: Website:

Summer 2013 Issue

> Grant Thornton Turkey:

Latest Research Businesses in France and Germany are a world apart on the eurozone future; the majority of Turkish businessmen do not want to adopt the Euro.


atest research from the Grant Thornton International Business Report (IBR) reveals that businesses in France and Germany, the eurozone’s two biggest economies, are a world apart in their views on the bloc’s future. This highlights a concern that a lack of clarity of vision on the eurozone’s direction could lead to crippling business uncertainty and

ultimately damage growth prospects. The IBR indicates that businesses in Germany are far more open to further integration compared with their French counterparts, echoing German Chancellor Angela Merkel’s calls for deeper union. 61% of German businesses support further political integration and 76% further

Opinion diverging between France and Germany Percentage of businesses positive about euro entry

economic integration, compared with 35% and 69% in France respectively. The research also asked businesses how they viewed their country’s membership in the euro thus far. 85% in Germany view membership as positive, up from 79% last year. By contrast, the proportion in France describing their membership as positive fell from 71% to just 64% - the joint lowest level in the eurozone. Moreover, one in five French business leaders (20%) describe joining the euro as negative – the highest proportion in the eurozone and well above the German result (7%). Aykut Halit, Managing Partner of Grant Thornton Turkey commented: ‘When we look at the statistics generated from Turkish participants, we see that 67% of the Turkish participants do not want to adopt the Euro. Considering the turbulence in the eurozone, this is not be surprising’




2013 2012 Source: GRANT THORNTON IBR 2013 Major powers disagree on way forward Percentage of businesses supportive of following initiatives

According to the research, businesses outside the eurozone are even less supportive of further European integration, heightening fears of a ‘twospeed Europe’. Just 14% of other EU businesses support further political integration, and 32% economic integration – falling to 6% and 20% in the UK. A further 29% from these economies do not want to see any further integration, compared with 9% in the eurozone. Meanwhile, the appeal of the EU is fading to business leaders outside the union: 51% believe further integration would be an advantage, down from 62% 12 months previously. i


Political integration France Germany Source: GRANT THORNTON IBR 2013

‘On the other hand, although Turkish participants are not eager to adopt the single currency policy, they still think a deeper integration with the European Union will affect their companies in a positive way. 63% of the Turkish participants agree on this. Additionally, they think that the main benefit of more integration will be further opportunities for exports. 56% think that deeper integration will create additional opportunities for export and 13% think that deeper integration would end up with a loosening of some red tape issues.

Economic integration eurozone


Other EU | Capital Finance International





ere are our Summer suggestions for ten individuals who are helping shape a better world. This is not a ranking of any kind but a mixed group of

interesting people who are outstanding in their own special ways. According to many of our readers we hit the target several times last issue but our choices will always be controversial. Let

me know when you think we get things right and when we get things wrong. You can reach me at and please indicate if your comments may be published in our Letters Page.

> Dr Mamphela Ramphele Anti-Apartheid Activist and Politician, South Africa

“All signs in our society point to the need for us to take stock and ask ourselves fundamental questions about how we have been able to discharge our responsibilities to honour the ideals we enshrined in our founding constitution. We stand at a crossroads yet again as a society struggling to emerge from the growing pains of being a young democracy”. This year, Mamplela Ramphele, aged 65, formed Agang (Build) a political party to oppose the African National Congress (ANC). She is an accomplished academic, medical doctor, antiapartheid activist, former World Bank managing director and this issue’s Hero from South Africa. Her experience of the evils of apartheid came early on. As an eight year old she witnessed a struggle between villagers who wanted to bury one of their dead in church grounds but were prohibited from doing so by a racist minister backed by a racist local authority. Her sister was expelled from school for demonstrating against South Africa becoming a republic and Ramphele


was mindful that she studied at the only medical school to allow the enrolment of black students without prior approval from the government. The scene was set. At university, Ramphele founded the Black Consciousness Movement alongside Steve Biko and set to work on community development programmes. She became increasingly drawn into activism with Biko (who was murdered by the apartheid enforcers in 1977). She then had the honour of being banished by the despicable regime and continued to work with the rural poor, improving healthcare and generally empowering women – all of course, under the watchful eyes | Capital Finance International

of the security police. Other honours bestowed on her by apartheid South Africa included a charge under the Suppression of Communism Act (for possessing banned literature). Archbishop Emeritus Desmond Tutu, also an opponent of the ANC, has praised Ramphele’s decision to form the new party and described her as a ‘brave and principled leader who would be contesting next year’s general election with a clean slate’. He, like many other South Africans, feels that in the midst of such frequent and compelling stories of corruption and mishandling of funds by those in charge of the country, 2014 may be the year for change.

Summer 2013 Issue

> Mukesh Kapila Former UN Country Head and Academic, United Kingdom

“Those that stand by and don’t even try to do something are almost as culpable as those who stick in the knife or pull the trigger.” The whistleblower that exposes misconduct in organisations is becoming more and more important to society and has a protected and honourable place within good corporate governance. While we have concerns that some well-meaning whistleblowing can have dangerous repercussions (for example, by compromising state security) there are times when loud and persistent whistleblowing is a moral imperative that must not be ignored. Perhaps the best exemplar of the latter is personified by our Hero Mukesh Kapila who struggled to bring the news of the tide of evil that was Darfur to a largely disinterested world ten years ago. Can you imagine being told by a government representative that his country was ready to implement ‘The Final Solution’ in a troubled remote area of their country? The country was Sudan, where Kapila was the UN head, and the problems were in Darfur in the far west.

The words used by the Sudanese official were a disgraceful throwback to the days of Nazi Germany but all too accurate is conveying intent. A veteran observer of the obscenities of Srebrenica and Rwanda, Kapila knew from day one what the Sudanese military were doing and had information about times, places and could even identify the army units that were directly responsible. A lone woman from Darfur walked into his office to tell that she, her daughter and two hundred fellow villagers from Darfur had been brutally attacked by soldiers. The scene was being set for the first mass murder of the twenty first century. There was no reaction from New York when Kapila reported back to his superiors other than a reluctance to interfere in the domestic affairs of a sovereign state. As Kapila remarked, ‘It was as if the report fell into a black hole.’ He was | Capital Finance International

confounded by the global indifference to what was taking place and resolved to tell the story to anyone who would listen. Mukesh Kapila could not understand why ‘so many good people stood by and did nothing.’ We should all be most grateful to Kapila and media organisations around the world for spilling the beans. Spill more, spill them all. Mukesh Kapila, who received a CBE award in 2003, is presently professor of Global Health & Humanitarian Affairs at the University of Manchester. He is also focusing on the prevention of genocide and crimes against humanity as a special representative of the Aegis Trust. Reviewing Kapila’s book ‘Against a Tide of Evil’, General Dellaire, UN Force Commander, Rwanda, said that, ‘Kapila forces us to look directly into the face of genocide’. It is a not a pretty sight.


> David Beckham Soccer Player and Image Ambassador, United Kingdom

“The spotlight will always be on me, but it’s something I’m learning to live with as the years go by.” One of the best known faces on the planet, David Beckham, 38 years old, became an Image Ambassador for Chinese Football after his twenty year playing career came to an end last season. The League in China is known for its corruption and Beckham for his sense of fair play and so some good should certainly come out of the partnership. Visiting China in late June, he was photographed at a children’s hospital and his personal appearance in Shanghai caused a stampede with seven people injured. In his glory days, Beckham was the


world’s best paid player (taking into account sponsorship income) spending time at clubs including Manchester United, Real Madrid, Milan, Los Angeles Galaxy and Paris St-Germain and representing his country in international matches. However, as Sir Alex Ferguson pointed out in 2007, ‘He is such a big celebrity that football is only a small part.’ Married to Victoria, fashion designer and former girl group singer, Beckham is a style icon and has been voted the UK’s most influential man under 40 years. He received an OBE | Capital Finance International

ten years ago and has since 2005 has been a UNICEF Goodwill Ambassador focusing on sports for development. He is a patron of Elton John’s Aids Foundation and other HIV and children’s charities and clearly loves working with young people. If we are looking to the world of football for a role model then David Beckham would seem to be a sane and obvious choice. He becomes our sporting Hero for the Summer issue.

Summer 2013 Issue

> MAXIMA Queen Consort of the Netherlands

“At present there are 2,700 million people in the world without access to a financial service; that is to say 50% of the world population does not have access to financial basics, they can’t save, they can’t use money to invest, they can’t generate profits, and sometimes they can’t buy food for their children.” The people of The Netherlands quickly came to adore the young, attractive Argentinian economist Maxima Zorreguieta who married their Crown Prince Wilem-Alexander in 2002. Trained as a private banker with a good understanding of emerging markets, she is the daughter of a former minister of Agriculture. Her father’s connection with the Junta of the late 1970s meant that her parents were not present at the wedding and watched her become Queen Consort in April 2013 on television at home. Maxima said that she was ‘at peace’ with the decision understanding that the occasion was a constitutional celebration.

Maxima is our hero not only because of the sterling work she has done over the years in the cause of financial inclusiveness but also for the skill with which she has carried out significant work alongside her duties as a member of the Royal Family. Our hope is that she will be able to continue to support this very worthy cause now that she is Queen and it does seems likely. Maxima appears to be very comfortable with and serious about the work she does in the limelight and could be a role model for other young royals. She is one of the few royal supporters of gay rights and has also done useful work to assist the | Capital Finance International

integration of immigrants into Dutch society. In 2009, Maxima became the United Nation’s Special Advocate for Inclusive Finance for Development. She has described financial inclusivity as ‘universal access to a range of financial services for everyone needing them, provided by a variety of sound and sustainable financial institutions’. Two years after the UN appointment, Maxima became Honoury President of the Global alliance of G-20 for Financial Inclusion.


> Helen Clark Politician and UN Administrator, New Zealand

“Any serious shift towards more sustainable societies has to include gender equality.” Helen Clark, born in 1950, served as New Zealand’s prime minister from 1999 to 2008. She was the first woman to be elected PM of her country and upon leaving office was celebrated as the ‘Greatest Living New Zealander’ in a newspaper poll. Her term of office coincided with strong growth in the economy and government concern about sustainability (she tackled problems over climate change). Her administrations were considered very strong on foreign policy and international issues. She proved to be an enthusiastic supporter of free trade and during her premiership New Zealand became the first developed country to sign a free trade agreement with China. As prime minister, Clark set out to strengthen the United Nations and, in 2009, upon leaving office, took up a key role at the United Nations Development Programme (UNDP). In March 2012 she confirmed that she would be seeking

a second term in the office of Administrator overseeing an annual budget of $5.8 billion and a staff of 8,000 spread across 177 countries. The General Assembly confirmed her reappointment on April 12th this year. She was the first woman to lead the organisation and spearheads efforts to eradicate extreme poverty and promote good governance. Her proposed solutions to these problem centres on gender equality and reproductive health. Clark is our Hero not only because of the endorsement she received from citizens after leaving office (in how many other countries would a former premier receive that sort of accolade?) but also because of the work she has taken on since leaving government. Forbes magazine ranked her 21st most powerful woman in the world in 2013 – up forty places since the days of her premiership.

> Mohamed Bin Issa Al Jaber Businessman and Philanthropist, Saudi Arabia “It’s about time for the Arab world to be a contributor in the world of technology – and one day to be an exporter of technology. I think it has all it needs to be a player… The challenge now is to move fast.” Mohamed Al Jaber, born in Jeddah in 1959, is a UNESCO special envoy who likes constructive dialogue and so do we. He believes in building bridges between the Middle East and the wider world and we applaud him for this too. As chairman and CEO of MBI International, Al Jaber has made a fortune from the development of hotels and resorts most of which are located in Europe. As is the case with many business leaders from this part of the world, he has diversified his portfolio and the MBI Group has food processing and oil service interests and has developed compounds for expatriate accommodation in Saudi Arabia. Al Jaber is


the majority shareholder in a business valued in excess of $7 billion. Our billionaire Middle East Hero is a prominent philanthropist who set up the very well organised MBI Al Jaber Foundation in London and has endowed a chair in Middle East studies at the capital’s School of Oriental and African Studies (SOAS). Last year the Foundation sponsored UNESCO’s Euro-Arab Dialogue Conference held in Vienna. The Foundation offers sponsorships for graduate students from the Middle East to study in Europe and anyone who is familiar with these programmes will confirm that young people | Capital Finance International

from the region become the most effective ambassadors of their respective countries. Al Jaber likes to connect cultures through wilderness expeditions and there is little doubt that bringing young people together in this way breaks down the barriers very quickly. He is a strong backer of female education. Through the generosity of Mohamed Al Jaber, restoration of mosques and manuscripts destroyed recently by militant Islamists in Mali is taking place. We are pleased to see that in more spheres than one Al Jaber is fighting back against senseless extremism.

Summer 2013 Issue

> France Córdova Scientist and Educator, Mexico/United States “We know that the universe emits not only invisible light, but also X-rays and gamma rays, sometimes in fits and bursts. I marvel at all these things, and I marvel more at the evolution of thinking and discovery that has led to our understanding. I think sometimes, there is nothing finer, nothing deeper, nothing truer, than to be connected to the tide of the universe. I am thrilled to analyse data, to write papers to try to explain nature, to further, a little, the collective knowledge about the universe.” Inspired by Niels Bohr, Albert Einstein and the Apollo 11 Moon Landing, France Cordóva became an astro-physisist and worked at Los Alamos for most of the 1980s. Cordóva, now aged 65, was the first of twelve children born to a Mexican father and American mother. After Los Alamos she carved out a stunning academic career becoming Chancellor of UC Riverside in 2002 and President of Purdue University five years later. She celebrated the latter appointment by hosting an ice-cream social (Handshakes and Milkshakes) and has become a role model for a diverse new generation of scientists. Like our Spring Hero Freeman Hrabowski, France Cordóva has little time for those who

pigeon-hole students by saying that certain works is for boys and girls don’t go to graduate school. She is a champion of ambitious youth and works especially hard to bring females and minorities to the sciences. Cordóva created a leading research university at Riverside, with its seventy percent representation of minorities, and developed Project Copernicus to encourage better science teaching. Our Hero Córdova was named one of ‘America’s 100 Brightest Scientists Under 40’ by Science Digest Magazine, was a winner of NASA’s Distinguished Service Medal and is a fellow of the American Association for the Advancement of Science.

> Patrice Motsepe Businessman and Philanthropist, South Africa “The State needs to create an enabling business and country environment, while business should keep its focus on not only creating value for shareholders, but on creating real value for communities and the people of South Africa.” Patrice Motsepe, aged 51, is a South African mining magnate born in Soweto who is now reputed to be the richest man in his country. This year he joined The Giving Pledge and has resolved to make over half his $2.4 billion fortune to charitable causes. Motsepe is the first African to sign up and we hope that he will be an inspiration to others. His generosity is an answer to those who say

that only the elite came to benefit from black empowerment post-apartheid. The stated objectives of the Patrice Motsepe Foundation are to improve the lifestyles and living conditions of the poor, disabled and unemployed. The Foundation supports female empowerment, young people and all marginalised South Africans. A specialist in mining and business law, | Capital Finance International

Motsepe was the first black partner in the firm Bowman Gilfillan. He was soon to set up a mining services business which brought profitsharing to employees. Three years later, in 1997, with the price of gold at historic lows, he started buying up mines on very favourable terms from Anglo Gold and this would become the basis of his great wealth.


> Justina Mutale Event Manager and Charity Promoter, Zambia/United Kingdom

“Positive Runway uses the allure of movie stars, models, fashion designers, musical artistes and others to shout out a string of positive messages to ‘Stop the Spread’ in the belief that when words and other formal efforts fail, celebrity, music, beauty and entertainment will speak effectively to the young generation.” Founder and CEO of the NGO Positive Runway, Justina Mutale was admitted to the UK’s Black 100+ Hall of Fame in July last year. The project sets out to identify top black achievers in Britain and we were not at all surprised to see her included. A Zambian, she was the first person from Southern/Eastern Africa to be included in the Hall. Most members go on to be mentioned in the UK Honours List. Positive Runway was set up to fight HIV/Aids


and tours the world leveraging the popularity of beauty, fashion, music and celebrity. The organisation benefits from Justina’s event management skills which were learned at the Commonwealth Secretariat and, of course, her undeniable good looks. The Miss Zamba Pageant has been designed by Justina Mutale as ‘Beauty with Purpose’ with winners raising funds to support children orphaned by AIDS. Positive | Capital Finance International

Runway is represented in 40 countries across six continents. In June this year, Ms. Mutale, who is also Diaspora Ambassador & Spokesperson of the campaign, delivered a letter to David Cameron outlining views of what should be considered at the G8 summit in terms of food security.

Summer 2013 Issue

> Anand Mahindra Businessman and Philanthropist, India “The culture of individual giving does seem to have become somewhat diluted in India in this era of ‘I, me, myself’. In the World Giving Index created by the Charities Aid Foundation, India ranks a lowly 134th out of 153 nations in terms of the percentage of population that gave to charity… So, although we come from a culture where wandering sadhus and bhikshus could once live entirely on the charity of the people to meet their needs, the rise in incomes could well be leading to a drop in generosity towards others.”

Anand Mahindra, born in 1955, was appointed chairman of the family conglomerate in August 2012 and has been managing director since 1997. He has been able to progress the business magnificently mainly through a succession of inspired mergers and acquisitions. Mahindra is a notable Indian philanthropist with strong views about the importance of giving but takes up a position that is in some opposition to the Billionaire’s Club. In 2010, he donated $10 million to Harvard (he was class of 77) to encourage ‘cross-cultural and inter-disciplinary exchange of ideas in an international setting’. We are all in favour of that and further applaud

Mahindra as a regular giver to a variety of good causes at home as well as abroad. Our Hero is against the trend of billionaires promoting philanthropy by circling the globe and calling on their own. As Mahindra says, ‘Why wait for people to become billionaires before they become philanthropists?’ He goes on to comment that, ‘While it is nice to get large sums from billionaires, perhaps the real challenge is getting five million people to donate one hundred rupees each year. To me, philanthropy is not a matter of a one-off donation. It’s a matter of an inner urge and a culture. And to be sustainable, philanthropy needs to become a part of everyone’s | Capital Finance International

value system and of everyone’s culture.’ Mahindra set up the Nanhi Kali Foundation in the 1980s when a modest financial donation could sponsor the education and wellbeing of a child for an entire year. This experience taught him that it is not the desire to give that is lacking: what is required is proven good governance and organisations that people can trust to use their money effectively and honestly. We agree wholeheartedly with that analysis. And, as Mahindra says, ‘Donors rarely abandon a child they have helped set on the road to a brighter future’.


> Orlean Invest West Africa:

Community Engagement Orlean Invest West Africa Limited is a logistics provider to the Oil and Gas sector in the Niger Delta Region of southern Nigeria and beyond. This region has historically and traditionally been very volatile in its corporate community relations from colonial days. This is captured in the various monarchs exiled by the then British government – from the Olu of Warri to the Igbanechukwu of Okrika for example; a period characterized by negation of the communities and well defined rigid boundaries between company operations and their respective host communities.


ven to this day; the separation of community and corporate goals has continued to be current in the modern oil and gas politics of the Niger Delta Region. Indeed, this is manifested by the volatility which is characteristic of this business

sector, and accounts for numerous cases of insurgency, kidnaps and insecurity within the Region. It is in this context that Orlean Invest operates as a logistics service provider. Indeed our community relations policy over the last 25 years have been shaped and sharpened by the

socio-political realities herein. The expansion of Orlean Invest operations requires a review of our Corporate Social Responsibility which amongst other things gave birth to our mission statement as follows:

“To create an environment in which the host communities and the company become fundamentally interdependent; where understanding is mutual and commitment to growth and development total.�

Donation of Technical Tools to Eleme Craft Centre


Free Medical Outreach for Communities | Capital Finance International

Summer 2013 Issue

Orlean Free Medical Outreach Observing World Malaria Day

Renovation of Schools In Rumuokwurusi

Skill Acquisition: Hairdressing

Skill Acquisition: Pipewelding

The fundamental objectives are: • Integrated planning and execution of community development programs with full community input and participation. • Sustainable empowerment of the indigenes of host communities through the provision of employment and improved welfare. • Adoption of best practices that guarantee community-friendly operations. All this form the basis upon which the CSR policy is the bedrock. We have over time identified three focus areas in our community relations.

Roughly these are: Projects; Employment and, Empowerment. A fundamental tool in our CSR is our use of dialogue and contact in the process of relationship building. We encourage interaction of any sort even sometimes sponsoring same in the interest of further bonding, social events such as christenings, traditional wrestling competitions, funerals, birthday parties, all form part of the social networking which we are fully in support of. Conclusion Community relations in the Niger Delta region | Capital Finance International

of South-South Nigeria continue to be very challenging and dynamic for reasons explained in this write-up. Corporate entities and Orlean Invest in particular, have had to evolve strategies to accommodate the idiosyncrasies within the Niger Delta. The Integrated Participatory Approach (IPA) developed over time and adopted as corporate policy in the last four years, represents Orlean Invest’s strategic approach to the achievement of the goals outlined in the mission statement. i


> MIGA (World Bank):

Africa Beckons, But Investors Still Cautious By Conor Healy

Multilaterals and Development Finance Institutions can help hedge risks.


s the economic recovery stalls in other parts of the world, economic growth in sub-Saharan Africa has remained strong. GDP growth estimates indicate an expansion of 4.9 percent in 2013, following another expansion of 4.4 percent in 2012. The region’s growth is projected to accelerate over the next couple of years to over 5 percent. Excluding South Africa, the largest economy in subSaharan Africa, growth was at the robust rate of 5.4 percent in 2012 and this is projected to be 6.2 percent in 2013. Strong domestic demand, high commodity prices, and increased export volume have been important drivers of growth.

“Foreign Direct Investment into subSaharan Africa has nearly doubled in the past 10 years and is projected to reach $40 billion in 2013.”

Investors have taken note of the continent’s growth and foreign direct investment (FDI) into sub-Saharan Africa has nearly doubled in the past 10 years and is projected to reach $40 billion in 2013. This is good news, but despite the opportunities presented by an emerging middle class and the fact that there is great demand across all economic sectors, investors remain heavily focused on the continent’s natural resources. The bulk of FDI is going into oil, gas, and mining projects. While these investments can bring much-needed revenues, they don’t necessarily bring one of the continent’s most urgent needs: the infrastructure that will serve as the backbone for sustained private sector growth. Infrastructure bottlenecks, especially in electricity supply and transport, are preventing

many countries from maximizing their potential for private sector-led growth. In Kenya, for example, World Bank studies show that businesses lost 6.4 percent of their sales in 2007 due to electrical outages. Businesses spend vast sums on expensive and polluting diesel-fired generators to keep their operations going. Bringing a container from Mombasa to Nairobi takes 20 days. This is longer than it takes to ship the same container from Singapore to Mombasa. While potential investors in the manufacturing sector may see eager consumers and a young labor market, these infrastructure woes often force them to look elsewhere. The World Bank estimates that Africa needs $93 billion in annual infrastructure investment

In Pictures: The construction site of the Henri Konan Bedié toll bridge in Côte d’Ivoire.

76 | Capital Finance International

and, with foreign assistance at $125 billion a year globally, it’s clear that money is not going to come from shrinking foreign aid budgets. Africa’s internal capital markets are gaining a foothold, but they are not yet sufficient to generate the revenues needed to address the vast financing gaps in the continent’s power, transportation, and water infrastructure. Leaders in the development assistance community understand that significant private sector investment will have to be mobilized in order to address the infrastructure deficit in Africa and the rest of the developing world. The challenge though is that large-scale infrastructure investments require involvement of a local government counterpart and many governments lack the institutional frameworks or the technical capacity to enter into publicprivate partnerships or offtake agreements. This often means that projects can take a long time to get off the ground. Occasionally political events can also delay a project. Take the example of the MIGA –supported Henri Konan Bedié toll bridge in Abidjan, Côte d’Ivoire. In 1996, a competitive bidding process was held to build a third bridge for the city, but a coup d’état and ensuing civil war put the planned public-private partnership on hold for more than 15 years. Fortunately the investors remained committed to the project and now construction is under way on this new bridge that the city so desperately needs.

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In Pictures: The Azito thermal power plant in Côte d’Ivoire.

“The World Bank estimates that Africa needs $93 billion in annual infrastructure investment.” Another challenge that keeps investors and lenders from investing in Africa’s infrastructure is that they often think of the African continent as a homogeneous unit when in fact it’s composed of 54 countries falling all over the risk spectrum. In an environment where project finance is already difficult to arrange, it can be difficult to mobilize private capital into this unfamiliar territory. Fortunately there are ample instruments to mitigate risk, including political risk insurance. Multilaterals like the World Bank Group increasingly see their preferred creditor status as a more powerful instrument for mobilizing the vast amount of private capital sitting on the sidelines than their limited envelopes of concessional financing. The Multilateral Investment Guarantee Agency (MIGA), the World Bank Group’s political risk insurance arm, brings the combination of a formal political risk-mitigation instrument and the World Bank Group’s preferred creditor status to the table, and investors and lenders are taking note. MIGA’s exposure in sub-Saharan Africa has more than doubled in the last four years,


and this exposure is largely in the infrastructure sector. Increasingly the World Bank Group is supporting the delivery of its member countries’ infrastructure strategies by deploying its full complement of private sector financial instruments. In Uganda for example, the Bujagali hydropower project is part of a key element of the country’s plan to increase access to electricity. The World Bank Group supported the project through challenging conditions for nearly 10 years before bringing it to financial close, beginning its efforts at a time when less than 10 percent of Uganda’s population had access to power. The project is already meeting almost 50 percent of the country’s electricity needs, selling power for about a third of the previous cost. The project is sponsored by a consortium of Sithe Global Power of the United States and the Aga Khan Development Network. Loans totaling $130 million from the World Bank Group’s International Finance Corporation (IFC) are complemented by significant financing from European development finance institutions. A partial risk guarantee from the group’s International Development | Capital Finance International

Association (IDA) is covering commercial lending of $115 million from Standard Chartered and Absa Banks, while MIGA is providing 20-year breach of contract cover of $120 million to Sithe subsidiary World Power Holdings. World Bank Group instruments are also leveraging significant investments in Côte d’Ivoire’s energy sector. These investments are important to signaling that the country is open for business after a prolonged civil conflict. Together with IFC financing, a MIGA guarantee of $116 million is providing breach of contract cover for the conversion of the Azito thermal power plant from simple-cycle to combined-cycle, increasing total capacity from 290 to approximately 430 megawatts. MIGA is also supporting Côte d’Ivoire’s power generation capacity through its support for Foxtrot International’s oil and gas production platform, which supplies Azito and other plants in the country. The agency is covering the equity investment by SCDM Energie and debt from HSBC. An IDA partial risk guarantee was just approved to support the government’s payment obligations to the company under a gas supply and purchase agreement.

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In Pictures: The Foxtrot oil and gas production platform in Côte d’Ivoire.

Another country where the World Bank Group has been closely involved in its energy sector development is Kenya. The country is implementing its ambitious “least-cost power development plan” involving the establishment of a number of independent power producers. The presence of World Bank Group’s private sector financial instruments has helped make these projects more bankable and has complemented the strides the power sector has made in the country. For example, a MIGA guarantee is backing the first commercial bank financing for a Kenyan independent power producer. Although Kenya is recognized as the business center of East Africa, the violence that followed the 2007 elections elevated risk perceptions.

“These investments are important to signaling that the country is open for business after a prolonged civil conflict.” As long as pockets of political and economic volatility persist in the developing world, investors are likely to continue to have political risk concerns at the forefront of their minds. In a survey conducted by MIGA in 2012 for its World Investment and Political Risk report, investors rate political risk as the top constraint to investing in developing countries over the next three years. However, the appetite of bond holders appears more eager as these investors continue a global quest for yields. This development offers fresh hope that countries will be able to generate more of their own resources to finance infrastructure investments. These developments, together with the convening power that multilateral’s private financing instruments can bring, could help Africa see the day when diesel-fired generators are a thing of the past and when it’s easier and cheaper to move cargo from Mombasa to Nairobi than from Mombasa to Singapore. i


In Pictures: Bujagali Hydropower Dam in Uganda.

About the Author Conor Healy is Senior Risk Management Officer in the Economics and Sustainability Group of the Multilateral Investment Guarantee Agency, the political risk insurance arm of the World Bank Group. Conor has worked as an economist at KPMG, where he was a manager in the London Transfer Pricing Group and was the senior financial sector transfer pricing expert for KPMG’s entire European operation. Prior to this he worked as an economist at Lehman Brothers, looking at the European economies. Conor has authored and presented papers at academic and professional conferences, looking at regional macroeconomic risk as well as at topics such as monetary policy, intellectual property, and business cycle theory. He has also worked as adjunct faculty at Georgetown University, where he has taught a course on globalization, investment, and development. Conor has a PhD from Princeton University, as well as an MSc. from the London School of Economics and a BA (First Class) from Trinity College, Dublin. | Capital Finance International

Summer 2013 Issue

> Meets Chairman & CEO of Ozma Nigeria Company Limited:

Chief Andrew Oziri Emeri


hief Andrew Oziri Emeri, (or OZ as he is popularly known) was born on 27th June, 1960 to the families of Mr. & Mrs. Emeri O. Alexander aka (Alexander De Great) of Umunede Kingdom in Ika North East Local Government Area of Delta State.

(the highest ruling body of the Royal palace) in Umunede Kingdom. He is also a member of the Nigerian Institute of Welding (NIW), Institute of Strategic Management (ISM) where he is the Chairman of the Warri District of the Institute and the Secretary to the Delta State Chapter, American Society for Non- Destructive Testing, amongst others.

He is the Chairman/ CEO of Ozma Nigeria Company Limited and DreamWorks Eng. & Const. Ltd., Precious Fortune Int’l Ltd., a seasoned manager and strategist.

This leader has attended several seminars and exhibitions relating to Oil and Gas, including: OTC 2012 & 2013, Nigeria Oil & Gas Exhibition 2012, Institute of Strategic Management Master class in London, 18th World Conference on NonDestructive Testing in Durban- South Africa.

Chief Emeri attended the then Pilgrim Baptist Primary School, Umunede, where his leadership quality was first spotted and, without compromise, he was selected as the general monitor of the school. He proceeded to Ede Grammar School Umunede where he sat for his West African Examination Council (WAEC). In search for greener pastures, Chief Emeri left for Lagos in 1980 joining Willisco Aerospace & Industrial Radiography Training School where he obtained ASNT level ll on three methods i.e. in Radiographic Film Interpretation (RI), Ultrasonic Testing (UT), Magnetic Particle Inspection (MPI) and Dye Penetrant Testing (PT), respectively. He left Willisco in 1989 as a Radiographic Supervisor to join Overseas Technical Services (OTC) as a Radiation Protection Supervisor (RPS), as a result of hard work, honesty, dedication to work and sincerity, he was promoted to the

In Pictures: Chief Andrew Oziri Emeri

position of Non- Destructive Testing (NDT) Manager, a position he held until he decided to establish his company, Ozma Nigeria Company Limited in 1994. Holding a Masters in Crime Management from Delta State University, Abraka, Bachelors in Business Management from Abia State University, Uturu and an OND (equivalent), Chief Emeri is a member of the Obi in Council | Capital Finance International

A God-fearing man, philanthropist and team leader, he is a very industrious individual who is always ready to embrace the newest of techniques/ technologies. The Chief is a business leader to reckon with, an employer of labour, and helper and shield to many. An achiever, a man with whom there is no impossibility ‘because there must always be a way out’. Chief Andrew Oziri Emeri is married to someone he describes as ‘the most wonderful woman on earth, Mrs. Franca Emeri’, and they are blessed with two lovely children. i


> Meets Executive Vice Chairman/CEO of Dateline Energy Services Group:

Wilson Endy Opuwei


Wilson Endy Opuewi is an oil and gas entrepreneur with business interests in exploration and production, manufacturing, power and marine sectors, as a player in the global industry marketplace, Wilson has midwifed multi-currency boardroom transactions, even as he contributes to human capacity development and resource management. With a background in international oil and gas law, this intellectually minded gentleman provides advisory services to multi-national corporations as well as governments. He has introduced 82

strategies and policies towards the advancement of industry operations and regulatory frameworks. A recipient of many awards as well as member of professional organizations, Wilson is currently the executive vice chairman / CEO of Dateline Energy Services Group, whilst on the board of notable local and international companies. Wilson hails from Bayelsa State of Nigeria, married with 4 children, loves golfing and an ardent believer in Project Nigeria. i | Capital Finance International

Summer 2013 Issue

> The Nigerian Oil and Gas Upstream Frontiers:

An Emerging Global Investment Destination, Passage of the Petroleum Industry Bill One of Nigeria’s energy entrepreneurs and corporate winner of the CFI 2013 award “Best Oil and Gas Project Support Services Company, Nigeria”, Mr. Wilson Opuwei has been a supporter of the quick passage of the Petroleum Industry Bill (PIB) in order to attract foreign direct investment as a way of opening up the oil and gas frontiers with the enormous potential for development and technology transfer.


puwei, who is Managing Director of Dateline Energy Services Limited, shed light on some notable challenges that have delayed the passage of this much awaited bill (which aims to stimulate economic growth as well as position the Nigerian nation in its rightful place within the global oil and gas industry market place). He has said that ‘the majority of the challenges being encountered by operators in the oil and gas sector have been captured and addressed by the PIB, which currently awaits legislative approval’. ‘It is only proper at this time that the government deals with all the issues and factors that have led to the delays in the passage of the PIB. In practical terms, I think the Legislature should fast-track the process as it will unlock the frontiers to investors desirous of exploring venture opportunities in the Nigerian oil and gas sector in the hope that when passed the PIB will allow seamless transition and operations in the country’. According to Opuwei, the passage of the Bill would put Nigeria on par with her contemporaries in the global oil industry including countries such as Mexico and Venezuela (whose upstream regulatory framework has been introduced to the NNPC): ‘In the PIB, there are certain areas of agreement which are very critical and are investment related such as the fiscal regime, royalties, ring fencing and other areas which relate to how returns are guaranteed on investments.” Opuwei further urged the government to urgently address the issue of oil theft and vandalism which erodes investor confidence in the sector. He commented: “The issue of oil theft and vandalism needs to be dealt with because it

“Opuwei further urged the government to urgently address the issue of oil theft and vandalism which erodes investor confidence in the sector.” hinders midstream and upstream investors that are planning to expand their operations in Nigeria. He also offered encouragement to foreign investors commenting that the oil and gas frontiers and borders are secure enough for operations especially if the foreign group finds the right local partners since the current regulatory frameworks guarantees steady operations in the sector, whilst discouraging oil theft activities which diminish production activities and result in downtime and daily loss of revenue. In his words, “If you notice, each time SPDC, for instance, declares a force majeure on the NCTL Bonny Pipeline, it costs the nation about $30 million dollars on a daily basis during the period of such shut down, - mainly as a result of the activity of vandals.’ Opuwei calls for the passage of the PIB is because it seeks to increase the utilization of indigenous technologies and personnel for the protection of pipelines and oil and gas installations among other good reasons. He comments that, ‘Modern technologies such as SCADA online-real time technologies should be applied for the monitoring of pipelines in order to prevent sabotage. This technology helps detect instantly any act of vandalism and transmits signals to a well-equipped platform from which an instruction is promptly deployed’. i | Capital Finance International


> De-Tastee Fried Chicken:

Great Products and a Deep Concern for Communities Served in Nigeria De-Tastee Fried Chicken Ltd., leading quick service restaurant in Nigeria, has been recognised as the 2013 CFI Community Engagement Award winner in that country because of the Company’s consistent and generous support to needy communities. Tastee stands out as an example of community engagement driven by the passion and value set of the organisation’s top leadership.


astee emerged as the winner, having carved a niche in the food and hospitality industry, thus ably representing Nigeria in the global arena.

The CFI award also recognized the brand as a very generous supporter of orphanages and physically challenged children, Tastee shows a strong desire to continuously improve educational opportunities and realise the full potential of young people in Nigeria. In the words of the Managing Director, Mrs. Olayinka Pamela Adedayo, “we give God all the glory for this international achievement and recognition. We promise to continue to support the causes of the abandoned, the less privileged and children - who are of course leaders of tomorrow”.

“De-Tastee Fried Chicken Limited is the realisation of a concept by an industrious woman, Mrs. Adedayo, who has created a major organisation and good fortune not only for the owners but also for thousands of families across Nigeria and society as a whole.” her management experiences at Kentucky Fried Chicken, led to a diversification into fast food service with the establishment of De Tastee Fried Chicken Ltd in 1996. The coming on stream of Tastee Fried Chicken revolutionised the concept of fast food service in Nigeria.

De-Tastee Fried Chicken Limited is the realisation of a concept by an industrious woman, Mrs. Adedayo, who has created a major organisation and good fortune not only for the owners but also for thousands of families across Nigeria and society as a whole. In order to bring her ideas into reality. she established Tastee Pot in 1989 to provide outdoor catering services to distinguished and discerning clientele right across Nigeria.

The advent of an eatery with a new concept of service, superb products, and exquisite ambience, became a reference point, but nonetheless, the company still maintains an unusual standard of service. Tastee Fried Chicken - with its deservedly highly reputation in Nigeria for quality fast food service - has at present nine outlets in metropolitan Lagos. An array of delicious meals and snacks are offered to delight the populace. The company has two other outlets nearing completion in Lagos. The Company’s success over the years is attributable to highly skilled labour, the use of quality inputs, and environmental friendly production technologies.

Tastee Pot has over the years become the outdoor caterer of choice. The desire of Mrs. Adedayo to meet the yearnings of Nigerians, especially Lagosians for quality fast food service ,following

Corporate Social Responsibility Policy at Tastee Tastee Fried Chicken believes in touching the lives of the citizenry by giving back to the society

through products donations, financial donations, and a series of communal projects aimed at supporting grassroots dwellers. Tastee’s Good Works: • Donation of cash and food items to Orphanages • Scholarship awards to bright and deserving students in tertiary institutions through the Olayinka Pamela Adedayo Foundation • Various donations to Schools • Donations to religious bodies • Donations to Government parastatals • Donations to Social Clubs 2012 Results and West African Tourism and Hospitality Award Success Addressing staff members Managing Director Adedaya commented, ‘We thank God for His mercy and grace upon Tastee Fried Chicken Limited. Against all odds, 2012 was not such a bad year for us. High points for 2012 included the opening of our Lekki outlet, the relocation of the Ikoyi outlet and once again, for the 3rd time in a row, Tastee Fried Chicken won the West African Tourism and Hospitality Awards for the best QSR in West Africa’’.

“The coming on stream of Tastee Fried Chicken revolutionised the concept of fast food service in Nigeria.” 84 | Capital Finance International

Summer 2013 Issue

TASTEE FRIED CHICKEN ORGANISES SPELLING BEE The International Children’s Day globally celebrated on May 27th this year was a day that pupils and students in primary and secondary schools in the Lagos metropolis will not forget in a hurry. De-Tastee Fried Chicken Limited organised what was their 4th Spelling Bee Competition. The competition seeks to improve written and spoken English in students of Lagos State, and reward excellence. Being an educational development initiative, the Spelling Bee received considerable support and sponsorship from corporate bodies, industrialists and banks. This year’s competition was held at Tastee Place Festac Town. This was the first time that secondary schools participated in the competition. Screening exercises were held to determine finalists for the Spelling Bee grand finale. To add colour to the event, there were talent displays from Pacelli School for the Blind and Partially Sighted Children, and Atunda-Olu School. Gifts were presented to the winners and all contestants. For the secondary school, the first prize was an Ipad, second prize a Play Station III, while the third prize winner took home a 32” Inch flat screen television. Primary School winners received a laptop as first prize, a Play Station III x 1 Game as second prize, while the third prize was also a 32” flat screen television. Schools of the first placed winners received a multimedia computer and set of encyclopedias, while the second and third place winners each received a set of encyclopedias. Representatives from the Ministries of Education and Youth and Sport and Social Development were also in attendance. TASTEE REWARDS CUTOMERS AT EASTER Tastee rewarded its loyal customers during the Easter period with souvenirs and gifts for purchases made. According to Mr. Olubunmi Adedayo, the Executive Director, ‘The fact is Easter is globally celebrated as a solemn festival which reflects on the death and resurrection of Christ for Christians. Bearing this in mind we will be celebrating Easter in a low key, while also appreciating our esteemed customers for their continuous patronage. At Easter 2013, Tastee organised a funfair for children at the Festac and Agege outlets where with the help of bouncing castles they had loads of fun. In addition, all Tastee outlets offered light entertainment, chocolates for customers and decorations to reflect the season. i | Capital Finance International


> Holland Farming SL:

Meeting Urgent Needs in Sierra Leone Sierra Leone has been enjoying levels of peace and stability for over a decade and its vast natural resources have attracted investment across a range of sectors, notably transportation, tourism and machinery. However the country remains one of the poorest in the world, with income inequality high: 70% of the population live below the poverty line and 26% in extreme poverty.


wo thirds of the population are involved in subsistence agriculture; and food is one of the country’s biggest imports. As recently as 2007, the government share of investment in agriculture was only 1.7% a year; it is now set at 10%. Sierra Leonean subsistence farmers remain some of the poorest people on the planet, working long hours, with few inputs: most do not use fertilisers, there is almost no mechanization and no working animals in use by the smallholder farmer. Post-harvest wastage amounts to up to 50% of crops. Holland Farming Sierra Leone Ltd was founded by Sierra Leonean and Dutch partners to meet the urgent need for quality agricultural inputs and consultancy services to increase farmers’ productivity and contribute towards rural development. Founded in 2007, the company has its headquarters in Freetown with branches in Bo, Port Loko and other provincial districts in Sierra Leone. The company’s directors realized that there was a clear lack of reliable, high quality agricultural suppliers on the market - and those that existed did not reach the interior of the country. Local rice was almost impossible to find, with imported rice dominating the market, and yet before the war Sierra Leone had been exporting its own rice. It was clear that supporting rural farmers to strengthen the sustainable provision of local food to a readymade market, and exploring export opportunities as appropriate, combined a strong business case with a sound development model.

“The organisation’s core strategic focus is its relationship with smallholder farmers which enables us to accurately determine what they need to improve productivity - and what they can afford.” Holland Farming Sierra Leone is committed to supporting and facilitating the development of Sierra Leone farming. The organisation’s core strategic focus is its work with smallholder farmers in order to accurately determine what they need to improve productivity - and what they can afford. An assortment of high quality fertilizers and seeds is sourced predominantly from the Netherlands, in a variety of packaging sizes to ensure affordability for all categories of farmers. The smallholders farmers we work with typically: • Cultivate less than 2 hectares of land; • Depend on family members for most of the farm labour; • Have limited access to know-how or technology; • Have limited resources (capital, skills, labour, risk management, basic agricultural economics); • Produce subsistence or commercial commodities, which do not have an immediate market;

In Pictures: Holland Farming technical team visit swamp rice farmer in Bo, Southern Sierra Leone.


• Use outdated farming techniques with limited capacity for marketing, storage and processing their harvests. The organization has a close relationship with farmers who are now realizing good harvests as a result of the improved inputs they source from the multiple sales outlets around the country. The next logical step for the business, and for the interest of the agricultural sector in Sierra Leone, is to secure appropriate and sustainable markets for the crops the farmers grow. The business will in future look for export opportunities when its input supply sector is optimally functioning. This is in line with the Ministry of Agriculture, Forestry & Food Security strategy to create a market place for the newly formed network of Agro Business Centers (ABCs). Despite the relatively sustainable supply of affordable agricultural inputs, the smallholder farmer in Sierra Leone is yet to realize the same socio-economic results experienced by their peers within the sub-region. Challenges facing rural farmers include: • Higher levels of agricultural technology are not affordable due to low economic returns from commodities; • Post-harvest loss is estimated to be around 50%. Lack of post-harvest processing opportunities such as rice milling facilities, feed mills and mechanics to ensure that farmers can benefit from reduced post-harvest losses and optimal sales value of their final products;

In Pictures: Holland Farming meet with farmers cooperative at the Ministry of Agriculture in Makeni. | Capital Finance International

Summer 2013 Issue

In Pictures: Holland Farming demonstration of the use of foliar fertilizer (Cropmax) in Kenema, Eastern Sierra Leone.

“By 2016, nobody will import rice to Sierra Leone.” • High fertilizer prices are limiting usage to 4kg/ ha compared to 9kg/ha for sub-Saharan Africa. • Lack of commercial markets for fertilizable commodities such as rice, maize etc.

• Markets - support the farmers within the pilot scheme with market pricing information to better inform them about the market value of the crops they grow.

As a result of these challenges, the majority of smallholder families are trapped in a lowintensified cultivation cycle, often producing the same commodities using traditional, low input/ output systems and investing little or nothing to gain greater productivity levels and profit.

This approach to re-engineering the agricultural value chain holds the potential to improve the return on investment for the smallholder farmers. We expect this initiative to increase access to agricultural inputs in the region and lead to an increase in domestic production/consumption and exports of raw materials and agricultural produce for which markets can be created in Europe and elsewhere. Smallholder farmers and the farmers’ cooperatives would benefit from the strengthening of the agricultural sector. They will increase their productivity, leading to increased incomes and an improvement in the socioeconomic status of rural communities.

To further understand where additional value can be added to the production chain in order to have a maximum impact on output, we have adopted the concept of the value chain to illustrate how and where value is created in the agricultural production chain. Our next level of support to the farmers will be to address critical components of the agricultural value chain presently neglected that will lever disproportionate benefit in yield to the farmer. This will include: • Inputs - increase farmers productivity via ondemand supply of the inputs the farmers will need. The ordering and payment can be done via mobile phone, which most farmers now possess, and with mobile payment facilities currently in use in Sierra Leone; • Production - introduce technology to cost effectively educate the farmers in improved cultivation methods of the food crops that they grow for which there is already an available market. With over 90% of the farmers we supply having little or no literacy skills, an innovative education method is needed if they are to be supported to improve their productivity;

Development Impact Women farmers and entrepreneurs are at the heart of our development agenda. Indirectly, the business is creating jobs for nearly 50 female entrepreneurs in the Bo region who come to our shop to buy fertilizers and seeds on credit for repackaging and reselling in 1kg bags. We recognise that the strength of the business lies with the quality and commitment of our staff; all staff have contracts based on employment best practice within the country. In 2010, we introduced fertilizer in 25kg bags in order to increase the number of smallholder farmers who can afford to buy and use our fertilizers, as well as transport them with ease. Since then, we have seen competitors move in that direction. Increasingly, we are being seen as the standard of excellence in the support | Capital Finance International

of agriculture in the country. The supply of fertilizer in 25kg bags has significantly increased the number of smallholder farmers who can now afford to buy and apply fertilizers to their crops resulting in increasing yield. With the introduction of 5kg packaging fertilizers to our product portfolio, we are making fertilization a reality for more and more smallholder farmers in Sierra Leone with direct impact on productivity. With the desire to have a visible presence in the communities we support, Holland Farming Sierra Leone Ltd intends to become a ‘one-stopshop’ in the agriculturally active communities in the country. As such we are in the process of developing rural retail facilities in selected pilot districts, which will primarily serve as a shop, as well as a go-to station for sales, consultancy and demonstration services. These facilities will have an iconic and easily identifiable architecture, which can be replicated in several communities. The supporting storage, caretaker/ resident consultant accommodation, and the demonstration garden guarantees a permanent physical presence of the resource in the community. With over 70% of Sierra Leone’s population dependent on agriculture, our work with smallholder farmers holds the potential to transform rural communities and the rural economy. The current President Ernest Bai Koroma recently proclaimed ‘By 2016, nobody will import rice to Sierra Leone’; we don’t think we are that close to self-sufficiency in the country’s staple food but Holland Farming has a key role to play in getting Sierra Leone to that point in the not too distant future. i

E-mail: Web: 87

> GRAT Network Digital Solutions:

Emerging Telecoms Player in Nigeria


RAT Network Digital Solutions Limited is based in Lagos, south-western Nigeria. GRAT is incorporated in Nigeria and registered under the Corporate Affairs Commission to undertake telecoms training, structured cabling, external line plant provisioning, datacom equipment sales and installation, IT/Telecoms facility maintenance and management, IT/Telecoms consultancy and project management, external line planning, Radio Frequency (RF) data collection and optimization, telecom-based security solutions for different industries, telecoms logistics, research amongst others.


Telecommunications Training • Fiber Optics Theory and procedures • Copper Plants Theory and procedures • Mobile Telecommunication • Next Generation Networks • Project Management

Installation Installation

Structured cabling and External Line Plant Provisioning (ELP) • Local Area Network • DDF\ODF • External Line Plant(Optical Fiber & Copper) | Capital Finance International

• Residential Cabling • Voice • Video\CATV\CCTV • Internet IT\Telecoms Facility Management and Maintenance • ELP management • Datacenter Management • Datacom Equipment Sales and Installation • Servers • Routers • Switches • Racks etc.

Summer 2013 Issue

• Determine the capacity of the existing network (if any). • Calculates transmission requirements. • Coordinating local authorities and other utilities. • Compliance with safety regulation and practices. • Preparing and sending a Request for Quote (RFQ) and evaluating responses. • External Line Planning • Performs a needs assessment • Determine the capacity of the existing network (if any). • Calculates transmission requirements. • Coordinating local authorities and other utilities. • Compliance with safety regulation and practices. • Preparing and sending a Request for Quote (RFQ) and evaluating responses. • Radio Frequency Data Collection and Optimization (2G & 3G) • Drive Test • Network Optimization GRAT Network Digital Solutions Limited is a 21st century company, with a passion to transform the telecoms and oil and gas sector in West Africa. Currently, GRAT holds a strategic business relationship with Future Fiber Technology (FFT) of Australia and FTP of South Africa to provide telecoms fiber optic security in West Africa the first of its kind in West and Central Africa. FFT is the global leader of fiber optic security with footprints in five continents and projects in over 14 countries including military/defense contracts. FFT’s project listings include: • 40+ Military Air Bases in USA, Asia & Australia • 25+ Pipeline Applications in Europe, Asia & Australia • 48+High Security Government sites in USA, Europe, Australia, Japan, China • 26+Telecomms network installations in Australia & USA • 22+ Major Oil Refineries in Europe and USA • 50+ Industrial installations worldwide

“GRAT Network Digital Solutions Limited is a 21st century company, with a passion to transform the telecoms and oil and gas sector in West Africa.”

• Telecoms Products, Test Equipment and Tools • Fiber Optics cables, closures patch panels, etc. • Distribution Frames, IDC blocks etc. • Fiber Optics tools and Test equipment • LAN test equipment and Tools IT Consultancy & Project Management • Network Design and Planning • Project Monitoring • Quality Control and Assessment External Line Planning • Performs a needs assessment | Capital Finance International

GRAT is currently seeking a strategic partnership with major institutions in Nigeria for Telecoms Training on a wide scale. Commitment to excellence is not just a statement; it is the way of life at GRAT Network Digital Solutions. It is a critical gene in our culture. It is how we continue to meet and exceed our clients’ expectations. Our passion for our clients’ success is why we come to work every day. Every new project or client is a challenge to better our previous bests. Delivering value to our clients drives everything we do. While we are mindful of achieving cost optimization for our clients, we never take our eyes off the ball in terms of quality. i


> LEX Africa:

Africa Powers On By Greg Knott

Africa’s energy landscape is rapidly changing. New gas and oil finds in countries outside the traditional resources foot print in North and West Africa have fuelled a flurry of activity among energy investors from Europe, China and India.


he latest headline grabbing news is that of America’s interest, President Obama’s $7 billion dollar pledge to upgrade power in Africa. Power Africa is the signature tune. The pledge, $7 billion dollars is significant and deserves attention. The pledge made in the mother city of Africa’s largest economy, Cape Town, South Africa, speaks to a distribution of funds to the African economies of Ethiopia, Tanzania, Uganda, Liberia, Kenya, Mocambique and Nigeria. Power is by far Africa largest infrastructure challenge with 30 countries facing regular power shortages and many paying high premiums for emergency power. The program will include $1.5 billion from the US Overseas Private Investment Corporation and 5.5 billion dollars from the Export–Import Bank. The Overseas Private Investment Corporation is key player in enhancing US investments in Africa. It supports investment in Africa through direct loans and loan guarantees, political risk insurance and private investment funds. It has supported over $2 billion in financing for Africa since 2009 and in 2012 committed $1.5 billion to financing new renewable energy projects in Africa. The US Export Bank plays an increasingly important role to Africa and for the last 2 years Ex-Im Bank has supported records amounts of exports in, exceeding $1.6 billion. Both entities have played a role in the funding of renewable projects in South Africa’s much lauded Renewable Programme which recently closed its second window of project closings; some 47 projects are now under way totalling 2450 mw. Round three of the programme is in progress and the procurement of gas, coal and hydro independent power producers will in the coming months grab further investment attention. The South Africa REIPP, hailed universally as a success, has managed to capture the imagination and excitement of the market. Administrative efficiency, a transparent and well run competitive, complex bidding process has gone hand in hand with high level political support. This has not been lost on investors, advisors and other players who have flocked to take part in the programme. 90

“And so while the message from the leader who made the phrase ‘we can do it’’ famous, a lot of hard work lies ahead for the continent.” The South African Department of Energy has drawn widespread praise for its capable handling of the process which has been immaculately executed with industry watchers noting the comprehensive bid specifications, inclusive consultation process and disciplined approach to deadlines, as well as the integrity of the process of selecting preferred bidders. President Obama struck a chord with the University audience as he did with African watchers. Access to energy is key. In eradicating energy poverty one combats the scourge of Africapoverty itself. As the President remarked “access to electricity is fundamental to opportunity in this stage. It’s the light that children study by the energy that allows an idea to be transformed into a real business-it’s the lifeline for families to meet the most basic needs and it’s the connection that s needed it plug Africa into the grid of the global economy.” The world’s iconic leader, Nelson Mandela, equated the fight against poverty as that against slavery and apartheid “Overcoming poverty is not a task of charity; it is an act of justice. Like Slavery and Apartheid, poverty is not natural. It is manmade and it can be overcome and eradicated by the actions of human beings. Sometimes it falls on a generation to be great. You can be that great generation. Let your greatness blossom.” He called on our generation and called for inspiration in the fight. The task is immense as Professor Eberhard of Cape Town University highlighted in a recent conference paper: “Power infrastructure is underdeveloped; electricity supply is often unreliable; power costs are high and access to electricity is low and unequal.” | Capital Finance International

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 And so while the message from the leader who made the phrase ‘we can do it’’ famous, a lot of hard work lies ahead for the continent. The scale of the challenge, Professor Eberhard, goes on to argue, implies that ideological debates around public versus private investment are irrelevant and meaningless; that all sources of finance have to be mobilised. This he goes onto say means an integrated approach of fixing public utilities; improving regulation and accelerating private sector participation which welcomes non –OECD sources of finance and projects. I couldn’t agree with the distinguished Professor’s statement more.

Summer 2013 Issue

Given the size of the challenge of Power in Africa the President’s initiative has it work cut out. Energy poverty is the single biggest obstacle to sustainable growth and development on the Continent. Africa has a population of 1 billion people, a number expected to double by 2050. The consumption of electricity per Capita is one of the lowest in the world as 70% of the population is not connected to a power grid. The situation in Sub-Saharan Africa is of particular concern as the region has the majority of the least developed countries in the world. Rapid and concerted action is needed. Given the situation, Power Africa must be welcomed as an initiative. It can however, be only part of the story. The legacy of Africa and its story lies in the hands of an active citizenry. It is they, who must ensure that investors from abroad, who want to take advantage of the global appetite for Africa and its primary energy sources, who must institutionalise the skills, the projects and the development for all of Africa. They must make it African in all its meaning. And to ensure this enduring Africa story of hope and sustainability Africa must drive and strive to innovate. As in ICT services, Africa countries must find inspiration to do things in new ways. The mobile telephone sector is a handsome example of what innovation can do in a particular sector and what it can mean for different Africa regions. One need only look at the power house Kenya has become in mobile phone services.

Interventions, inspired by innovative mind-sets, a desire to become a trendsetter are keys to unlocking the potential of Africa in the energy sector. Kenya, Ethiopia, South Africa and Morocco have made significant strides in setting trends. The renewable or clean energy sectors in these countries provide inspiration to other countries to surge ahead with next generation technology.

has seemingly changed. To keep winning at it, active citizens need to hold dear the good institutions that are created and above all, have that mind-set to innovate. It is time to make true that well used phrase of Pliny the Elder;“ex Africa semp er a liquid novi, out of Africa always something new”. i

The interventions in this sector can be both public and private, as the undertaking is just too big for a single player. It demands a collaborative effort- as sign of of intent and active work of Government and private forces. Aside from innovative technology, there must be a clear mind-set to change and innovate the market. Market reform needs to take place, there has to be continuity and planning and political commitment in policies and strategies. Any successful strategy must embrace independent power producers. Energy regulators, institutions and the like all supplement the build out of a sustainable sector. Investors look for a market that is certain, even though it may appear strange and at times, volatile. An investor needs to know the rules. The officials implementing the rules must be free from corrupt practices, competent, able and have the capacity to implement and apply them. The sector is so vital to the growth of the continent, that these characteristics of a regulatory regime are non-negotiable. Africa enjoys a change in landscape, arguably for the better. Africa promises to perform, the game | 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 91

> Meets the CEO of Cirrus Oil Services Limited:

Ivy Apea Owusu


Ivy has been working in the Energy Sector since 2002 working with GE Capital in the USA from 2002 through 2007 and in the UK from 2007 until August 2009 in Energy Financing. Prior to that, she was with the Consumer Banking Department at Ecobank Ghana from 1998 until 2001 working closely with the Head of Consumer Banking and Customer care. Ivy is a graduate of the University of Ghana, Legon (BA Admin) as well as Vanderbilt University in TN, USA (MBA). Ivy began her energy career in 2002 as an associate with GE Structured Finance Group and GE Energy Financial Services (GE EFS) focused on reserve based acquisition and monetization and quickly rose through the ranks to become Vice President in January 2007. During this period she garnered hands on experience in both Debt and Equity financing in the Oil & Gas, Power Generation, Renewable and Ancillary Energy Services Sectors. She was also involved in portfolio management, underwriting and loan syndication. In 2007, Ivy was appointed Risk Director and transferred to London, UK to set up and head an European Structured Finance desk for GE’s French Bank (GECFB). In this role, she worked closely with GE EFS and was responsible for deal structuring, document and contract negotiations, supervising deal teams in risks and mitigants analysis and presenting deals to credit committee for approval. She worked on over $1BN transactions covering Leverage Buyouts, Project Finance and Acquisition Finance. Her experience and wins include closing and syndicating the first GE Energy Financial Services UK Wind Farm Project Finance deal ($60MM) and the financing of 3 Spanish Solar projects (~$100MM) with WestLB and Santander Banks. She was also the portfolio manager and agent for the $100MM Katahdin Power Generation Portfolio which was owned by ArcLight Capital Partners. In 2008, she was handpicked and awarded by the Company CEO as an outstanding employee. She also received a best employee award in 2000 at Ecobank Ghana Limited. Ivy joined Cirrus Oil in 2009 as the company’s Risk Manager. She was promoted to the role of General Manager, Commerce a few weeks after joining the company and then appointed CEO in November 2010. In this role, she has spearheaded a wide range of health and education related community activities for Cirrus


CEO: Ivy Apea Owusu

including partnering with the Pediatric Oncology Center OF Korle Bu Teaching Hospital (KBTH) as well as constructing and furnishing a library for the Poasi and New Takoradi communities in the Western Region of Ghana. Ivy has held numerous speaking engagements; some of which include giving the key note address for the Canadian Chamber of Commerce Power Breakfast 2012, panel presenter during the 2013 TICAD V conference in Japan, speaker at the CWC Energy Conference in Ghana 2011, etc. Cirrus Oil Cirrus Oil Services Ltd. is a subsidiary of Woodfields Energy Resources which has been in operation since 1999. In 2007 Cirrus Oil Services Limited obtained its license to operate | Capital Finance International

as a bulk distributor of petroleum products and has since become a market leader in Ghana and the Sub Saharan Africa region. In a market with growing need for energy, energy services and related products, Cirrus Oil is uniquely positioned as the preferred partner in the trading and distribution of downstream petroleum products. As a regional distribution hub, the company has over 70,000 cubic meters of storage capacity in Tema and Takoradi equipped with state- of- the- art terminal and loading gantries for distribution of petroleum products to its customers including the mining, aviation, offshore exploration, oil marketing companies and production industries. Our product line includes Gasoil, Gasoline 91, Gasoline 95 (differentiated product), LPG, Aviation Fuel, etc.

Summer 2013 Issue

As part of its expansion projects, Cirrus Oil is constructing a new storage depot (Woodfields Storage Depot) with a capacity of 200,000 cubic meters and an LPG storage depot with an approximate storage capacity of 8,000 metric tonnes. Cirrus Oil is critically acclaimed in the region for adherence to quality and safety Vision: To be a leader in oil trading, storage and distribution in the West African sub-region and beyond. Mission: To serve our clients with the highest quality of petroleum products and services and invest in strategic assets to ensure efficient product delivery to our clients’. Clients: We aim to create sustainable and superior value in all our business relationships and transactions.

In Pictures: Library for the Poasi and New Takoradi communities.

For our people and our company: We aim to be an employer of choice through a firmly established culture of openness that fosters people development, professionalism, and sustainably contributes to long term individual and organizational goals. Our Strategic Objectives Cirrus Oil’s strategic objective is to invest in strategic infrastructure and facilities that ensure the most reliable and efficient supply of petroleum products, under optimum safety and environmental conditions. Our People and Management In Cirrus Oil, the people make the difference. The people are definitely the organization’s most priceless asset and our business is as good as the value of the people we bring on board, making staff training and development a key focus. The Cirrus success story is a pointer to a proven competent leadership team with industry expertise which enables the organization not only to make better investment choices but also to win the confidence of suppliers, local and multinational clients and maintain its top industry ranking in the Sub- Saharan Africa region.

In Pictures: Donation to KBTH.

Corporate Social Responsibility Cirrus Oil is promoting health through financial and non-financial resources. Financial Support: • Donation to the Global Fund towards HIV/ AIDS awareness and treatment • Donation to Korle Bu Teaching Hospital (KBTH) Pediatric Oncology Centre in support of rehabilitation • Donation to the surgical department of KBTH towards construction of an Out Patient Department for endoscopy and breast center units • Donation to a medical research project by Noguchi Memorial Institute for Medical Research on Schistosomiasis control in Ada Foah

In Pictures: Cirrus Oil Terminal.

• Support for Pamela Bridgewater Project on improving livelihood of kayayo (porter) girls in Ghana • Donation to radiology department of KBTH towards cancer walk & public awareness • Donation towards surgery for 2-year-old hole in heart patient Non FInancial Support: • Provision of 12m3 waste container within the | Capital Finance International

community for the collection of refuse. A major contributor to industrial pollution • Educating community market women on fire action in the event of a fire outbreak • Coaching sessions on the Oil and Gas Industry for students of tertiary institutions. • Job Creation for supervisory roles to ensure efficient waste management • Alliance with Ghana AIDS commission to sensitize the general public. i


> PwC, South Africa:

Renegotiated South African / Mauritius Tax Treaty – Mauritius Still a Stairway to (Tax) Heaven? By Francienne Miller and Hasinah Essop

Mauritius has for a long time been a popular intermediary holding location for both South African investors looking to expand abroad as well as foreign investors looking to enter the South African market. Following the recent renegotiation of the South African / Mauritius double taxation treaty, current and potential investors with structures involving Mauritius will have to be wary of the changes to the treaty. Brief background to renegotiated treaty South Africa signed a new tax treaty with Mauritius on 17 May 2013 to replace the current treaty which has been in force since 1998. This follows many months of negotiation between South Africa’s National Treasury and the Mauritian authorities, and has dramatically increased speculation on how the renegotiated treaty would impact investments both into and out of South Africa via a Mauritian holding company. The renegotiated treaty is expected to tighten the reins on South African multinational companies that use the current treaty. This does not come as a surprise considering the growing concern by tax authorities and standardsetting bodies about the aggressive tax planning by multinationals, and the special focus on “base erosion and profit shifting” in recent years. In February 2013, the Organisation for Economic Cooperation and Development (OECD) published a report entitled ‘Addressing Base Erosion and Profit Shifting’ (the BEPS report) which highlights, inter alia, the need to address socalled treaty shopping practices, and general misuse of tax treaties by corporates across the globe. The BEPS report notes that ‘…current international tax standards may not have kept pace with changes in global business practices, particular in the areas of intangibles and the development of the digital economy’. International tax rules and guidelines were originally developed at a time when entities were managed, goods manufactured and services rendered from a single location. Technological advancement and the increasing prevalence of electronic commerce in business have, however, made it possible for companies to be managed from various physical locations. As such, it is often difficult to ascertain where the valuable 94

“International tax rules and guidelines were originally developed at a time where entities were managed, goods manufactured and services rendered from a single location.” business activities of a particular multinational entity actually take place. One of the focus areas of the BEPS work conducted by the OECD therefore includes an investigation into whether tax treaties may be allocating taxable profits to jurisdictions where the valuable business activities do not necessarily occur. This follows the growing perception that governments across the world lose considerable corporate tax revenue as a result of the aggressive tax planning undertaken by corporates with the sole purpose of eroding the taxable base and/ or shifting profits to jurisdictions with more favourable tax regimes. Significant changes to the treaty The renegotiated treaty between South African and Mauritius is largely based on the OECD Model Tax Convention and contains significant changes from the current treaty. The new treaty has not yet been ratified by the two countries, and it will only come into effect on 1 January of the year after ratification. Dual Resident Entities The place of effective management tie-breaker for persons other than individuals is replaced with a mutual agreement procedure between the competent authorities. Accordingly, SARS and the Mauritian tax authorities must ‘endeavour’ to reach ‘mutual agreement’ on whether a dual resident company should be regarded | Capital Finance International

as resident in Mauritius or in South Africa. If agreement is not reached, the treaty will not apply to such persons (with the exception of the exchange of information provisions). This increases the importance of the South African Revenue Services’ (SARS) interpretation of the term “place of effective management”, which currently differs from the OECD interpretation and is focused more on middle-management than top management. SARS is considering aligning its interpretation of this term with the OECD’s. Even though this change would not be considered crucial if investors have ensured that sufficient management substance is maintained outside South Africa, the spectre of a mutual agreement procedure must be considered seriously. Property-rich companies The new treaty repeals the exemption from capital gains tax for the sale of shares in property rich companies. This is of particular relevance to foreign investors holding shares in South African companies via Mauritius, if the value of those shares is to a large extent determined by immoveable property situated in South Africa. Currently, where the foreign investor (e.g. Mauritius Co) disposed of such shares, the taxing rights on that sale are allocated to Mauritius, in which case no tax is suffered. According to the new treaty, South Africa will now have full taxing rights on capital gains derived from the sale of such shares. This results in Mauritius Co being subject to 18.67% tax in South Africa on the capital gain. Examples of directly impacted companies would be those investing in the mining, farming and commercial/residential property sectors. Withholding taxes Dividend flows remain subject to a 5% withholding tax rate on shareholdings of ten percent or more. There has been a reduction in the dividend

Summer 2013 Issue | Capital Finance International


withholding tax rate on shareholdings that are less than ten percent, where the rate has been reduced from 15% to 10%. Interest income was previously only taxable in the source country. This has been largely removed (only retained in the new tax treaty for interest paid or earned by a Government, or for interest on debt instruments listed on a stock exchange). A withholding tax rate of up to 10% now applies to interest.

about the authors Francienne Miller completed her undergraduate and Honours Degrees in Accountancy and has specialised in International Tax. She has been in the consulting environment for 5 years, advising multi-national clients on various tax related matters. She is currently a senior tax consultant in the International tax department of PwC South Africa.

Similarly with royalties, the general source country exemption has been withdrawn under the new treaty and a maximum withholding tax rate of 5% now applies to royalties. Tax sparing relief The tax sparing relief will, going forward, only be available for investment into South Africa by Mauritian residents. Tax sparing relief allows the resident to claim as a credit against its taxes the full foreign tax that would have been suffered in the foreign country, ignoring any reduction or waiver of taxes in order to promote economic development. Hence Mauritian residents can continue to apply this relief in claiming credits against their Mauritian tax liability for South African tax suffered; however, South African residents can now essentially only claim “actual� Mauritius tax suffered on the income. This change should therefore be noted by South African investors on their outbound investments into Mauritius. Conclusion Despite the changes to the treaty, Mauritius still remains a good option for foreign direct investment flows in and out of South Africa. Certain precautions would have to be taken, for instance ensuring that the Mauritian company is not effectively managed in South Africa under both South African and OECD standards. Foreign investors using Mauritius as an intermediary holding location for investment into South Africa will also have to be aware of the new exit charge that may apply (i.e. the taxation of shares in property-rich companies). South African investors, on the other hand, will have to bear in mind the removal of the tax sparing relief. On the whole, although the renegotiated treaty does not pose many entirely new challenges for investors, it will require more careful thought and input from tax advisors. i This publication is provided by PricewaterhouseCoopers Inc. for information only, and does not constitute the provision of professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all the pertinent facts relevant to your particular situation. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, copyright owner or publisher.

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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.

Summer 2013 Issue

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> Nigeria:

Investment Haven for the Savvy By Marina Securities

Nigeria – negating the odds It is no longer controversial that the growth poles for the world now tilt towards the emerging markets of Asia and Africa; in which Nigeria is an integral part. Notwithstanding the prevailing headwinds plaguing the global economy, the Nigerian economy continues to show resilience to the externalities. The prevailing macroeconomic stability - moderation in all measures of inflation within single digit targeted by monetary authority; stable banking system and exchange rate regime and robust external reserves have helped Nigeria’s trajectory growth.


Also, proactive capital flow management as well as sustenance of a predictable macro-economic environment through robust monetary and fiscal policies buffered its resilience against external shocks. On an aggregate basis, the country’s economy, when measured by the real Gross Domestic Product (GDP) grew by 6.56 percent in the first quarter of 2013 as against 6.34 percent in the corresponding quarter of 2012. Also, the current account was in a surplus of US$6.14 billion or 9.9 percent of GDP in the review period as | Capital Finance International

against US$4.93 billion or 7.3 percent of GDP in fourth quarter, 2012 and US$4.60 billion or 7.9 percent of GDP recorded in first quarter, 2012, respectively. Foreign Direct Investment (FDI) sustained upward trend, hovering around US$6 billion - US$8 billion per annum. Inflation has abated in recent times to single digit, thanks to tight monetary stance of the monetary authority. Nigeria’s National Bureau of Statistics (NBS) reported inflation ease to 9.0 percent yearon-year in May 2013 from 9.1 percent in the April same year, making five straight months of consecutive single digit rate.

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Infrastructure development – A must Having realized that infrastructural development is a key driver of economic growth and development, the Federal Government of Nigeria has decided to spend at least US$125 billion in the next five years cutting across major sectors to revamp and transform the country’s abysmally poor infrastructure. The International Monetary Fund (IMF) recommended structural reforms so as to enhance global competitiveness and productivity which include quick conclusion of power reforms to boost manufacturing capacity, passage of Petroleum Industry Bill (PIB) to boost investment for Multinationals in order to transform oil and gas sector and stern trade protection to encourage local and infant industries. In light of this, the federal and state governments are working together in areas of policy coordination in macro-economic management and integration, provision of public services and market connectivity to improve the economy as a whole as evident in several economic projects on-going in the country at the moment. Opportunities sway In Nigeria, the telecom industry’s percentage contribution to GDP is 8.53 percent as at March 2013 which represents growth of 21 percent from last year. As such, the telecom industry is a vibrant and profitable industry to invest in; especially considering, that since the industries’ birth in 2001, subscription has gone from 866,782 to 119.3 million subscribers in 2013 and the population of Nigeria which is estimated at 170 million is expected to keep growing. Fixed wired/wireless and Code Division Multiple Access (CDMA) remains underdeveloped, accounting for only 0.12 percent and 2.20 percent of subscriber base respectively. The Nigerian Government is presently enacting policy to support telecom by making their assets Critical National Infrastructure (CNI).

“Notwithstanding the prevailing headwinds plaguing the global economy, the Nigerian economy continues to show resilience to the externalities.”

Despite the reduction in US demand for crude oil from Nigeria due to US share oil reserves, the oil and gas sector of the country is still promising for investors since world oil demand is expected to increase by 0.8 million barrels per day (mb/d) in 2013 and 1.0mb/d in 2014. With Nigeria’s oil reserves of 37.2 billion barrels, the industry is not at capacity with production which is still at 2.29mb/d. Additionally, the middle and downstream oil industries are primed for investment since the present refineries only do 445 kilo barrels per day which is less than domestic consumption. Furthermore, natural gas reserve of 182Tcf and production of 1Tcf shows that the industry remains largely untapped. Nigeria’s housing deficit is currently estimated to be between 16 and 17 million housing units and with Nigeria’s potential for continuous growth in its population, opportunities abound for investments in the real estate sector of the economy. The Federal and State Governments of Nigeria have undertaken various construction projects including construction of roads, | Capital Finance International

bridges and rail network in order to facilitate economic activities. The dominant input of most construction activities is cement and domestic production capacity has risen from 2 million tons in 2002 to 28.6 million tonnes in 2013 which is higher than total consumption thereby proffering option for exportation. We expect the construction sector to remain attractive to investors considering huge potential which the sector offers. Agriculture plays a critical role in the mainstay of the Nigerian economy, contributing about 45 percent to the Gross Domestic Product (GDP). Nigeria is the world’s largest producer of cassava, yam and cowpea and with its competitive advantage in producing cash crops like cocoa, rubber, oil palm and groundnuts pyramid as far back as 1960, government is taking concerted efforts to build capacity and boost productivity. Part of the initiatives taken by the Nigerian Government are the setting up of Commercial Agriculture Credit Guarantee Scheme (CACS), registration of 10 million farmers for mobile fertilizers, credit line of 60 billion naira (US$375 million) to agro-dealers at 9 percent across the country, approval of 15 billion naira (US$93.75 million) to capitalize the Bank of Agriculture at less than 10 percent rate to farmers. A pledge of US$1.9billion to farmers in Nigeria by World Bank and African Development Bank will go a very long way in developing the sector. Investment opportunities remain in the Nigerian maritime sector especially in its container terminals subsector as the current ports infrastructure struggles to keep up with demand. In June 2012 the country’s ports handled 73,865Twenty-Foot Equivalent Units (TEUs), up 24.6 percent on the 59,265 TEUs handled in June 2011. The burgeoning middle class with a corresponding increase in consumer demand and private consumption, a key driver of increased container traffic, call for rapid expansion of container terminals. Investing in construction of new terminals is a welcome development for it should help the country cope with ever-growing demands placed upon it by its rapidly expanding economy and population growth. While a number of terminals are being developed in the country with an eye to capture transshipment trade, expected demand for containers in Nigeria should be sufficient to support new terminals. As Nigeria continues to grow its aviation sector, the focus of the industry has shifted from the day-to-day commercial operations to business aviation. In recent times, the growth in the industry has attracted major players from the Middle-East (Etihad Airways and Royal Jordan). To attain the status of emerging hub of international travel, the Federal Government of Nigeria signed a US$500 million loan agreement with the Chinese Government for the construction of four new international airport terminals in its major cities, Abuja, Lagos, Port Harcourt and Kano. Taking position at the take-


Figure 1: Comparative returns on major African exchanges. Source: Bloomberg.

off stage will mean well for investors as high return on investment in the sector is anticipated in the medium term to long term. The Nigerian financial sector has been largely transformed, after the Central Bank of Nigeria (CBN) intervention, and subsequent reforms has reshaped the industry and increased its global competitiveness according to rating firm – Standard and Poor (S&P). After the global turmoil experienced in 2008, Nigeria’s financial industry went through a series of overhaul which includes significant clean-up of balance sheet by Nigerian banks through the establishment of a bad debt bank, Asset Management Corporation of Nigeria (AMCON), mergers and acquisition in banking and insurance sector, sound risk management and corporate governance culture to improve operating efficiency and good profit line. Ongoing reforms to open up the financial sector also include the cashless policy being pursued by the Central Bank of Nigeria which encourages use of mobile banking and financial inclusion will certainly enhance robust economic growth in Nigeria. Equity investors go bullish Nigerian equities have demonstrated strong growth potential in 2013 with returns that rank among the highest in Africa. At 28.8 percent return at the end of first half of the year, the benchmark index of the Nigerian Stock Exchange, All Share Index, is eclipsed by only three African exchanges, namely the Ghana Stock Exchange with returns of over 46 percent and the Zimbabwe Stock Exchange and Uganda Securities Exchange with 38 percent and 29 percent returns respectively in leading performance indices. Buoyed by improved year-end earnings for 2012 and renewed zeal in holding equity investments as opposed to alternative asset classes, Nigerian stocks hit record highs during the year with Nestle Nigeria Plc, a food products manufacturer and the highest priced stock quoted on the Nigerian exchange, soaring above 1,000 naira per share (US$6.25) for the first time since its listing on the Exchange back in April 1979. Several other blue chip rated stocks have advanced significantly over the course of the year including Dangote Cement Plc, a cement producer owned 100

by Africa’s business mogul billionaire, Alhaji Aliko Dangote, which has advanced 42.1 percent after Public Investment Corp, a South African pension fund manager, bought 1.5 percent stake in the cement company in June this year. By turnover, the Nigerian market averages US$138.5 million weekly based on 2013 data only and this stands high above several other African markets which average less than US$10 million. Only the Johannesburg Stock Exchange outshines the Nigerian bourse with US$3, 518 million average weekly value. The average dividend yield on the Nigerian exchange, though lower than average yield on

“Nigerian equities have demonstrated strong growth potential in 2013 with returns that rank among the highest in Africa.” the Nairobi Securities Exchange which has 5.28 percent yield as at 2012, stands at 4.83 percent, higher than the Zimbabwe Stock Exchange and Johannesburg Stock Exchange with yield 1.61 percent and 3.19 percent respectively. The Nigerian stock market has recovered more than 90 percent of its value prior to the market crash of 2008 where total market capitalization peaked at 12.640 trillion naira (US$79 million). With current total market capitalization of 11.426 trillion naira (US$71.4 million), the Nigerian market is one of the largest in Africa, obscured only by the South African market with total capitalization of US$903 billion. Its potential however remains apparent considering that equity and debt instruments account for over 99 percent of total market capitalization (equities constitute 72.4 percent) thereby providing opportunity for growth through listing of alternative securities such as derivatives. Nigerian bonds – the new toast of global bond indices Federal Government of Nigeria Bonds (FGN Bonds) was included in the JP Morgan Government Bond Index – Emerging Markets late in 2012, based on independent assessment | Capital Finance International

by the globally recognized investment firm, JP Morgan. Until now, South Africa bonds were the only African Government bonds included in the index alongside other emerging market bonds from countries including Russia, Malaysia and Brazil, amongst others. As a result, yields on FGN Bonds strengthened from 2012 high of 16.99 percent to between 10.70 percent and 13.50 percent in 2013. The 5-year FGN Bond closed the half year at 12.25 percent and the 20-year FGN Bond closed at 13.50 percent. The inclusion of Nigeria’s debt instruments in international indices seeks to boost foreign interest in the Nigerian economy through foreign direct investments (FDIs) and should reduce dependence on domestic investors with a view to ensuring larger resources that emanate from foreign investors. In fact, the Nigerian Government aims to reduce its domestic debts in the second half of 2013 by issuing more international debt instruments which might spur demand for domestic debt instruments. The continued interest in Nigerian sovereign bonds by foreign investors saw the inclusion of Federal Government of Nigeria bonds (FGN Bonds) in the Barclays Bank bond index for emerging markets in April 2013. The bonds will constitute 0.97 percent of Barclays’ bond index. With monetary authorities maintaining benchmark interest rates at 12 percent following declining inflation rate to within single-digit, Nigerian treasury yields have reversed, albeit slightly in 2013. The 230 day and 91 day Treasury bill were sold at 13.30 percent and 11.62 percent respectively at the end of June. MARS ResearchTM foresees more upsides in the Nigerian fixed income market considering foreign participation in this market. Positive outlook lingers MARS ResearchTM expects that Nigeria should continue to witness increasing inflows of Foreign Direct Investment (FDI) on the heel of high return on investment and favourable platform for sustainable growth. Recently, the Federal Government launched Investment Support Scheme which stipulated that ‘Pioneer’ status companies (generally labour-intensive industries viewed as essential to economic development) receive five-year complete tax holidays (more if they are sited in poor regions); 30 percent tax concessions also exist for industries using 60-80 percent local raw materials, while 15 percent concessions exist for using labour-intensive production techniques. There are other incentives for the natural gas sector, as well as investments in agriculture, mining and export sectors. MARS ResearchTM expects half year financial results of quoted companies on the Nigerian Stock Exchange to reflect boom and trough. While the H2, 2013 results should have attendant impact on equity fundamentals, we expect investors’ sentiments as well as outflow of funds, which surfaced in mid-June to have a rub-off effect in the third quarter. i

MARS ResearchTM is the research department of Marina Securities.

Summer 2013 Issue

> Meets the CEO of Marina Securities:

`Jibola Odedina Overview of Marina Securities Limited With the vision of being Africa’s leading securities trading and financial advisory company, Marina Securities Limited (“Marina Securities or “parent company”) was incorporated in 1992 as Intermediate Capital Group Limited to carry on the business of Stockbroking as a wholly owned subsidiary of Marina International Bank Limited. The Company commenced full business operations in July 1999, having been registered and licensed by the Securities and Exchange Commission (“SEC”) and the Nigerian Stock Exchange as Broker/Dealer and Investment Adviser. Further to the successful merger of Access Bank Plc, Capital Bank and Marina International Bank Limited in October 2005, Access Bank assumed 100 percent of the equity shares of Marina Securities Limited and immediately thereafter appointed a new management team to undertake the task of effecting a seamless transition of ownership and management and develop a business transformation agenda for the Company. In line with the Central Bank of Nigeria (CBN) directive to banks to divest from non-banking subsidiaries, Access Bank Plc has fully divested its interest in the Company, and today, Marina Securities having been registered by SEC as Issuing House, is an independent Investment and Financial Advisory Services Company. In August 2011, Marina Securities Stockbroking Services Limited was incorporated as a wholly owned subsidiary of Marina Securities Limited, to carry on the Broker/Dealer business of the parent Company. CEO’s Profile The new management team appointed in October 2005, was led by Mr. ‘Jibola Odedina, who brought to bear over 22 years of cognate experience in principal investments, securities trading, portfolio management, and property development. ‘Jibola assembled a team of finance and investment professionals charged with the responsibility of transforming the company from a purely stockbroking firm to a full-fledged investment and financial services company. He oversaw the seamless transition of the new ownership and management of the company and completed the process of business re-engineering to evolve Marina Securities as a leading force; pushing the boundaries of service delivery,

CEO: `Jibola Odedina

technological innovation, business processes and market expertise. ‘Jibola Odedina holds a Bachelors of Business Administration (BBA) degree in Finance (1984) and an honours degree in Economics (1987) both from The University of Texas at Arlington, Texas, USA. ‘Jibola started his professional career as a Callover Clerk at the Nigerian Stock Exchange in December 1987 and also worked in the Quotations and Listing department. From there, he joined AVC Funds Limited (an affiliated investment company of the former Allstates Trust Bank Limited) in January 1989 as an Investment Analyst and rose to head the Treasury and Funds Management operations of the company. In August 1994, he was appointed Executive Director of Ouddy Nominees Limited, a private Investments and Financial Services company, and set out to establish the commercial | Capital Finance International

operations of the company. His sojourn at Ouddy Nominees Limited also saw him oversee the principal investments of the company in manufacturing and real estate development between 1999 and 2005. ‘Jibola qualified as an Authorized Dealing Clerk of the Nigerian Stock Exchange in December 1995 and has served as member of the National Committees of Securities and Exchange Commission, and The Nigerian Stock Exchange, on review of Registrar Operations, IT infrastructure and Trading Platform. He also served as Secretary to the Association of Stockbroking Houses of Nigeria (ASHON) Capacity Building and Rapid Skill Enhancement Sub-Committee. He currently sits on the board of directors of NASD Plc, Marina Securities Limited, and Marina Securities Stockbroking Services Limited. i



Egypt and Energy – Can the DESERTEC Concept Help? By Hani El Nokraschy

Egypt is suffering at the moment from a gigantic energy crisis, on both electricity and fuel. Although one of the richest countries in natural energy resources, these are tapped only marginally. History In this chapter a historical event related to energy will be briefed, not the history of Egypt.

First parabolic trough, Maadi 1912: 1912 the American inventor Frank Shuman [1] came to Egypt and started construction of the first solar engine powered by concentrating direct sunrays. In a tube at the focus of a parabolic mirror shaped like a trough, that

In the 1960s the Aswan High Dam was built several kilometres south of the existing dam having a storage capacity of 120 Billion m³ and an integrated hydro-electric power station of total capacity 2100 MW. However, though exceeding Egypt’s electricity demand at that time; it could not cover the demand at all times. In winter, water flow in the Nile is reduced for about two months to enable irrigation canals to be cleaned from sediments. At that time the electricity production did not cover the demand, so several thermal power stations were built, mainly operating for two months. This situation, which is obviously not economic, changed with time as the demand increased to reach in 2012 over 25 GW, thus the contribution of hydro-power decreased to less than 10% of the total portfolio. The thermal power stations were powered by oil mainly from local oil fields.

was tracking the sun, water was evaporated. The generated steam was used to drive an engine that operated a pump to irrigate cotton fields in Maadi, now a suburb of Cairo. It was successfully put in operation 1913, exactly100 years ago. That is why the Energy research Center at the Faculty of Engineering of Cairo University is planning to celebrate this centennial on 25th Sept. 2013.

1914 World War I changed many views on economy and energy, especially after oil was discovered in the Middle East. In a couple of years after the beginning of the war the solar engine was dismantled and disappeared. Development of electricity in Egypt 1893 electricity started in Egypt with decentralised diesel generators, as in many places in the world. As demand increased, larger units using steam turbines and fired with oil. Gradually these were connected to a unified grid. 1899 to 1902 the first dam across the Nile, about 9 km south of the city Aswan was built, its height was raised twice, last in 1933 to give a total storage capacity of 5 billion m³ (less than 10% of the yearly Nile water entering Egypt). Later a hydro-electric power station was added having a capacity of 550 MW. 102

These oil fields peaked in 1996 at 922 thousand Barrels/day[2], while local consumption of that year reached 501 thousand Barrels/day[3]. The fact that production peaked was ignored by the government and was not seen as a chance to try reducing local consumption. This continued to increase (mainly encouraged by subsidy of oil products that started 1992) till it reached 625 thousand Barrels/day[4] in 2005, which was equal at that time to the yield of the oil fields. Since then Egypt is a net importer of oil. In the 1960s gas fields were discovered in Egypt. Their production increased gradually and was used to cover the local consumption. Around the 1990s the ministry of electricity and Energy (MoEE) - which is responsible for nearly all electricity production in Egypt – started to replace oil burners with gas burners in the thermal power stations (mainly operating steam turbines), thus reducing dependency on oil and contributing to reduction of Carbon dioxide (CO2). The availability of natural gas gave the opportunity to choose Combined Cycle (CC) power stations when building new capacity[5]. | Capital Finance International

CC has a higher thermal efficiency, thus giving more electricity for the same amount of gas burnt and has another decisive advantage, which is the reduction of water evaporated when cooling the condenser (about 1/3 of a steam cycle of same capacity). Burning natural gas from own production was very convenient for the MoEE as gas is cheaper than oil (for the same amount of heat stored) and has a high subsidy granted from the ministry of oil and gas. The production of natural gas increased till it exceeded domestic demand, which was also increasing in 2004. Export contracts were established and two liquefying plants were built at the Mediterranean coast as well as a gas pipe line to Jordan, Syria and Israel to export gas. In 2009 the production probably peaked and as from 2009 delivery to power stations had to be reduced or cut, causing some shut downs of electricity especially during the peak times which occur in summer about one hour after sunset. Electricity shut downs increased in frequency and duration after the change of regime 25 Jan. 2011 in the summer of 2011 and 2012 as well as in spring/summer 2013. In the mean time newspapers reported about negotiations with the state of Qatar to buy gas, whereas Egypt offered a price of 8 $/MMBtu[6] and Qatar insisted on 13 $/MMBtu. This news recalled in my memory a discussion I had with former minister Dr. Hassan Younes, MoEE. I tried to explain to him the advantages of a CSP power plant, and justified the initial high capital expenses with free fuel for the life time of the power station, thus after pay back of the loan (25-30 years) the electricity production for the remaining life of the power station would be at the costs of personnel and maintenance only; moreover they will continue working even after Egyptian gas fields are depleted. He answered: If

Summer 2013 Issue

the gas fields in Egypt do not produce any more, I will buy gas from the market even if it is as expensive as 6 $/MMBtu. Actual crises in electricity supply Egypt, like other developing countries, shows a high annual increase on electricity demand. Driven by an annual population growth of 1.61.9% and an economic growth of 5-6% an increase in electricity consumption of roughly 8% should be expected, however, the extremely low consumer prices of electricity (caused by heavy subsidy) do not encourage the existing programs of efficient usage of electricity. Accordingly the peak load demand in summer 2012 increased 9.5% over the peak value of the previous year, reaching 25705 MW in summer 2012. Already in 2010 the increase of peak demand alarmed the MoEE. Urgent actions were taken to buy several gas turbine units of 150 MW each, which are - generally seen - beside hydro power from water falls, widely used over the world to cover the peak demand. However, due to a shortage of gas the turbines could not fill the gap. The programmes for efficient energy usage were intensified, but show little effect as long as the subsidies keep electricity prices so low. However, raising the prices is a difficult decision for policy makers, especially when the people suffer from increasing food costs. To relief the grid, the MoEE worked out a plan to cut the supply for two hours alternately in different districts and recommended to all entities that cannot afford such an intermittence to generate their own electricity by means of emergency generators. However, half a year later another crisis came up; it was the fuel which was not found in the Egyptian market. It was clear that a solution had to be found – beside energy conservation measures – to produce electricity without dependency on conventional fuels, especially carrying in mind the annual increase of demand of 8-10%. Only two solutions are possible: A) Massive usage of renewable energies and B) Nuclear energy, although it is not domestic and is also going to disappear from the planet. Future alternative (A), Renewable Energy A very good survey of available renewable energies in Egypt is found in the Study of the German AeroSpace Center DLR called MEDCSP[7]. The economic potential of Concentrating Solar Power (CSP) is over 100 times the expected needs in 2050, followed by wind energy, whereas biomass is limited to agricultural and municipal wastes that have no other commercial value than burning them, due to limited farm land and limited water resources, so that fuel plants have to leave the fields for food crops. Where solar energy is abundant, also Photovoltaic (PV) can be used. In fact it proved effective for remote – off grid - areas like some small villages in the desert or for powering cell phone relay

under the assumption that they feed in a stable grid and neglecting the costs for grid stabilization and compensation when they do not deliver. In fact, integrating them in large quantities – even together – will destabilise the grid. A balancing power is essential. This balancing power is present now by the fuel fired power stations and in future the CSP power stations shall take over this role. As CSP did not experience mass production like wind and PV in the last decades, it did not reduce in cost as much as the two former ones. However, since CSP is necessary to stabilize the grid, we try some thoughts to find out a way to reduce the costs: A large market that enables delivery security for locally produced components will allow mass production, which is the best and quickest instrument to push costs down.

stations, in both cases battery backed to provide electricity 24 hours a day. However, considering the pattern of electricity demand over 24 hours for the Egyptian grid, the peak demand is found one hour after sunset (sunset in summer 19:00 h normal time), which means that PV will fail supplying electricity at this critical time. Any PV grid connected application will act as a fuel saver (which is also an advantage), but relatively expensive compared to another available fuel saver which is wind energy.

“It was clear that a solution has to be found [...] to produce electricity without dependency on conventional fuels.” The pattern of 2001 is quit similar to that of 2012[8], with the difference that the peak is double so high, so that it can be assumed that the pattern remains unchanged - except regarding its magnitude - till 2050, where the peak may reach about 100 GW. Franz Trieb of DLR modelled several scenarios for 2050 assuming that the decision makers decided to feed renewable energies in the grid. Three choices were sketched to answer the question of effectiveness (cover the demand), if wind, PV or CSP supply the majority of the grid. Hydro power and bio-energy are always present with the potential available [10]. The three sketches show that CSP – which includes thermal storage and firing backup for less than 5% of operating time - is the correct choice; because it substitutes adequately the fuel fired power stations. Wind and PV may look better in terms of costs | Capital Finance International

Taking in consideration the average growth of electricity demand in the past years, the Egyptian market will need 25-30 GW of new installed capacity till 2022; consisting of new power stations and replacement of out phased capacity. Continuing the present MoEE trend in strategy to build huge power stations of 1.5 to 2 GW each will not lead to a mass production; and the units installed will be oriented no the market availability which is gas driven combined cycle power stations. On the other hand the present availability of CSP power stations with thermal storage of 8 to 16 hours is limited to 20 or 50 MW. Concentrating on only two sizes 20 and 50 MW with standardized specifications especially for the turbine exhaust temperature to be 80-90°C so that air cooled condensers can be used when it is in the desert and a MED[11] desalination unit as substitute to the condenser when it is near to the coast, will create a market potential of 800 to 1000 units till 2022. This will be sufficient to attract investors starting fabrication in Egypt and mass production of components will drive the costs down. The ability to produce at reduced costs relative to other markets will enable producing more small power stations of the same standard design to have additional capacity for export to other markets like Europe, which will be suffering from increasingly fluctuating supply from wind and PV, keeping their coal and gas power stations always ready for balancing these fluctuations. Supplying the European grid with reliable, affordable and balancing power to reduce dependency on fossil fired power stations is one of the strategic goals of DESERTEC. This can be reached when the North African countries build sufficient potential to cover a substantial portion of their own demand and simultaneously supported by the European Union to build additional capacity for export to the EU.


Starting with the wind scenario, as wind electricity in Egypt can

The “PV” scenario shows less fuel savings than the “Wind”

In contrast to the former scenarios, if sufficient CSP power

be produced at relatively low costs.

scenario due to the typical bell shape of the PV electricity supply.

stations with thermal storage are connected to the grid, these will

The fluctuations of wind (here symbolically sketched) show

The investments for fossil fuel power stations are higher than in

be in charge of the required balance of fluctuations from other

clearly that nearly the complete capacity of fuel fired power

the scenario “Wind”.

renewable sources (Wind & PV) as well as from the load.

stations have to be kept as stand by.

Where the peak demand at noon, as it is in Saudi Arabia or the

Only in the peak hours, gas has to be used to cover this peak.

Wind will save about half of the fuel burnt but has little effect on

Gulf States, the advantage of PV would be significant.

Investments are low as the CSP power stations can cover the

invest-ments in fuel fired Power stations.

Future Alternative (B), Nuclear power The lobby for nuclear power stations (NUC) is arguing that its electricity production is cheaper than renewable energy. This comparison considers only erection costs, however even these are lower for several small – and thus bankable - CSP power stations with thermal storage of up to 16 hours full load. This in addition to back up firing for 1-2% of the year during sand storms will give a group of 50 CSP power stations - each 20 MW with air cooling - the same performance as a 1000 MW NUC, and in addition following advantages, even over conventionally fired large power stations: 1. They can follow the variation of load, because they deliver a “balance power” (NUC deliver a steady power day and night). 2. In contrast to fuel fired power stations, the evaporated water when cooling the condensers is eliminated. Usually Nile water is used which is very precious. The evaporated water is in the range of 1 to 3 m³/MWh of electricity produced. Actually over 250 Million m³ per year are lost for cooling the condensers of power stations in Egypt according to power production and installed power station technology in 2010/2011 3. Lower initial investment + decommissioning costs for same power as a NUC. 4. Investment costs of CSP get lower with time due to mass production. 5. No waste and no problems with

demand day and night; and deliver electricity „ON DEMAND“.

decommissioning after 40 years (assumed life of power station). All parts can be properly scrapped and reused. 6. No problems with delivery of nuclear fuel. Fuel are the sunrays which are for free. 7. Easier financing because banks will finance single small units and not a total of 1000 MW. 8. After fulfilling the loan contracts with the bank, 25 or 30 years; the electricity production will be very cheap, because only maintenance and personnel costs are required. 9. Needs more medium qualified personnel, which is favourable for Egypt to offer more jobs. 10. Will deliver electricity in 2-3 years, because they can be built simultaneously and the first one starts delivery of electricity when it is finished. So no need to wait till the entire complex is complete (5-6 years for fuel fired and 10 years for NUC). 11. It can cope with the increasing demand of 2000-3000 MW each year, when mass production is incorporated in the global planning. 12. Can be built any where, near oases or near new settlements in Sinai or in the south of the red sea. 13. When built in the desert instead of building on fertile land in the Delta or the Nile valley – as is done till now – no objections are to be expected from the population. This means public acceptance is ascertained. 14. Can easily be coupled with sea water desalination, when built near the sea shore

(10-20 km to keep the coast free for other investments like tourism or water sports). 15. Can be built along the main line south-north (transporting the electricity from the high dam to Cairo), thus reducing the transmission loads on the line. 16. Shorter transmission lines reduce transmission losses and maintenance costs 17. Solar electricity can be sold to EU at favourable prices. 18. When a power station is stopped for any reason, the gap in supply is not serious. 19. There is a much higher chance that local production of components can get established by the private sector, thus boosting ecomony. 20. Fossil fuel burning for electricity can be reduced. In 2010/2011 over 27 Million Tonnes of Oil equivalent were burnt to produce electricity [14].

About the Author Hani El Nokraschy Chairman of the Supervisory Board Coordinator for Egypt DESERTEC Foundation

[5] MoEE annual reports

Conclusion Egypt’s energy crisis can be solved by adopting a programme to install standardized CSP power stations equipped with thermal storage and back up firing to bridge sand storms and cloudy days, equipped with air cooling to save water or a desalination unit using waste heat as a substitute to the condenser. Thus the power stations can be placed nearly without restrictions in any free area. After July 4 it seems that the chance to realize a reasonable plan are better. i

[6] MMBtu = Million British Thermal Unit, used beside Cubic Foot and m³ as purchase unit. [7] Downloadable over a link at [8] Annual reports Ministry of Electricity and Energy, latest 2011/2012 [9] German AeroSpace Center, Stuttgart, presentation at the conference MENAREC 3 in Cairo 2006



[10] Ref.: German AeroSpace Center, MED-CSP study

[1] Feb. 1914 he wrote in a letter to The Scientific American:

[11] Multi Effect Destillation

“…One thing I feel sure of, and that is that the human race must

[12] MoEE annual report 2010/2011 and own calculations

finally utilize direct sun power or revert to barbarism.”

[13] About 10 000 $/kW see:

[2] Index Mundi

uploads/2008/01/0708238.pdf from within:



[3] Same reference as [2]


[4] Same reference as [2]

[14] MoEE annual report 2010/2011 | Capital Finance International

Summer 2013 Issue

> Meets the Founder & CEO of Carbon X Energy:

Naeem Mawji


aeem grew up in Musoma, within the Mara region in North Eastern Tanzania. From an early age, he has been involved in the planning and execution of several self-help development projects initiated by farmers and their local government throughout the Mara region via his family business, Mawsons Constructions Ltd. Many of the projects involved the construction of earth dams, bridges and primary schools in some of the most remote areas of Mara, including Busegwe Primary School, Buswahili Earth Dam, Mkirira Earth Dam and Rwako Bridge.

the UBC Engineering Co-op Student of the Year 2011 and the William M. Gallacher Scholarship in Engineering. In April 2010, Naeem’s company, Carbon X won the Lighting Rural Tanzania Competition organized by the World Bank and the Rural Energy Agency. Using the funds from this award Naeem and his team were able to implement a working model of the community power concept in a village called Masurura in Northern Tanzania. Naeem built a Solar PV mini-grid that has been operational for over a year now and has proven itself as a viable model for rural electrification.

Before embarking on his university career, Naeem received the University of British However, the concept of community power is not Columbia’s prestigious International Leader without challenges. Naeem and his team face of Tomorrow (ILOT) award, a full scholarship many practical day-to-day challenges in terms of for his undergraduate degree. At UBC, Naeem electricity theft, revenue collection and operations pursued Chemical management, that Engineering with a limit their ability to “A community power model that allows scale and replicate the specialization in Clean villages to generate and consume their project in other regions Energy. As part of his program, Naeem led a within Tanzania. In own electricity locally.” group of six final year efforts to address engineering students in developing a biomass these challenges, Naeem and his brother Aleem power generation system that can power Mawji, are working towards developing a new small farming communities with electricity by technology that will allow community power burning excess agricultural residue. The project project developers like themselves to overcome involved engineering design, economic analysis some of these obstacles. This new technology is and continual engagement with the local host being developed through a company called Jamii communities. This project won Naeem and his Power (Swahili for ‘Community Power’) recently team the Shell Canada Award for Best Final Year founded by the two brothers. Engineering Design Project. The new technology, called JAPO, is a smart While at university, Naeem’s desire to contribute mini-grid prepaid metering and management to socio-economic betterment of Tanzania did system that automates the day-to-day operation not wane. Stemming from his experience as a and maintenance of a mini-grid through extensive certified electrical technician, Naeem initiated use of mobile services. Naeem and his brother the Kuwasha Project (Swahili for ‘to Ignite’), a hope to complete the development of this system collaboration between the Masurura Village, the within the next year. Once complete, the two Musoma District Council, and the UBC Centre brothers plan to use this technology to replicate for International Health. This initiative allowed their community power model to over 100 for a better understanding of the power needs of villages in the next five years through a collective Masurura and other regions within Tanzania and effort between Carbon X and Jamii Power. led to the creation of Carbon X Energy. As a strong believer in clean energy, Naeem is Naeem founded Carbon X together with two also pursuing a Master of Engineering in Clean other local partners AlHussein Dhanani and Energy Engineering at UBC to get a better Viraj Gadhvi with the vision of providing access understanding of the emerging alternative to conventional 230V AC electricity supply to technologies that can be implemented in isolated villages through the use of a Solar PV countries like Tanzania through his community mini-grid. A community power model that allows power (micro-utility) model. He wishes to develop villages to generate and consume their own a deeper understanding of not only the technical electricity locally. and economic aspect of these various sources of clean energy, but also the different government In recognition of his above achievements and policies that surround them in various countries high academic standing, Naeem was awarded globally. | Capital Finance International

Naeem receiving the Lighting Rural Tanzania Competition award.

However, in order to do this, Naeem realizes that Solar PV is not the only viable technology for offgrid applications in Africa. There is a need to develop a technology agnostic approach to rural electrification in terms of the power generation technologies. There is no one solution to power generation. Every village community has the ability to select the most appropriate technology based on its locally accessible resources to produce electricity. Some villages produce very high yields of dry agricultural residue that can be used to generate electricity from biomass gasification. Others may take advantage of small streams in the area and choose the option of micro hydro. Naeem’s wealth of experience in community engagement and new business development coupled with his comprehensive technical background provides him with the specific skill set necessary to lead his team forward. In addition, his proactive nature and unwavering work ethic alongside his strong leadership skills and wealth of relevant real-world experience gives Naeem and his team an innovative competitive edge. i 105

> Eko Support Services:

Alternative Logistics Solutions for the Oil and Gas Industry in Nigeria Eko Support Services is a wholly owned Nigerian Company created to develop an alternative logistics solution to the Oil and Gas Industry in Nigeria. We have been providing logistics support services to Exploration & Production clients and Oil service companies with activity in the Western Niger Delta and offshore Lagos.


he Facility is located at The Bull Nose within the Nigerian Ports Authority (NPA) Port in the Lagos Port Complex and from here we provide both Terminal and shore base services to clients. Eko Support currently has an initial 20-year concession agreement with NPA including the option of a further 20 years. We have full Port Status enabling us to receive and handle import/ export vessels and cargo directly.

The Terminal has dedicated customs officers in the base and can customs clear and release cargo directly. Our facility handles a variety of vessels, PSV’s, Installation vessels, Heavy Lift Vessels and anchor handling tugs amongst others. As well as provision of support to the International Oil Companies for their drilling campaigns we have also provided logistic support to various service companies.

Areas where we have provided shore base and logistics support services are: • Subsea Development operations • EPC contractors for the installation of Flowlines, Risers and umbilicals. • Fast Track delivery of Subsea Production Systems • The mobilization of ROV operations • Diving Support operations • Seismic Operations • Transit Base Services

“After a successful tender exercise and approval by the Federal Government of Nigeria, ESS has commenced the redevelopment of The Port Facilities.”

In Pictures: Phase 1 of Redeveloped Jetty.

106 | Capital Finance International

Summer 2013 Issue

In Pictures: Jetty under construction.

In Pictures: Eko Support Services.

In Pictures: Eko Support Services.

In Pictures: Aerial view of Bullnose before redevelopment commenced.

We also handle non-oil and gas project cargo vessels and have received cargo for power plants and other infrastructure projects. FACILITIES Eko Support Services Ltd area of operation is leased from Nigerian Ports Authority and being part of the Lagos Port Complex we offer full Port Services to the Oil and Gas Industry for the importation of project and commercial cargo. Eko base also offers transit & supply base facilities to support the upstream Oil and Gas Industry. DEVELOPMENT PLANS In order to offer a more complete range of services to our clients and better support drilling and development activities in offshore deep water, Eko Support Services Ltd made a request to the

Nigerian Ports Authority for the redevelopment of the entire bullnose facility.

for use and completion of this berth is scheduled for delivery in August 2013.

As a result competent qualified companies were selected to tender for the redevelopment of the bullnose. After a successful tender exercise and approval by the Federal Government of Nigeria, ESS has commenced the redevelopment of The Port Facilities at the Bullnose with the expected completion of the project being the last quarter of 2014.

The project main features of the reconstruction are: • Dredging and reclamation works. • Construction of suspended wharf on piles with mooring dolphins, fitting and shore line protection. • Increase of existing open storage area from 40,000 sqm to 70,000 sqm and the jetty to 400m with a 12m draft (low tide). • Construction of a water supply network to satisfy client’s requirements (including Fire Fighting Capability.

Our contractors are on schedule with the development of Phase 1 of the project that includes Construction of Deck on Pile (Combiwall - Bored Piles - Concrete Works- Precast Concrete Sheet Pies - Anchors). On completion of this Phase Eko Support shall have 150 M of new jetty at 12M draft available | Capital Finance International

Other investments would include: • A new Perimeter Fence • A new entry/exit gate, perimeter fence, CCTV and biometric access control. • Redevelopment of entire stacking area


• New Office building and expanded warehousing space. • New equipment up to 250 ton lifting capacity. By executing the project in phases, Eko Support can continue rendering limited services to our existing clients whilst increasing capacity with each delivered phase. This investment is a commitment of USD 150M dollars that will greatly increase our ability to support the upstream Oil and Gas Logistic sector. On completion, we would have 400M of new jetty at 12.5M, an ultra modern facility having the deepest draft in Lagos to better support deepwater projects. • Quay: 400M • Draft: 12m in Low water • S/area: 70,000 m2 • W/house: 1000 m2 • Offices: 750 m2 • Workshop: 1000 m2 • Water Treatment plant with 1000 CBM storage providing potable water at 60 tons per hour. The Available equipment is: • 2 x 400KV Generators • 1 x 100KV Generator • 1 x 180 ton Crane

1x 120-ton Crane • 1x 20-ton forklift • 1 x 15 ton forklift • 1 x 3 ton forklift • 3 x Mack Trucks with 40ft trailers • Heavy Lift Modules Services offered Ocean Going Vessel Berthing Operations Port Status enables the handling of Ocean Going Vessels directly Stevedoring Services Our stevedoring contractors work round the clock to ensure our vessels are discharged quickly and


efficiently Support Vessel Operations Handling of Service Boats operating in country 24-Hour Operations The Port is open 24 hours a day, 7 days a week throughout the year and our services are constantly provided. Cargo Handling We offer loading, offloading and transfer of cargo. Open and Covered Storage Developed stacking area and warehouse available for storage including dedicated area where required Road and Sea Transportation Both water and road access Crew Change Terminal Fully furnished crew lounge Equipment Rental Equipment available for hourly, daily and dedicated long-term rental Logistics Supervision Qualified staff will supervise operations Shore Base Services Provision of shore base services Provision of Industrial Water Industrial water delivered at the rate of 40 tons per hour Office Rental Rental of fully functional furnished office Warehouse Management Management of supply chain, inventory and warehouse. Logistics Solutions Preparing lift plans and total logistics solutions to clients. Eko Support Services has made an application to the Oil and Gas free zone authority for a free zone license and this has been recommended for approval with the completion of the redevelopment project The Oil and Gas free zone is considered a foreign territory enclosed in Nigeria. The Synergy among | Capital Finance International

Oil and Gas industry, the free zone authority and the local representative of the Federal Government created an efficient system with minimized bureaucracy. The free zone offers undoubted advantage and incentive to foreign companies to invest in Nigeria. FREE ZONE ADVANTAGES • 100% repatriation of capital investment. • Remittance of profit and dividends allowed. • No import or export license required. • 100% of FZ goods can be sold in Nigeria. • 100% foreign ownership of business allowed. • Duty-free stock (equipment, pipes, spare parts). • Non double handling of in and out or Nigeria. IMMIGRATION INCENTIVES • Fast-track immigration procedures and attendance. • Visa application under the STR. • Free-Zone expatriates shall reside within the zone. • Free movements in and out of the zone. • No capital gains tax. • Custom Incentives. No custom duty payable for: • Goods stored within the free zone. • Goods consumed within the free zone (including equipment and machinery). • Export of free zone goods to other country. • Free zone goods maybe transferred under custom escort from any port of entry in Nigeria to Onne free zone. • No quota or tax restriction for expatriate employee. • Tax Incentives. • No VAT. • No withholding or corporate tax. • No personal income tax payable for expatriate employees. i

Summer 2013 Issue


Making a Difference to Maternal Health and Child Care NEPAD’s support through training programmes has made a big difference to the quality of health standards in rural Africa.


n Kenya, Tanzania, Rwanda and the Democratic Republic of the Congo, approximately 70 nurses and midwives have been trained in a NEPAD supported Masters degree programme in midwifery, maternal care, child nursing and trauma in the last two years. In addition, around 100 nurses and midwives will have graduated this year in Mozambique. The staff trained has been deployed to rural areas to provide the much needed care to communities who have not had easy access to hospitals and clinics due to the remoteness of where they live. This training provides not only specialist practitioners, but also researchers, who train others. In Chad and Gabon at least 40 nurses and midwifes will graduate in 2015, while courses in psychiatric nursing, critical care and trauma are currently underway in Tanzania. Key partners behind the implementation of the programme are the Universities of KwaZulu Natal, Witwatersrand, Free State, Western Cape and Stellenbosch in South Africa. They provide the trainers and lecturers. NEPAD and Stellenbosch University will soon launch a new Masters programme in Cameroon for 25 nurses and midwifes in maternal and child care. This arrangement is through the Agency’s Project on Nursing and Midwifery Education in Africa,

“The training programme will include health workers in Cameroon to ensure that they are provided with the necessary competencies to address the alarmingly high maternal and mortality rates in Africa.” Professor Mzobz Mboya

which works to establish advanced training programmes in community health care. A Memorandum of Understanding between the University of Stellenbosch and a University in Cameroon to be selected by the Government of that Country will be signed next month to roll out the post-graduate programme for the 25 master’s degree students. The training will begin in January 2014. “The training programme will include health workers in Cameroon to ensure that they are provided with the necessary competencies to address the alarmingly high maternal and mortality rates in Africa,” said Professor Mzobz Mboya, NEPAD’s Advisor on Education and Training.

During the one-year course, lecturers from the University of Stellenbosch will share best research and practice in maternal and child health care and to advance the national health education agenda. The students who are already health practitioners will come from rural areas, where their impact is expected to be the greatest. Professor Mboya said the partnership was facilitated by NEPAD through consultations with the Ministry of Health in Cameroon. NEPAD’s role was to bring together all relevant stakeholders including civil society to jointly design and implement the post-graduate programme for nurses and midwifes. The next phase is to roll-out NEPAD Mobile Clinics, which will move around rural areas to provide health care services in the mostly remote parts of the continent whose residents do not get easy access to proper health care.. The clinics are expected to start operating at end of 2013 in Tanzania, Kenya, Rwanda, Democratic Republic of Congo and Mozambique. To ensure sustainability of the project, the NEPAD Agency will seek to mobilise 10 million dollars from partners over a period of ten years. So far, the Chinese Government has pledged US$1.5 million for the nurses and midwifery project in the Republic of Congo, Gabon and Cameroon. US$3.5 million is needed for a similar service in a number of countries in West Africa. 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. | Capital Finance International


> Ozma Nigeria Company Limited: Independent Engineering Inspection and Allied Services in Nigeria


zma Nigeria Co. Ltd. was founded in 1994 and operated as a sole Proprietorship. It was incorporated as a limited liability company in 1999 with the Corporate Affairs Commission.


Ozma (Nig.) Co. Ltd. is a professional member of: • Nigeria Institute of Welding (NIW) • Nigeria Institute of Safety Professionals (NISP) • American Society of Non-Destructive Testing (ASNT) | Capital Finance International

OZMA is a 100% indigenous ISO 9001:2008 certified company that utilizes the abundant local and international human resources to achieve the objective of truly satisfying clients. From its inception, Ozma has engaged exclusively in

Summer 2013 Issue

independent engineering inspection and allied services and has carried out major work in various engineering fields. Ozma services include: • Quality Control and Quality Assurance Services • Lifting equipment inspection, Boilers, Pressure vessels, Ship, Hull Measurement • Non-destructive Examination Services such as radiography (RT) • Ultrasonic Testing (UT) • Magnetic Particle Testing (MPI) • Dye Penetrant Testing (DPI) • Destructive testing examination services such as Hardness test, Bend test, Impact Test etc. • Post Weld Heat Treatment (PWHT) • Third Party Witnessing • Hydrostatic Testing • Project Management Inspection (PMI) • Condition Monitoring • Pigging, De-combustion and Cleaning • Manpower Support Services • Pre-commissioning, Commissioning, • Start-up & De-commissioning • Training/Manpower Development Ozma Nig. Co. Ltd. is one of the few ISO 9001 companies to focus strongly on human resource development through training programs in conjunction with both foreign and indigenous professionals. Since the inception of the company, Ozma has successfully organised training programmes in various fields including QAQC, NDT, Electrical. COMMUNITY DEVELOPMENT Since its founding, OZMA has trained more than one hundred persons of different ethnic and educational backgrounds to become competent QAQC and NDT professionals. Awards In recognition of its contribution to the economy, Ozma has received various awards of excellence including Niger Delta Symbol of Diligent and Efficient Service Delivery presented by the National Association of Niger Delta Student (NANDS). EQUIPMENT In addition to skilled and experienced operators, good equipment is necessary for efficient non-destructive testing. Ozma has sufficient experience in the selection of equipment most suitable for reliable and prompt on-site testing.

“From its inception, Ozma has engaged exclusively in independent engineering inspection and allied services and has carried out major work in various engineering fields.” | Capital Finance International

CAPITAL BASE FUNDING FOR SPECIFIC PROJECTS We have a sound financial base to enable us fund and execute our contracts. The company retains long term and reliable support from its bankers. Keystone bank, First Bank, Main Street bank as a result of prudent financial management policies. Such facility from our bankers includes but not limited to overdraft, loan and project sponsorship. i


> Solar Industry in the MENA Region:

Sunny Prospects


trend towards generating electricity from solar power is on the horizon for the countries of the MENA region (Middle East and North Africa); The regional market for photovoltaics (PV) and solar thermal power plants is expected to reach 3.5 GW by 2015. While Saudi Arabia and Turkey are tipped to be the largest investors in PV and solar thermal installations, Egypt and Morocco are also starting to think differently with a move away from fossil fuels and towards solar energy. The solar industry in the Middle East and North Africa (MENA) is geared up for growth: By 2015, the regional market for photovoltaics and solar thermal power plants is expected to grow to a total output of 3.5 gigawatts (GW). Saudi Arabia in particular is planning to move away from generating electricity using crude oil in favor of photovoltaics and solar thermal technologies. A study conducted by GTM Research, Boston, USA, puts this development down to high solar irradiation and rising electricity prices and requirements that arise from an increasing


population size. By 2017, the expansion of solar energy is expected to exceed a combined output of 10 GW in the MENA region. With a share of 70%, the majority is set to be implemented in Saudi Arabia and Turkey. Sunny prospects for solar energy in North Africa The sun also ranks among the most valuable resources in North African countries. Egypt benefitted from crude oil exports in the 1990s; however, current reductions in yields produced by oil fields and increasing energy subsidies are forcing the Egyptian government to take action. In the financial year 2012/2013, subsidies reportedly account for a quarter of the entire Egyptian state budget. As the largest energy resource in the country, the sun offers an ideal alternative to dwindling oil and gas. Every year, each square meter in Egypt receives more than 2,200 kilowatt hours of solar energy. The Egyptian Solar Energy Development Association (SEDA) in Cairo sees potential application areas for solar energy in the form of solar installations | Capital Finance International

for producing drinking water and intelligent lighting concepts for hotels. In addition to concentrating on tourism, statements from the Egyptian Ministry of Housing reveal that, over the next few years, standard measures will see public housing equipped with solar installations. In Morocco, solar plants with a combined output of 2 GW are set to be installed by 2020, which means that the share of renewable energy in the Moroccan power grid could reach a total of 42%. Alongside solar energy, wind energy and hydropower are also expected to form part of this share. Under the supervision of MASEN (Moroccan Agency for Solar Energy), the construction of a large, impressive project has already begun in the Moroccan province of Ouarzazate, which will be the world’s largest solar thermal power plant. A capacity of 160 megawatts (MW) will be installed in the initial expansion phase alone. Once completed, the power plant will reach an output of 500 MW. Indeed sunny prospects for the solar industry in MENA. i

Summer 2013 Issue

> Meets MD/CEO of GRAT Network Digital Solutions, Nigeria:

Badaru Adeoti Badaru is a computer science graduate of Babcock University (one of the first private universities in Nigeria). He worked for/with different telecoms and media companies in various capacities ranging from Head/Lead Engineer to Regional Manager before starting up with Grat Network Digital Solutions Limited, a company incorporated under the Corporate Affairs Commission of Nigeria.


e has played various roles in different spectra of the telecoms industry ranging from telecoms consultancy, project management, practical field work, business development and strategy. Badaru has also consulted for major telecommunication service providers and vendors amongst others.

In Pictures: Badaru Adeoti

Badaru is also a director at De Prestige Limited, a company established to run hotel management and services, real estate and mechanized farming. De Prestige has been in existence for three decades. A personal leadership consultancy for individuals who want to discover their purpose and ascend the ladder of success is another of Badaru’s successful ventures . He is an avid reader and a result oriented person who has been instrumental in growing Grat Network from its humble beginnings into a vibrant company as well as its first-to-market of mini innovative solutions for oil and gas security, driving the company’s rapid growth. Board member of several up and coming telecoms servicing companies, Badaru Adeoti has a great passion for telecoms and onshore/ offshore oil and gas security. i | Capital Finance International


> Rising to the Challenge:

A Quest in Creating the Future


igeria’s potential for greatness has never been in doubt given its immense human and capital resources. Its socioeconomic demands have grown rapidly to outstrip government’s capacity, leaving the country with challenges such as the absence of basic industry, poor industry competition, and high production costs. As Nigeria attempts to attain a brighter future, harness the immense capacity of its dominantly youthful population and avert real risks of economic stagnation and socio-political upheaval, the sheer scope of its needs and the resources required to develop its fortuitous endowments clearly creates an


immense opportunity which nevertheless comes against a debilitating hurdle. Where there is an urgent need to harness the untapped capital that resides in a dominantly informal economy by creating investment vehicles, intermediaries are faced with a paucity of instruments and platforms to channel resources to areas where they are most needed, symptomatic of a market failure that pervades Nigeria’s economic realities. There is little doubt that Nigeria’s underdeveloped market infrastructure creates a massive gap in efforts to help the country deliver on its potential. For instance, the agriculture and energy sectors, | Capital Finance International

which respectively accounted for 39% and 14% of gross domestic output in 2012, constitute less than 1% and 3% of equity market capitalisation-meaning that domestic operators in these segments will be hard pressed meeting their funding needs--while a fledgling bond market remains heavily dominated by federal government issues which account for 95% of outstanding bonds. Furthermore, actors in Nigeria’s huge grey economy (which accounts for an estimated 50% of economic output) have minimal interactions with those in the formal economy. Less than 25% of adults have a bank account, only about 0.5% of adults have brokerage accounts or formal

Summer 2013 Issue

We at ARM however see opportunities amidst the shortfall in the Nigerian economy. The critical piece in this rich tapestry of opportunity is creativity. Along with a consuming desire to facilitate the value creation in the widest possible sense for all its stakeholders, this challenge has shaped how ARM defines its mission and has driven its evolution as one of the largest non-bank financial services company in Nigeria in its nineteen years of existence. Based on our deep understanding of the Nigerian economy, ARM’s framework for mapping the company’s unique capabilities to risk-mitigated opportunities enables us to identify a broad spectrum of investment opportunities via its Specialised Funds and investment vehicles, which have often played a catalytic role in the emergence of key segments of Nigeria’s market economy. Therefore, whether in its role in the emergence of a formalised contributory pension scheme that is now the primary source of capital formation, or its mutual funds which hosts Nigeria’s largest retail investor base, ARM’s interactions with the Nigerian economy take on many critical facets. This has manifested, for instance, in the company pioneering an award winning toll road, the marquee PPP project which crafted the legal and operational framework for infrastructure financing and execution in Nigeria. It is also reflected in ARM activation of a portfolio of assets that has become the largest private real estate company, its pioneering Agriculture Fund and in its commitment to supporting the dreams of entrepreneurs via its partnership with Kinnevick which puts100 years of global, and 35 years of African investing expertise at their service in creating Nigeria’s leading incubator for uniquely positioned next generation businesses. With its consistent and well refined philosophy and methodical and disciplined investment process, ARM’s experience and achievements have proved beyond doubt that it is possible to serve the higher social purpose, to realise ambitions.

credit and despite its economic importance, lending to agriculture stands at a dismal 2% of total loans. These dire statistics have significant implications for macro-economic management; market development, economic growth and macro-economic stability are closely intertwined and stunted capital markets are both a cause and a symptom of dislocations in the broader economy. Thus, strengthening the links between markets and economy is critical to engendering the productivity needed to setting off a virtuous circle that bolsters economic revival, democratises wealth creation and engenders broad-based improvements in living standards. | Capital Finance International

ARM is a diversified, integrated, non-bank financial services provider with over nineteen years of asset management expertise. It started operations as a traditional asset management company specialising in the management of quoted equities and fixed income securities. However, over the years, the Firm has taken advantage of opportunities in various sectors of the Nigerian economy and has proven its ability to identify and develop new strategic businesses and integrate these to strengthen its asset management business model. This ability has resulted in the evolution of the Firm into a diversified financial services institution with businesses divided into two distinct parts within which various products and bespoke asset management services are offered to diverse clients, focusing on Traditional Asset Management and Specialised Funds. i 115

> International Monetary Fund (IMF):

Middle East and North Africa – Defining the Road Ahead Two years after the “Arab Spring” commenced, many countries of the Middle East and North Africa (MENAP - Middle East, North Africa, Afghanistan, and Pakistan) region are still undergoing complex political, social, and economic transitions. Economic performance was mixed in 2012: although most of the region’s oil-exporting countries grew at healthy rates, economic growth remained sluggish in the oil importers. In 2013, these differences are expected to narrow because of a scaling-back of hydrocarbon production among oil exporters and a mild economic recovery among oil importers. Many countries face the immediate challenge of re-establishing or maintaining macroeconomic stability amid political uncertainty and social unrest, but the region must not lose sight of the mediumterm challenge of diversifying its economies, creating jobs, and generating more inclusive growth. Narrowing Differences in a Two-Speed Region Modest growth is anticipated across the region. Last year’s subdued growth in MENAP oil importers is expected to improve only somewhat in 2013, and will not be sufficient to begin making sizable inroads into the region’s large unemployment problem. MENAP oil exporters’ healthy growth rates are projected to moderate this year, as oil producers are expected to scale back increases in production amid modest global oil demand; however, continued strong public spending is expected to support non-oil growth at comfortable levels in many of these countries. A challenging external environment continues to exert pressure on international reserves in many oilimporting countries. Sluggish economic activity in trading partners, particularly in the euro area, is holding back a quicker recovery of exports, while elevated commodity prices continue to weigh on external balances in countries that depend on food and energy imports. Tourist arrivals are gradually rebounding, but remain well below pre-2011 levels. Foreign direct investment and remittance flows are expected to remain subdued, while portfolio flows will remain lower than in other emerging markets and developing countries. Growing regional economic and social spillovers from the conflict in Syria add to the complexity of the economic environment. 116

“A challenging external environment continues to exert pressure on international reserves in many oilimporting countries.” Oil-exporting countries, mainly in the Gulf Cooperation Council (GCC), generally face a more benign outlook. However, if the global outlook worsens, oil exporters would also face serious pressures. A prolonged decline in oil prices, rooted in persistently low global economic activity, could run down reserve buffers and result in fiscal deficits. Resolute policy action, across the region, will be needed this year. In many MENAP oil importers, greater fiscal consolidation and exchange rate flexibility will be necessary to preserve macroeconomic stability, instill confidence, improve competitiveness, and mobilize external financing. For MENAP oil exporters, further strengthening of fiscal and external positions | Capital Finance International

will be important to reduce their vulnerability to a potential material oil price decline. For both groups of countries, it will be important to undertake these efforts in a socially balanced manner, supported by adequate measures to protect the poor and vulnerable. Arab Countries in Transition: Defining Paths to Success In the Arab countries in transition (Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen), economic developments will depend on confidence, which remains susceptible to political and social developments. The political transitions are complex: many of the countries have yet to adopt new constitutions and elect governments with terms exceeding a year. High unemployment and a rising cost of living exacerbate social tensions among populations impatient for a transition dividend. Confidence could rapidly deteriorate with setbacks in political transitions and worsening domestic security. Over the past two years, policymakers in these countries responded to social pressures by raising wages and employment in the public sector. These measures, together with increased food and energy subsidies, resulted in higher fiscal deficits and public debt. In many cases, exchange rate stability helped contain inflation but sped up the erosion of foreign exchange reserves.

MENAP Oil-Importing Countries: Recent Economic Developments and Outlook Summer 2013 Issue Political uncertainty, social unrest, and external recovery...

Despite the complex politicalon situations facing challenges weighed economic the Arab countries in transition, decisive policy action GDP, will be crucial, given diminished fiscal and Real annual percent change foreign exchange buffers. Recent subsidy reforms 12 in some countries, paired with measures to implement more targeted social protection, have 10 begun to reduce fiscal and international reserve 2011 2012 pressures. However, more fiscal consolidation, as 8 well as exchange rate flexibility, will be needed to bolster confidence, competitiveness, and growth.


Looking ahead, countries should increasingly 4 tap into their vast potential for higher and more inclusive growth. The transition to dynamic 2 economies that create more jobs urgently requires policymakers to design and implement a bold 0 agenda of structural reforms that benefits from -4.4 broad public support. Each country will define its -2 own unique path, but all paths should converge AFG MRTprivate-sector DJI PAK TUN MAR JOR EGY LBN SDN on accelerated growth and international trade, through structural reforms Weakened revenues subsidies and that deepen trade integration,and lowerhigher the cost of doing wagebusiness, bills...foster hiring by private firms, develop high-quality human capital, and expand access to finance. Movingand ahead with defining in percent GDP, Change in revenue expenditure, national agendas and swiftly implementing some 2010‒12 quick winsOther will expenditures also give hope to increasingly 15 impatient Capital populations. expenditures

...with persistently high unemployment. Unemployment rate, percent 20 18 2011 2012 16 14 12 10 8 6 4 2 0 TUN EGY JOR SDN


...have raised government deficits and debt. Public debt vs. fiscal deficit, in percent GDP 160 140


Public debt, 2012

Subsidies and transfers Wages The Other Official Support: Channeling 9 IMF and Total expenditures Positive Change Totalthe revenues 6 Support from international community is



120 100

SDN World JOR EGY MRT needed to support countries’ efforts toward 80 3 MENAPOI macroeconomic stabilization and economic 60 PAK 0 EE LATC MAR transformation. Bilateral and multilateral TUN partners can help—by providing policy and -3 40 DJI Dev. Asia technical advice, financing, and trade access— The IMF is closely engaged in the region MENAP Oil-Exporting Countries SSA -6 20 as well Non-Oil Economy to Support Growth in 2013 2012 to support positive change. Even with ambitious through analytical and technical advice, -9 domestic efforts, considerable external financial as through substantial financial support. It has was a year of robust growth of 5.7 percent, on 0 support will be needed in many Arab countries in committed more than US$8 billion in financing average, in the MENAP oil-exporting countries— -12 -5 0 5 10 15 transition, because private sources are unlikely arrangements with Jordan, Morocco, and Yemen. Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, AFG DJI EGY JOR LBN MRT MAR SDN TUN Fiscal def icit, average 2011–12 to fulfill countries’ substantial financing needs. It has reached stafflevel agreement on a US$1.75 Qatar, Saudi Arabia, United Arab Emirates, and Enhanced access to export markets for the billion Stand-By Arrangement with Tunisia, and Yemen. Growth was supported by the almost And eroded international few region’s products and services will alsoreserves be critical leave is in discussions on a possible arrangement with complete restoration of Libya’s oil production ...ahead of a challenging outlook. ...with persistently high for cultivating competitiveness and unemployment. jobs. Egypt, and on a second program with Yemen. and strong expansions in the GCC countries. buffers...

Recent Economic Developments and Outlook






Gross international Unemployment rate,reserves, percent months of imports 14 20 Dec-2010 Mar-2013 (or latest available) 18 12 2011 2012 16 10 14 128 10 6 8 64 4 2 2 00 LBN EGY MAR AFG TUN PAK SDN MRT TUNJOR EGY JOR SDN MAR DJIPAK

Real GDP growth, 2013 8 7 Emerging and developing 6 5 4 3 2 1 0

Sources: National authorities; and IMF staff calculations. Sources: National authorities; and IMF staff calculations. Note: Afghanistan (AFG), (AFG), Djibouti (DJI), Egypt (EGY), Jordan (JOR), LebanonJordan (LBN), Mauritania Morocco(LBN), (MAR), Pakistan (PAK), Sudan (SDN), Tunisia (TUN), Latin America and the Caribbean Note: Afghanistan Djibouti (DJI), Egypt (EGY), (JOR),(MRT), Lebanon Mauritania (MRT), Morocco (MAR), Pakistan (PAK), ...have raised government deficits and debt. (LATC), Sudan (SDN), Tunisia (TUN), Latin America MENAP oil importers (MENAPOI), Sub-Saharan Africa (SSA), and (LATC), MENAP oil importers (MENAPOI), Sub-Saharan Africa and (SSA),the and Caribbean Emerging Europe (EE). Emerging Europe (EE).

Public debt vs. fiscal deficit, in percent GDP 160

| Capital Finance International


Timid global recovery in 2012 but major risks diffused

Timid global recovery in 2012 but major risks diffused. Source: IMF, World Economic Outlook, April 2013.

Source: WorldwasEconomic April 2013. Non-oilIMF, GDP growth supported byOutlook, the low accumulate current account surpluses of about global interest rate environment and, in some countries, by large increases in government spending amid high oil prices and in response to social pressures. Overall, economic growth is projected to fall to about 3 percent in 2013, as oil production growth pauses in the context of subdued global oil demand. In the first few months of 2013, oil exports have been declining. For 2013 as a whole, additional oil supplies from Iraq and Libya are expected to more than offset a decline in oil exports from Iran, while lower net demand for Saudi Arabian exports is expected to result in slightly reduced production. As a result, aggregate hydrocarbon GDP and export volumes are expected to be flat in 2013. At the same time, growth of about 4 percent in the non-oil economy will be supported by low global interest rates, accommodative fiscal stances in some countries (including stepped-up post-conflict reconstruction and governmentfinanced capital expenditure projects), and consumer spending of public-sector salaries. Large Balance of Payments Surpluses Elevated hydrocarbon export volumes and prices allowed the MENAP oil-exporting countries to 118

US$440 billion in 2012. A small decline in projected global oil prices (based on futures markets) and an expected rise in imports will lead to a somewhat smaller current account surplus of about US$370 billion this year. Oil Exporters Are Vulnerable to Falling Oil Revenues Risks to the global outlook have somewhat diminished in recent months but remain high. Lower global economic activity would likely result in lower oil prices. Many countries have low public debt levels and would be able to draw on international reserves and other foreign assets to sustain aggregate demand in the event of a brief decline in oil prices, but a prolonged period of low prices would entail significant risks. Policies to Reduce Dependence on Hydrocarbon Revenues In many countries, high and rising break-even oil prices and spending at levels that would not accumulate sufficient wealth for future generations imply that fiscal policy should be tightened, particularly in times when the nonoil economy is expanding at a comfortable pace. To build resilience to a possible sustained decrease in the oil price, increases in hard-toreverse current government expenditures, like the wage bill and subsidies, should be contained. | Capital Finance International

In many countries, capital expenditures can be maintained, but need to be prioritized to ensure that the quality of public investment is not compromised. In some countries that are running overall deficits, the need for fiscal consolidation is more pressing, and, in the case of Yemen, it will need to be coupled with continued international financial support. All MENAP oilexporting countries have scope for further developing their medium-term fiscal frameworks to improve macrofiscal planning and to avoid procyclical swings in expenditure triggered by fluctuations in oil prices. Effective social and capital expenditure can decrease dependence on oil revenues in the long term by promoting future growth in nonhydrocarbon industries. Given low private-sector employment rates for nationals, remaining oil wealth should increasingly be used to build human capital wealth. The region has done well to converge on the global average in terms of the quantity of schooling: MENAP oil exporters accounted for half of the 10 highest increases in the average years of schooling since 1980 worldwide. However, the quality of school achievement is exceptionally low compared to international benchmarks. Providing a highquality education at the primary, secondary, and tertiary levels is an essential component of the reforms needed to support job creation and economic diversification. Moreover, educational

Global Ou

Slower European p ggrowth1 would impact p Maghreb g

Major spillovers from the conflict in Syria

Summer 2013 Issue

Cumulative GDP loss, 2013 and 2014

Estimate of refugee flows from Syria1



Euro area





T Turkey: k 325K

Total outside Syria: 1.4 million

-0.4 -0.6

Lebanon: 456K

Internally displaced: Internall about 4 million


Syria Iraq: 142K

-1.0 -1.2

Egypt 62K

14 -1.4

Jordan: 448K

-1.6 -1.8

Recent developments and near-term outlook


Source: IMF, World Economic Outlook (April 2013); and IMF staff calculations.

Recent developments and near-term outlook

Sources: UN Refugee Agency, Information Sharing Portal : Syria Regional Refugee Response. 1As of 6 May 2013. Figures reflect the number of refugees registered or awaiting registration.

Slower European growth would impact Maghreb (Euro area weak policies scenario described in April 1 Euro area weak policies scenario described in April 2013 World Economic Outlook.

Major spillovers from the conflict in Syria - estimate of refugee flows from Syria (as of 6 May 2013.

2013 World Economic Outlook).

Figures reflect the number of refugees registered or awaiting registration.)

MENAP oil importers

Source: IMF, World Economic Outlook (April 2013); and IMF staff calculations.

Tunisia Morocco


Syria Jordan

MENAP oil importers

Global Outlook Sources: UN Refugee Agency, Information Sharing Portal : Syria Regional Refugee Response.

MENAP oil exporters

Afghanistan Iraq





Iran Kuwait

Saudi Arabia Bahrain Qatar




United Arab Emirates

Yemen Djibouti

MENAP Oil Importers.

improvements should be complemented with a rebalancing of incentives that encourage skilled citizens to seek work in the private sector in a way that does not unduly jeopardize incentives for business activity. MENAP Oil-Importing Countries Tepid Economic Recovery in a Complex Environment Oil-importing countries in the MENAP region (excluding Syria)—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Sudan, and Tunisia—grew 2.7 percent on average in 2012, with investment and net exports weighed down by political uncertainty, continued social unrest, and a challenging external environment. Steady remittances and public-sector wage growth sustained consumption. Economic activity was also supported by a bumper harvest in Afghanistan and Pakistan, and by a post-drought agricultural reboundin Mauritania, while the downturn in Sudan worsened from the loss of oil production to South Sudan. The modest recovery generated few jobs, and high unemployment persists, especially among women and youth. Investor confidence stayed weak because of political transitions and social unrest across the Arab countries in transition and regional spillovers from the conflict in Syria—including the cost of supporting refugees, disruptions to bilateral and transit trade, and heightened security concerns. In a number of countries, these factors resulted in a rise in nonperforming loans, a decline in stock market indices, capital outflows, credit ratings downgrades, and widened sovereign spreads. The Need to Act In 2013, growth in the MENAP oil importers is expected to recover at a moderate pace, with

MENAP Oil Exporters.

only a minor increase, projected at 3 percent. Social, political, and economic conditions remain impaired, with continued social unrest, complex political transitions, and an economic environment characterized by modest global growth, high commodity prices, and weak domestic confidence. Mauritania’s growth, buoyed by the recovery of mining production and sustained investment in the sector, is projected to top that of other oil importers. At the other end of the spectrum, recovery can begin in Sudan after the recent signing of security and oil agreements with South Sudan. Persistently high unemployment is liable to spur further social tensions among populations anxious for jobs, better incomes and social conditions, and equal access to economic opportunity. The social situation in Jordan and Lebanon will be affected by growing numbers of refugees from Syria. Even where economic recovery is supporting revenues, fiscal deficits are anticipated to deepen in countries that have not already acted to increase revenues and contain wage and subsidy expenditures. Broadly unchanged deficits are expected where subsidy savings are channeled into strengthened social safety nets and into capital spending in support of growth and employment. Eroded international reserves are unlikely to improve, absent significantly lower global food and energy prices or a boost in exports, foreign direct investment, or remittances. Impaired investor confidence may imply a further drain on reserves. considerable fiscal consolidation and greater exchange rate flexibility will be needed, in many cases, to maintain macroeconomic stability, instill confidence, preserve competitiveness, | Capital Finance International

and mobilize external financing. In particular, countries will need to implement more cutbacks in subsidies, coupled with better-targeted safety nets, and will need to design policies that help contain the wage bill. Looking past these near-term challenges, there is considerable potential in these countries for higher and more inclusive growth and more jobs. To realize this potential, it will be necessary to press on with structural reforms that deepen trade integration, streamline regulations, increase institutional accountability, remove impediments to business entry and exit, modify labor market regulation to encourage hiring while maintaining adequate worker protection, align the education system with employer needs, and expand access to finance. Risks Still Largely to the Downside Downside regional and domestic risks dominate the outlook for oil importers. Instability resulting from more setbacks in political transitions may further delay needed policy action and, in combination with regional escalation of the conflict in Syria, could severely damage economic confidence. Output losses and amplified international reserve pressures could result from these risks, as well as from higher global food and energy prices, lower trading partner growth, or re-intensification of global financial risk aversion. On the positive side, accelerated reform momentum in Europe and smooth political transitions across the region could boost reforms, investor confidence, external inflows, and growth. i

Source: International Monetary Fund, Washington. 119

> Benno Keller and Roy Suter, Zurich Insurance Company:

Insurance has an Important Role in Fostering Economic Growth and Investment in the Middle East and North Africa Region The MENA region is facing a score of socio-economic challenges which, left unaddressed, will undermine the region’s development prospects. Prominent amongst these is the need to diversify and modernize the region’s economies with a view to creating sufficient employment opportunities for the young. Insurance has the potential to help the nations of the region to tackle such challenges. Yet insurance in the region is largely untapped. Unleashing this potential will require the removal of several barriers to a vibrant insurance market.


ver the past decade the MENA region has performed fairly well in terms of economic growth, with the exception of the past two years that have been characterized by elevated levels of political and economic uncertainty. Annual GDP growth averaged around 5 percent which is comparable to the GDP growth rates of other emerging regions. However, in a number of MENA countries economic growth has not kept pace with population growth. This has resulted in only modest advances in GDP growth per capita. The outcome of this development has been stagnating living standards and rising unemployment, in particular for a burgeoning young population. In fact, the outbreak of social unrest and political upheaval in early 2011 - and what has become known as the “Arab Spring” – can to a good extent be traced back to this disappointing economic performance. To be sure, important variations persist among the individual countries of the region. The main factor here is the availability of oil, gas, and related energy resources. In this regard, MENA countries can be classified as either resourcerich, or resource-poor. The resource-rich MENA countries tend to have relatively small populations and high GDP per capita levels, whereas the opposite applies to the resourcepoor MENA countries. Key challenges of the MENA region Despite these variations, almost all MENA countries are confronted with the challenge of inclusive job creation. It has been estimated that the region needs to create up to 70 million jobs by the year 2020 just to keep pace with population


“It has been estimated that the region needs to create up to 70 million jobs by the year 2020 just to keep pace with population growth.”

risk since the outbreak of the Arab Spring has compounded the already comparatively high risks of doing business and has resulted in a reversal of Foreign Direct Investment (FDI) inflows into the MENA region.

growth and to bring overall unemployment down to a more palatable norm. Resource-rich countries’ heavy reliance on energy exports adds a further rationale for the urgent need for economic diversification. Falling energy prices or declining reserves are expected to act as a brake on growth, reducing prospects for long-term development. Diversifying the economy is thus one of the most important challenges resourcerich countries will face in future. In sum, there is clearly a real need for developing balanced, multi-industry economies that can absorb a large army of unemployed or underemployed citizens.

Protecting and supporting the rising middle class A large proportion of the population in the MENA region – in particular in the resourcepoor countries – is still at a low income level. These individuals have only limited possibilities to build financial reserves to protect against illness, accidents or property loss or damage. As a result of an adverse event, consumption can be drastically reduced, often with major, long-term implications for future health and income. Individuals, families or entire villages can fall into poverty, affecting overall economic development. For those who manage to escape poverty, it provides security, helping them to maintain their social status.

Progress in this respect has been uneven, both across countries and over time. Some MENA countries, in particular in the Gulf region, have been successful in building new financial centers, others in fostering the tourism industry. Manufacturing, on the other hand, continues to play a marginal role in all MENA countries. Various factors explain why these efforts to transform and energize the region’s economies have not always materialized. The lack of an adequate institutional framework exacerbates the risks – and costs – of doing business. Insufficient integration of these economies into the global economy is also an important impeding factor. What’s more, heightened and intensified political

Populations in emerging economies are still much younger than those of advanced economies. This is particularly true in the MENA region. However, as in other less-developed regions, its population is also starting to age. This means that providing the elderly with an acceptable standard of living will become increasingly important. At the moment, retirement systems in the region are still underdeveloped. Earnings-related pension schemes, mostly for public employees, comprise the main type of retirement provision in the region. A major shortcoming of these pension systems is that they hold insufficient reserves to cover future liabilities. They also cover only around one-third of the labor force, | Capital Finance International

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The economic and social role of insurance Insurance plays an important economic and social role and has the potential to provide vital support to emerging economies. However, its important contributions often tend to be overlooked. Insurance performs three core economic functions:

Graph 1: Population versus GDP per capita. GDP per capita is in US dollars, adjusted for purchasing power parity (PPP).

Source: data from the IMF Economic Outlook Database for 2012.

• Insurance enables risk transfer: insurance provides an efficient mechanism of risk transfer by pooling idiosyncratic risks. In technical terms, such risk pooling, based on the law of large numbers, provides value in that the premium paid by individual policyholders is smaller than the cost of an expected maximum loss occurrence. • Insurance provides risk management: By charging a premium that reflects the underlying risks, insurance provides an important signal to policyholders and the economy at large, thereby offering incentives for risk mitigation. Insurers also give risk management advice and services to individuals and companies. • Insurance contributes to efficient capital accumulation: Insurers typically invest collected premiums as reserves for future claims payments. By accumulating large pools of capital invested in real and financial assets, insurers foster capital formation. In contrast to other financial institutions, insurance assets are typically matched in size and maturity with positions on the liability side, and do not involve maturity transformation. Through these functions, insurance enhances individual wellbeing, promotes economic activity that otherwise would not be undertaken, and protects people from falling into poverty as a consequence of an adverse event.

Graph 2: Age-dependency ratio, old (percent of working-age population).

Source: UN statistics.

and are accumulating large and unsustainable, unfunded pension liabilities, not least because they are promising overly generous implicit returns to their contributors. The rise of the middle class in many emerging economies will increase the demand for savings products as people strive to maintain their lifestyle into retirement. Without appropriate solutions, the risk is high that large parts of the population will face poverty after they retire. What is needed is an appropriate balance between public pay-as-you-go systems, funded pension plans, and individual retirement savings. Life insurance can play an important part in funding retirement solutions. It not only provides long-term savings vehicles, but also addresses risks that might affect the ability to save (i.e. disability) or living longer than expected on one’s savings (i.e. longevity risk).

Graph 3: Insurance penetration or premium volume (per cent of GDP, 2011).

Source: Axco global statistics.

122 | Capital Finance International

envisioning financial prosperity in the region

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Bahrain: World Trade Center

124 | Capital Finance International

Summer 2013 Issue

Fostering investment, capital formation and trade In the context of diversifying and modernizing their economies, MENA countries will need to attract enhanced investments in infrastructure, buildings and machinery by both domestic and international investors. Insurance can facilitate such investments in several ways. For example, both domestic and international investors face numerous risks to their investments. By taking on and pooling some of the risks inherent in business operations, insurance frees up capital, which in turn can be channeled into productive investments. Another example is surety coverage, by which insurers take on certain risks related to large and complex construction projects. Without such coverage, these projects would not be undertaken. Involving international investors in modernizing the region’s economies is critical. Yet foreign investors face uncertainties, with political risk seen as the single greatest impediment to inward investment. This is particularly true when it comes to the resource-poor economies of the MENA region. A global and competitive insurance industry can play an important role in supporting FDI. By absorbing and managing some of the risks that investors typically face, global insurers facilitate investments otherwise deemed to be too risky. Moreover, insurance can make an important contribution to the formation of capital for long-term investment. Insurers typically collect premium payments before any claims may arise. In many cases, for example, in life insurance, there is a long lag between when premiums are collected and claims are paid out. Insurers reserve for future claims by investing these funds in capital markets, aiming to match the expected maturity of liabilities with assets of equal or at least similar duration. This demands a longterm investment horizon, meaning that insurers are much better prepared than other types of investors to ride out short-term financial market fluctuations. Insurance also promotes trade. For example, exporters face a number of risks including those related to physical product loss, and ones arising during transport and shipping. Supply chain risks become greater as emerging economies move up the value-added ladder. These supply chains often extend across national borders or even different continents. In-depth knowledge is needed about the various risk factors and their interdependence in order to effectively manage the risks of complex supply chain disruption. Unleashing the untapped potential of insurance Despite this potential, the MENA region has some of the lowest insurance penetration rates in

the world. The average insurance penetration rate across the MENA region is 1.5%, which is almost four times lower than Singapore and almost eight times lower than the UK. Against this backdrop, wider use of insurance in the MENA region would greatly speed up the region’s continued economic progress. Policymakers, regulators and market participants need to address a number of market and regulatory challenges to enable insurance to grow in the region. This includes:

About the Authors Benno Keller is Head Research and Policy Development at Zurich Insurance Company. He holds a PhD in Economics and Social Sciences from the University of Fribourg, Switzerland.

Financial literacy: There is much potential in the region to enhance financial literacy and deepen awareness about insurance products and their beneficial effects. Financial education is crucial to make progress on this front, and the public and private sectors should cooperate towards this end. Professional qualification: Insurance is a particularly complex business that requires sophisticated actuarial, accounting and auditing skills. These technical and professional skills have been identified to be in low supply in the region. While foreign insurers can provide valuable knowledge transfers to help to bridge the skills gap, there is an urgent need for developing the capacity for local training. Micro-insurance: Insurance can be too expensive for the poorest part of the population. Insurers can tailor the products to reduce the thresholds for efficient insurance by simplifying policy terms and collecting payments in highly scalable ways. Such tailored products can serve the needs of low-income households. Regulation: Regulatory standards in the MENA region are relatively vague and less detailed and sophisticated than in developed countries. This can enhance the risk and screening costs for customers, allowing insurers with poorly developed risk management systems and poor reserves to enter the market. At the same time, there are also regulatory restrictions in place that limit insurers’ ability to effectively pool risks. Therefore there is an urgent need to strengthen the regulatory framework and its enforcement. In conclusion, insurance can play a crucial role in addressing the key challenges of the MENA region by protecting the assets of individuals, families and businesses and promoting economic development. However, a lack of trust and awareness by consumers is a major impediment for insurance in playing this role. On one hand, the insurance sector needs to develop affordable and tailored products for emerging markets that enable consumers to build up trust in the sector. On the other, it is vital for many countries of the MENA region to ensure that the right regulatory infrastructure exists to allow the sector to deliver the economic and social benefits that it is able to. i | Capital Finance International

Roy Suter is a senior public policy analyst at Zurich where he also headed the company’s international government affairs operations. Prior to joining Zurich, Roy worked for the Swiss Ministry of Economic Affairs where he was in charge of managing Switzerland’s relations with various multilateral development banks. He holds a PhD in International Relations and a LLM in International Business Law.

Zurich is a leading multi-line insurance provider with a global network of subsidiaries and offices. With about 60,000 employees, we deliver a wide range of general insurance and life insurance products and services for individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries.


> A Powerful 2013 Performance from Bentley Motors, Middle East:

World’s Biggest Workshop in Dubai Sales In March this year, Bentley Motors announced its financial results for the year ending 31 December 2012, reporting a significantly increased operating profit of Euros 100.5m compared to Euros 8m in 2011.

increased to 7%. Demonstrating the global reach of Bentley’s business, exports accounted for 87.3% of Bentley’s total turnover, equating to a total export value of Euros 1.269 billion. The company’s market share in the luxury segment rose by 4.9 percentage points to 20.1%.

Bentley boosted its total turnover by 29.9% to Euros 1.453 billion and its profit margin

Bentley Motors Middle East continued the successful performance of 2012 with a record

126 | Capital Finance International

first-half of 2013 and an increase of 28 per cent against the same period last year for deliveries to customers. The previous year was the best ever year for Bentley Motors in the Middle East and 2013 is set to beat that record. The Continental GT V8 and Continental GTC

Summer 2013 Issue

V8 have achieved increasing popularity in the Middle East since their launch in 2012 and accounted for a large portion of Continental GT sales. Combined with the Continental GT W12, GTC W12, GT Speed, and GT Speed Convertible, the GT sales accounted for 70 per cent of total sales in the first half of 2013 for the Middle East region. The United Arab Emirates and Kingdom of Saudi Arabia are the strongest performing countries in the region, contributing to over 50% of overall sales. GT Speed At the start of this year Bentley launched the New Continental GT Speed, the fastest production car to date, with the ability to go to speed of up to 329 km/h. The convertible version of this vehicle is now available and is the fastest four-seater convertible in the world! The new GT Speed Convertible combines the sensory pleasures of roof-down luxury touring with the shattering performance of a 625 PS (616 bhp) twin-turbocharged 6.0 litre W12, while delivering a fifteen per cent improvement in fuel efficiency. The close-ratio eight-speed transmission, uprated and lowered suspension and retuned steering provide exhilarating acceleration and sharp, communicative handling without detriment to the renowned ride comfort of Bentley’s Continental convertible. Permanent all-wheel drive ensures optimum traction and power delivery whatever the road conditions. Mulsanne The Middle East remains one of the most important markets in the world for the flagship Bentley Mulsanne. The model also enjoyed a strong first half with sales increasing by 70 per cent compared with the same period last year. The Mulsanne is a pure example of the Grand Touring Bentley, combining coach-built elegance and hand crafted luxury with immense power and sportiness that together offer the world’s most exclusive driving experience. It is a luxury car that makes the joy of driving its central focus. In an era of mass production, it stands at the pinnacle of British luxury motoring.

Pictured: Bentley Mulsanne

With a 0-100 km/h sprint time of just 5.3 seconds and a top speed of 296 km/h the 505 bhp (512 PS/377 kw) Mulsanne, with its classleading torque of 1020Nm, has always offered thunderous levels of performance for an ultraluxury sedan. The Mulsanne’s beautifully balanced proportions convey a unique sense of dynamism and movement. These are reinforced by muscular haunches and sharply sculpted, gracefully flowing lines, hinting at the phenomenal levels of power and torque that are in reserve at all times. In common with all Bentley vehicles, customers of Mulsanne have the opportunity to create a | Capital Finance International


Pictured: Bentley Flying Spur

“The Middle East is home to a specially designed workshop, which holds the title of the world’s biggest Bentley workshop in Dubai, UAE.” truly bespoke car from a palette of over 100 paint colours, a class-leading choice of unbleached premium quality veneers and marquetry options and a selection of 25 leather hides. The beautiful cabin alone takes Bentley’s craftsmen and women over 170 hours to create. Mulsanne fitted luggage set Bentley has also launched this year, a stylish range of luggage to fit effortlessly into the flagship Mulsanne model. The luggage, hand-made by Schedoni of Italy, allows customers to tailor the specification of the set to match the hides within their own car. The design of this range is inspired directly from the key styling elements within the inner door panelling of the Mulsanne. The full set consists of two large cases, two foldable garment bags and two small cases. New Flying Spur Bentley’s presence in the Middle East is set to be strengthened later this year with the introduction of the new Flying Spur. The new luxury sedan made its global debut at the Salon International de l’Auto in Geneva earlier this year. Benefiting from the highest levels of luxury, craftsmanship


and performance, as well as the latest technologies, the new Flying Spur is set to make a big impact on the region’s luxury car market. Bentley Middle East has dealerships in Bahrain, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the UAE, all of which have already taken orders for the New Flying-Spur. Its predecessor was a huge success for Bentley in the region. With its unrivalled blend of effortless driveability, exquisite luxury and craftsmanship, sculpted design and state-of-the-art technology it is sure to be very well received in the Middle East. World’s Biggest Bentley Workshop The Middle East is home to a specially designed workshop, which holds the title of the world’s biggest Bentley workshop in Dubai, UAE. Al Habtoor Motors, Bentley Motors’ longstanding importer for the UAE, has invested AED 300 million in the 3millon sq. ft. site, of which 189,000 sq. ft. is dedicated to Bentley. The state-of-the-art centre is air-conditioned from the moment customers step out of their vehicle and walk into the luxurious reception area. | Capital Finance International

The reception area is vast and comfortable with televisions, refreshments and Wi-Fi, allowing customers to wait for their vehicle in a relaxing environment. For those wanting to shop, the reception area displays merchandise from the extensive Bentley collection. Located behind the reception area, the extensive workshop is a world-class facility offering the latest technology, equipment and systems to improve further the efficiency and quality of service, repairs and renovation. A one-stopshop, the Bentley workshop is able to carry out PDI’s, servicing, repairs, body shop repairs, paintwork and restoration. The workshop has 190 vehicle bays and 250 customer and visitor car parking spaces, and will allow technicians to perform maintenance on up to 40 vehicles simultaneously. For owners of heritage models, the Bentley workshop has the expertise, capacity and equipment to restore classic models. The body repair, restoration and heritage area of the business is now even better placed to look after customers from all over the UAE. Cherishing cars

Summer 2013 Issue

Pictured: Bentley Continental GT

as enthusiastically as owners themselves, the skilled technicians and craftsmen will deliver the finest results.

which will generate up to 40 per cent of Bentley’s energy requirements and reduce CO2 usage by 2000 tonnes per year.

raised motif echoing that of the knurled bezel – a refined nod to the famous radiator grilles gracing the prow of a Bentley.

Crewe, UK. Bentley Motors employs around 4,000 people in Crewe, UK which is home to all its operations including design, R&D, engineering and production. The combination of fine craftsmanship, using skills that have been handed down through generations, alongside engineering expertise and cutting-edge technology is unique to UK luxury vehicle manufacturers such as Bentley. It is also an example of high-value British manufacturing at its best. Bentley exports over £1bn worth of goods per year.

The panels will also generate enough energy to power over 1,200 households in Crewe, proving the valuable contribution the factory has made to the local and wider community.

The watch is limited to only 1,000 pieces worldwide, the unrivalled performance of this elegant and reliable watch is powered by a selfwinding chronograph movement chronometer.

Partnerships – Breitling 2013 has seen the launch of many new and exciting products, created with luxury and performance in mind in collaboration with partnership brands.

‘Lalique for Bentley’ and ‘Bentley for Men’ The collaboration between Bentley and Art & Fragrance, owner of Lalique, creates the bespoke ‘Lalique for Bentley Crystal Edition’, an impressive crystal flacon with the legendary ‘Flying B’ Bentley mascot. The eau de parfum itself, composed by Mylène Alran, from the French perfume house Robertet, is a fitting elixir of fine woody notes and exquisite leather to complement the epicentres of excellence within Bentley’s craftsmanship.

Having just celebrated its 75th anniversary, Bentley’s Crewe Factory has many great achievements from its original construction to producing cars for over 60 years that sit at the pinnacle of luxury automotive manufacturing. Originally constructed to manufacture the Merlin engines which powered Spitfire and Hurricane fighters, the factory is now home to more than 4,000 Bentley employees who helped manufacture over 8,500 Bentley cars last year for discerning customers all over the world. The manufacturer recently installed 20,000 solar panels with a capacity of 5MW, the UK’s largest roof-mounted solar panel installation,

Bentley and Breitling have again combined British chic and Swiss horological excellence to create a limited edition, ultra-sporty Bentley Light Body Midnight Carbon chronograph. The limited edition watch conceals a light and sturdy titanium chassis featuring a highly resistant carbon-based coating beneath its all-black exterior. The dashboard-style dial displays exclusive Breitling technical features highlighted by redrimmed indications. The originality and strength of the design are accentuated by the hands and hour-markers, also clad in matt black and enhanced by a luminescent coating ensuring optimal readability in the dark. The midnight black rubber strap is distinguished by its central | Capital Finance International

The ‘Bentley for Men’ and the high-impact ‘Bentley for Men Intense’ fragrances are created by top French perfumer Nathalie Lorson, from the perfume house Firmenich. She has skilfully transformed the quintessence of the luxury automotive brand Bentley into a superb and unmistakeable fragrance experience. To do so, the finest perfume raw ingredients have been used, including those must-haves for Bentley’s debut fragrance, fine wood and leather notes. i


> Joseph Stiglitz and Hamid Rashid:

Sub-Saharan Africa’s Subprime Borrowers


EW YORK – In recent years, a growing number of African governments have issued Eurobonds, diversifying away from traditional sources of finance such as concessional debt and foreign direct investment. Taking the lead in October 2007, when it issued a $750 million Eurobond with an 8.5% coupon rate, Ghana earned the distinction of being the first Sub-Saharan country – other than South Africa – to issue bonds in 30 years.


This debut Sub-Saharan issue, which was four times oversubscribed, sparked a sovereign borrowing spree in the region. Nine other countries – Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania – followed suit. By February 2013, these ten African economies had collectively raised $8.1 billion from their maiden sovereign-bond issues, with an average maturity of 11.2 years and an | Capital Finance International

average coupon rate of 6.2%. These countries’ existing foreign debt, by contrast, carried an average interest rate of 1.6% with an average maturity of 28.7 years. It is no secret that sovereign bonds carry significantly higher borrowing costs than concessional debt does. So why are an increasing number of developing countries resorting to sovereign-bond issues? And why have lenders

Summer 2013 Issue

suddenly found these countries desirable?

sovereign bonds.

With quantitative easing having driven interest rates to record lows, one explanation is that this is just another, more obscure manifestation of investors’ search for yield. Moreover, recent analyses, carried out in conjunction with the establishment of the new BRICS bank, have demonstrated the woeful inadequacy of official assistance and concessional lending for meeting Africa’s infrastructure needs, let alone for achieving the levels of sustained growth needed to reduce poverty significantly.

To ensure that their sovereign-bond issues do not turn into a financial disaster, these countries should put in place a sound, forward-looking, and comprehensive debt-management structure. They need not only to invest the proceeds in the right type of high-return projects, but also to ensure that they do not have to borrow further to service their debt.

Moreover, the conditionality and close monitoring typically associated with the multilateral institutions make them less attractive sources of financing. What politician wouldn’t prefer money that gives him more freedom to do what he likes? It will be years before any problems become manifest – and, then, some future politician will have to resolve them. To the extent that this new lending is based on Africa’s strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis? The risks will undoubtedly grow if sub-national authorities and private-sector entities gain similar access to the international capital markets, which could result in excessive borrowing. Nigerian commercial banks have already issued international bonds; in Zambia, the power utility, railway operator and road builder are planning to issue as much as $4.5 billion in international bonds. Evidence of either irrational exuberance or market expectations of a bailout is already mounting. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s credit rating is four grades higher? Indeed, except for Namibia, all of these Sub-Saharan sovereignbond issuers have “speculative” credit ratings, putting their issues in the “junk bond” category and signaling significant default risk.

“So why are an increasing number of developing countries resorting to sovereign-bond issues?”

Signs of default stress are already showing. In March 2009 – less than two years after the issue – Congolese bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Côte d’Ivoire became the first country to default on its sovereign debt since Jamaica in January 2010. In June 2012, Gabon delayed the coupon payment on its $1 billion bond, pending the outcome of a legal dispute, and was on the verge of a default. Should oil and copper prices collapse, Angola, Gabon, Congo, and Zambia may encounter difficulties in servicing their | Capital Finance International

These countries can perhaps learn from the bitter experience of Detroit, which issued $1.4 billion worth of municipal bonds in 2005 to ward off an impending financial crisis. Since then, the city has continued to borrow, mostly to service its outstanding bonds. In the process, four Wall Street banks that enabled Detroit to issue a total of $3.7 billion in bonds since 2005 have reaped $474 million in underwriting fees, insurance premiums, and swaps. Understanding the risks of excessive privatesector borrowing, the inadequacy of private lenders’ credit assessments, and the conflicts of interest that are endemic in banks, Sub-Saharan countries should impose constraints on such borrowing, especially when there are significant exchange-rate and maturity mismatches. Countries contemplating joining the bandwagon of sovereign-bond issuers would do well to learn the lessons of the all-too-frequent debt crises of the past three decades. Matters may become even worse in the future, because socalled “vulture” funds have learned how to take full advantage of countries in distress. Recent court rulings in the United States have given the vultures the upper hand, and may make debt restructuring even more difficult, while enthusiasm for bailouts is clearly waning. The international community may rightly believe that both borrowers and lenders have been forewarned. There are no easy, risk-free paths to development and prosperity. But borrowing money from international financial markets is a strategy with enormous downside risks, and only limited upside potential – except for the banks, which take their fees up front. Sub-Saharan Africa’s economies, one hopes, will not have to repeat the costly lessons that other developing countries have learned over the past three decades. i

About the Authors Joseph E. Stiglitz is a Nobel laureate in economics and University Professor at Columbia University. Hamid Rashid is a senior economic adviser at the United Nations Department of Economic and Social Affairs. The views expressed here do not reflect the views of the UN or its member states. Copyright: Project Syndicate, 2013.



AWARDS 2013 SUMMER 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.

Summer 2013 Issue

> USA Award Winner Wells Fargo: A Bank for Life

In the world of private banking, size does not always ensure that the personal needs of clients are always well met. Wells Fargo Private Bank, however, displays a nimbleness that many of its smaller rivals can only view with envy. The CFI judging panel are pleased to announce Wells Fargo as the winner of the award ‘Best Private

Bank USA’. Throughout Wells Fargo’s long and proud history the Bank has always been an innovator - not just in financial products (with, for example, the first indexed fund) but also in customer service - having launched the first internet bank. The feedback the panel received on Wells Fargo’s commitment to maintaining

relationship managers of the very highest calibre means that clients receive seamless high quality advice as their needs and aspirations develop over time - making Wells Fargo Private Bank a bank for life.

> The Energy to Satisfy: Danfoss Wins CFI Award in Denmark

Danfoss, a family-owned Danish business founded in 1933 now employs 23,000 people and is a major player throughout the world in the production

and sales of energy-efficient solutions. The CFI judging panel considers the Danfoss efforts to ensure customer satisfaction as exemplary. CFI

has no hesitation in recognising the Company as providing ‘Best Customer Satisfaction, Denmark, 2013.

> Millennium bcp: CFI 2013 Award Winner in Portugal and an Example to Banks around the World

The judging panel at CFI are delighted to declare Millennium bcp winner of awards for Best Corporate Governance and Best Investor Relations Team, Portugal, 2013. Millennium stand out as an example – not just in Portugal but to banks across the world – of how constant evolution, the application of the highest standards of corporate governance and a clear and concise communication of objectives even in very difficult times can bring benefit to all stakeholders. Millennium are constantly strengthening their model of corporate

governance and make excellent use of a diverse mix of strong independent directors, shareholder representatives and oversight committees which closely monitor the bank’s activity and management processes, ensuring alignment among the different stakeholders. It is the panel’s belief that the impact of effective independent directors combined with a strong governance model has resulted in the high levels of stability that ensure stakeholder confidence. This is clearly reflected in the financial markets and the Investor Relations Team have done an excellent | Capital Finance International

job in communicating and building trust with a broad spectrum of investors. The results are clear in the size of the investor base, which has risen to more than 187,000 shareholders, with a steady increase in the number of small investors and high levels of confidence from institutional investors. Banks around the world would do well to look at Millennium as an example of how, by maintaining and developing the highest levels of corporate governance, financial institutions can maintain and (in Millennium’s case) build confidence even in turbulent times. 133

> King & Spalding, 2013 Legal Award Winners in KSA

The judging panel were very impressed by the legal professionals at King and Spalding, and pleased to confirm an award to the firm as, ‘Best Energy Team, Saudi Arabia, 2013’. The firm

advises not only on oil and gas but across the energy spectrum and is helping develop the mergers and acquisitions side of the sector. The stated Middle East strategy at K&S is to play to

individual firm’s strengths and this has certainly been the case in the Kingdom. The focus is on what K&S can do better and they are certainly doing very well in Energy.

> Itau: Second Time Banking Award Winner in Brazil

The CFI judging panel congratulate Itau on winning the Private Banking award in Brazil for the second consecutive year. According to the panel, ‘Itau

is an exciting Brazilian bank and a major player in Latin America. The Bank’s activities tick the boxes in many important areas and Itau is a

very responsible corporate citizen. We expect to be hearing much more of Itau internationally during the coming years’.

> Holland Farming: The CFI Corporate Community Engagement Winner in Sierra Leone

Holland Farming Sierra Leone Limited’s mission is to facilitate profitable rural transformation. The private company is owned by Dutch and Sierra Leonean partners and provides seed and fertilizers for government and private contracts but also works alongside smallholding farmers to determine what they need to improve productivity at an affordable cost. The CFI judging panel is very impressed by the work Holland Farming is doing to help smallholders including its support to female members of these communities and encouragement cooperatives. 134

Also, the longer term plans of Holland Farming attracted favourable comments from the panel. These plans involve the setting up of joint ventures with manufacturers and dealers of farming machinery to create leasing programmes operated and maintained by locally trained staff. This will ensure new job opportunities for young people and bring mechanised farming within the reach of the smallholding farmers. There are also plans to build cold stores so that farmers are not so dependent on middleman for getting crops to market and have the opportunity to | Capital Finance International

wait for better prices after harvesting. Also transport to market is a problem that needs to be addressed to improve profitability for small farmers. The plan is to have a presence in every district to make the services accessible to as many farmers as possible. There will also be a credit facility bank where farmers can pay off their micro credits with the coming harvest. Holland Farming has been declared Best Corporate Community Engagement Programme, Sierra Leone, 2013.

Summer 2013 Issue

> Edelweiss Wins CFI Corporate Governance Award

We are pleased to announce Edelweiss as winner of the award for ‘Best Corporate Governance, India 2013’. Many companies have excellent standards of Corporate Governance and India is certainly following the global trend by raising standards. Of course, good corporate governance is about far more than compliance and the panel felt that Edelweiss stands out as an example of a company that has truly taken corporate governance to its heart. Since its foundation in 1996, Edelweiss has prioritised development of the highest standards of governance and has

continually improved on these standards. In particular, Edelweiss ensures that the quality and empowerment of independent directors has been one step ahead of the field. Audit and remuneration committees are completely entrusted to independent directors and all other committees have at least equal representation. With so much responsibility for the protection of Edelweiss’s stakeholders in the hands of top level independent directors, the Company has been very successful in ensuring a balance between the benefits of long service director

understanding of the Company and that of shorter term engagement. The panel felt this has provided a major contribution to the rapid but sustainable growth of the business. By truly embracing the benefits of best corporate governance, the founders of Edelweiss have ensured that all stakeholder needs are properly taken into account. Edelweiss is an excellent example to companies across the world that have aspirations for growth. Their message is that by trusting in strong and effective corporate governance great things can be achieved.

> ARM Investment Managers Named Best Fund Manager, Nigeria

The opportunities for domestic and international investors as Nigeria moves from a frontier to an emerging market should not be under-estimated but one should also be aware of the risks. To take best advantage of the opportunities that Nigeria and the region as a whole represents requires a deep understanding of the balance between risk and returns. With the constantly improving quality of financial services in Nigeria, the judging

panel faced some difficult decisions in selecting a winning fund manager but it was ARM’s ability to foster trust with all stakeholders through a focused approach to good governance, its highly effective use of an external advisory board plus excellent fundamental analysis at both the micro and macro level that the judging panel recognised and applauded. ARM helps investors take full advantage of the opportunities in the

region and, significantly, was able to protect investor capital during the turmoil of 2008. As one of Nigeria’s largest non-banking asset managers, the Company has been effectively diversifying its offerings while maintaining the highest standards of fund management. The panel is delighted to declare ARM winner of the ‘2013 Best Fund Manager Award, Nigeria’.

> Team Player Schroders Wins CFI Banking Award in the UK

Private Banking clients have a huge choice of service providers ready to help them manage their wealth. Schroders Private Bank considers itself to be a team player and has the confidence and experience necessary to service client needs without feeling the need to always be in the

driving seat. The CFI judging panel were very impressed with the way Schroder’s value their clients’ time as much as their money. The Bank interacts well with professional advisers and external money management experts helping to bring the peace of mind that clients need. | Capital Finance International

In declaring Schroders winner of the CFI award for Best Private Bank, UK, 2013 the panel commented that ‘the self-assured attitude to providing private banking services without arrogance set them apart in the very competitive and professional UK market. 135

> EKO Support Systems Win Oil and Gas Logistics Award for 2013

The CFI judging panel regards EKO Support Services, a wholly Nigerian owned company working under the supervision of the Nigerian Ports Authority, as well established and on the right road to significant future success. EKO sets

out to bring alternative logistics solutions to the Nigerian Oil and Gas industry and is now engaged in significant upgrading work which should be fully completed by mid-2014. For EKO’s accomplishments to date and potential

identified, the panel agreed to name the Company as ’Best Oil & Gas Logistics Service Provider, Nigeria, 2013’.

> Power to the People in Tanzania: Carbon X Wins the CFI Community Engagement Award

CARBON X ENERGY is the largest rural community electrification programme in Tanzania (a country where 80 per cent of the population has no access to electricity). Of course, the situation is at its worst in rural areas where it is difficult to extend the national grid and the dangers of fuel-based lighting are all too obvious. This worthy project

harnesses solar power in an effort to alleviate poverty, improve lifestyles and encourage business opportunities and entrepreneurship. The founder, Naeem Mawji, has funded this work in part by awards from the World Bank and Tanzania’s Rural Energy Agency. The panel, unanimously confirming CARBON X

as the Corporate Community Engagement Award winner in Tanzania, is said to have been humbled by the efforts of this young man and his colleagues to bring clean light and power to the people.

> Newcastle becomes National: NSX is our Exchange Winner, Australia

The CFI award for Best Stock Exchange, Australia, 2013 goes to the National Stock Exchange of Australia. NSX was established thirteen years ago and is now the second largest in


the country. The Exchange can trace its roots back to the 1930s when it was known as the Newcastle Stock Exchange. The panel feels that this exchange offers good value for customers | Capital Finance International

seeking a listing and wishes to congratulate NSQ on its admirable flexibility.

Summer 2013 Issue

> De-Tastee Fried Chicken: A Generous Supporter of Communities in Nigeria

A company’s community engagement can be driven for a variety of reasons and the CFI panel were left with very difficult decisions in choosing between the excellent work of shortlisted companies in Nigeria. However, after careful consideration and despite competition from some of the country’s best known organisations, the panel felt that De Tastee Fried Chicken stood out as an example of community engagement driven by the passion and value set of the Company’s leadership. TFC’s community engagement is of course not just the result of a desire to

do the right thing but is also indicative of a direct understanding of the needs of the local communities in which the Company works and serves. The efforts of TFC and organisations like them should not be underestimated. Just as in the wider economy (where it is often the SMEs that are the main drivers of economic growth and improvement in living standards) the impact of smaller businesses in the struggle to achieve millennium goals is of critical importance. Although this is of course an award for TFC’s work in the community, it is also recognition of

the efforts of SMEs and the overall impact of the work they do within communities. All too often recognition is focused on large national and multinational companies. In the case of TFC the panel felt that pound for pound their impact was far greater. TFC is a very generous supporter of orphanages and physically challenged children – working constantly to improve educational opportunities and realise the full potential of the young people they help.

> Al-Rajhi: Islamic Banking Leader in KSA and the World

Established in 1957, by Abdulaziz Al-Rajhi and with majority ownership still in the hands of his four sons, Al-Rajhi Bank is the largest Islamic

bank in the world and Saudi Arabia’s biggest private bank. After fifty years operating solely in the Kingdom, Al-Rajhi ventured into Malaysia

(an obvious move) seven years ago. The judging panel agreed without hesitate the 2013 award to Al-Rajhi, ‘Best Islamic Bank, Saudi Arabia.’

> America Is More Than Satisfied with Gillette

The CFI judging panel congratulated Procter & Gamble’s Gillette on the announcement of its award for ‘Best Customer Satisfaction, USA, 2013’. The panel commented that, ‘There have been few

criticisms of these branded shaving products and their successors since King Gillette sought trademark protection at the turn of the 20th century. Moreover, customer satisfaction - | Capital Finance International

judged by a wide variety of measurements indicate that America truly trusts Gillette and respects the brand’s proud history.


> Orlean Invest West Africa: CFI Community Engagement Award Winner, 2013

Orlean Invest West Africa is CFI’s stand-out Corporate Community Engagement winner for the continent in 2013. The judging panel applauds Orlean’s ‘Integrated Participatory Approach’ whereby transparency in stakeholder relations is paramount and leads to shared goals and mutual benefits. The panel considers Orlean’s mission statement to be exemplary; it calls for the

employment of members of local communities, the provision of community development programmes that are really needed and bestpractice guarantees of community-friendly operations. The Company provides generous employee welfare and is championing educational success, improved healthcare and sporting activities in the communities. The

panel was most impressed to hear of Orlean’s mediation between hostile ethic groups near the Company’s operations in Nigeria. These people had been fighting for forty years but were brought together in peace as a result of Orlean’s intervention and community project development efforts.

> Macquarie Group Takes the CFI Alternative Asset Manager Award in Australia

With seven percent growth last year, infrastructure funds specialist Macquarie Group remain at the top of the list of the world’s most important alternative asset managers (assets are rapidly

approaching $100 billion). According to the CFI judging panel, Macquarie, with its improved profitability, is well placed to take advantage of any improving market conditions. Macquarie

takes the award: ‘Best Alternative Asset Manager, Australia, 2013.’

> Marina Securities Win CFI Nigeria Brokerage Award, 2013

With the increasing levels of interest in the Nigerian Financial Markets both domestically and internationally, top quality brokerage firms are key to sustainable financial development. After careful consideration of the shortlisted firms the judging panel were pleased to announce Marina Securities as winner of the ‘Best Stock Brokerage, Nigeria, 2013’ award. The judges


were very impressed with Marina Securities’ overall approach to business. The management team have a well formed and balanced approach to their services including careful review of their clients’ needs and very strong fundamental technical analysis. Marina Securities are constantly striving to improve all aspects of their services and it is this continual approach | Capital Finance International

to building and improving the brokerage that convinced the panel. As the Nigerian Markets continue to grow and opportunities are created, investors looking to take advantage of the situation will be in safe hands with Marina Securities.

Summer 2013 Issue

> CFI Private Banking Award for Belgium Goes to ING

ING Private Banking has been declared winner of the CFI Best Private Bank, Belgium Award for 2013. For high net worth individual across Belgium, ING Private Banking offer the advantages of a fully-fledged universal bank with a strong network of Private Bankers and Portfolio Managers spread across the country. The team is able to provide a high level of

service through building strong personal relationships with clients. This level of client interaction has enabled ING to provide a holistic approach that allows the private banking team to draw on and tailor solutions from ING’s impressive array of financial services. To achieve excellence of service as a private bank - building and maintaining trust - is of course

absolutely critical and ING’s local network has been achieving this. The feedback the panel received through the nomination process clearly shows that ING has the trust of its clients and is providing not only excellent service but ensuring peace of mind.

> CFI Recognition for Emerging Nigerian Telecoms Player

As the telecoms market in Nigeria continues to develop and mature, the demand for high-quality service providers has never been greater. The competition is fierce but several companies are rising to the challenge and opportunities are being created. After considering all the

nominees, the panel felt that the number of personal commendations received by Grat Network Digital Solutions could not go unrecognised. Financial indicators for the company are highly positive for 2013 and its partnerships with universities for training are

commendable. The judges also applaud the firm’s stated ambition to become the number one vendor in west Africa, CFI is pleased to name GNDS as Best Emerging Telecommunications Services Provider, Nigeria, 2013.

> Klagsbald Wins This Year’s Dispute Resolution Award in Israel

According to the CFI judging panel, Dr. Klagsbald & Co. Law Offices is an extraordinarily successful boutique law firm. Headed by the man whose name appears above the door, this firm of strong and talented litigators handles demanding civil and commercial dispute work on behalf

of major Israeli and foreign corporations and business leaders. Dr Klagsbald, who has represented three Israeli prime ministers as well as several high profile members of the Knesset, brings his 25 years of experience into play each working day as he takes the lead on all | Capital Finance International

cases. He has brought together a small group of highly effective lawyers and the panel has no hesitation in naming the firm Best Dispute Resolution Team, Israel, 2013.


> 2013 Petroleum Distribution Winner in Nigeria: BB King Oil

The CFI panel concluded that the powerful marketing skills of BB KING OIL (W.A. LTD) are likely to result in continued success for this key player in the Nigerian oil and gas industry. The

organisation is a major name in exploration, refining, haulage and distribution (with a fleet of 27 trucks on the road and the biggest depot in northern Nigeria). The branch network is rapidly

expanding and the firm takes pride in providing jobs where they are needed. BB KING is our Best Petroleum Distribution Company, Nigeria, for the year 2013.

> Jalsovsky: CFI’s Best Tax Team, Hungary, 2013

According to the CFI judging panel, Jalsovszky, a firm established seven years ago which has doubled the strength of their team over the past couple of years, is ‘an outstanding boutique

tax firm in Hungary.’ The firm has experienced rapid growth and was unaffected by the global economic crisis. The seven tax lawyer team offers a substantial presence in the country and

merits strong client consideration. CFI has no hesitation in naming Jalsovszky as ‘Best Tax Team, Hungary, 2013’.

Fund Manager in Japan, 2013 CanPension an arm’s-length price > GPIF Named Best

fall outside the arm’s-length range?

The Best Pension Fund Manager, Japan, award for 2013 goes to the Government Pension Investment Fund. Financial performance on the back of rising stock prices has been acceptable and The Metropolitan Court passed a strange judgement in a a weaker yen has recent case. According to the judgement, taxpayers impacted favourably cannot argue that they used arm’s-length price in their on overseas asset transaction with their related companies if the values. GPIF is corresponding the transfer pricing document does not meet biggest pension the fundlegal requirements. On the basis of the court in the world by assets judgement, in such case, the tax authority is not obliged to and the CFI judging examine whether the price used by the taxpayer falls panel was happywithin to the arm’s-length range. It is sufficient for the tax authority to choose one specific price falling within the provide this accolade arm’s-length range, and if the price applied by the for 2013. 140

The company supported the arm’s-length nature of the applied interest rate with a transfer pricing document. The document started from the interest statistics of the National Bank and such interest rates were adjusted by certain premiums, like the country risk premium. The tax authority argued that the calculation is incorrect as the interest statistics of the National Bank already contain those risk premiums the company included in the calculation of the arm’s-length interest rate. Therefore the tax authority refused to accept the transfer pricing document of the company, it determined an arm’s-length President: Takahiro taxpayer differs from thatMitani price then tax arrears can be interest rate at its own and established a tax default on the established. The judgement opens the way for a very basis of such interest rate. CFI.cofor. | Capital Finance International dangerous practice that taxpayers need to prepare

The case

Expert opinion

Summer 2013 Issue

Global Health: The Key to Economic Development in Africa Innovative Solutions from Investments in Health

> CFI Award Winner Cirrus Oil and Corporate Community Engagement in Ghana

Sub Topic: Leveraging Corporate Core Competencies for Health


Cirrus Oil is working hard to bring benefits to the people of their host communities in Ghana. The CFI judging panel was impressed by the Company’s focus on education. Cirrus constructed a splendid modern library in December last year and has stocked it well. The giving strategy is that of empowering people through improved

literacy. Health concerns are paramount in Ghana with high incidences of HIV/Aids and Tuberculosis and the Company has donated much-need medical equipment. Cirrus also champions a campaign to keep neighbourhoods clean and tidy. The panel was impressed by the Company’s consultative approach to

responding to community needs. Each quarter Cirrus arranges meetings where chiefs, children, parents and the Company are all represented. The attitude at Cirrus is to ask, ‘What can we do?’

Presenter: I

> Kromann Reumert: CFI’s IP Award Winner in Denmark

With a team of excellent and accomplished litigators, this firm does sterling work especially in the fields of trade mark and patent protection. KR

has a high profile client roster and has carried out some useful pioneering work for the music industry. ‘Good solid lawyers,’ commented the

judging panel, ‘and an obvious choice as Best Intellectual Property Team, Denmark, 2013’.

> Al Baraka, Egypt Wins 2013 Banking Award

Now leaders in the Egyptian market, Al Baraka has been offering Islamic financial products for the past 21 years. The CFI judging panel applauded the Bank’s 36 percent growth in profitability in

2012 despite the various serious challenges facing the country. Al Baraka certainly outperformed the domestic banking industry during very difficult times and is continuing to do so. | Capital Finance International

He panel has no hesitation in naming Al Baraka as Best Islamic Bank, Egypt, 2013


> Solid Work at Ozma, Nigeria Results in 2013 Oil & Gas Award

Ozma engages exclusively in independent engineering inspection work and associate activities. The panel congratulates this 100 percent Nigerian company on the quality of the

work it has carried out since the late 1990s, regarding Ozma as a ‘very solid, properly certified, wll established business with a good future.’ The panel has no hesitation in

confirming Ozma as ‘Best Oil & Gas Engineering Services Provider’ in Nigeria.

> CFI’s Best Investment Bank, Canada, 2013

Canaccord Genuity, the Canadian global investment bank seeks out growth companies. The CFI judging panel point to Canaccord’s outstanding

advisory and corporate finance solutions. They conclude that the Bank works to the very highest professional standards with a talented team

operating efficiently and effectively throughout the world. Canaccord Genuity is CFI’s ‘Best Investment Bank, Canada, 2013’.

> Dateline Energy: Moving Forward Confidently in Nigeria

The CFI judging panel congratulates Dateline Energy Services on its recent restructuring and the creation of new platforms to ensure competitiveness in a tough market place.


Dateline has a good record of working for a major international player having created a scope of work that is resulting in significant new business. This company is well placed to | Capital Finance International

achieve significantly improved results for its stakeholders. Dateline wins our award for ‘Best Oil & Gas Project Support Services, Nigeria, 2013’.

Summer 2013 Issue

> Top Regional Player Wins Islamic Banking Award for Malaysia

Maybank Islamic Berhad, established in 1960, is the biggest Islamic bank in Malaysia and the strongest industry player in the entire Asia Pacific region. First quarter 2013 results were satisfactory and the Bank has had consistently

good recognition from the ranking agencies. Maybank Islamic (with four million customers) dominates its domestic market and according to the CFI judging panel, is, ‘a strong industry innovator with a fast-growing office network

around the world’. The panel confirmed Maybank Islamic Berhad as ‘Best Islamic bank, Malaysia, 2013’.

> Great Safety Record at Selambus: The CFI Customer Satisfaction Award Winner in Ethiopia

For road transport passengers, customer satisfaction means a comfortable journey and safe arrival at the destination. The judging panel confirms that Selambus in Ethiopia meets these criteria on a daily basis. The fifty-strong

driving team are courteous, continuously trained and very skilled. Selambus can boast eighteen accident-free years (since its establishment in 1995). Customer feedback is very important to Selambus with suggest boxes on each bus and

opportunities to comment via the internet. The drivers are well-rewarded for good service and efficiency.

> Julius Baer: Second Year as CFI’s Best Private bank, Switzerland

With strong asset growth, effective cost control and good profitability in 2012, Julius Baer wins the CFI Private Bank, Switzerland, award for the second year running. The judging panel commented

on the benefits to the Bank following its acquisition of Merrill Lynch’s international wealth management business (outside the United States). The judges were pleased to see | Capital Finance International

the continued success of a solid private bank in a competitive market.


> Ernst & Young, Argentina:

Tax Havens – The Argentine Government Issues a New Tax Regulation on Low or Nil Taxation Countries By Leonardo Favaretto & Sergio Caveggia

Sergio Caveggia and Leonardo Favaretto from Ernst & Young explain the scope of Presidential Decree 589/2013, which sets new parameters for considering a state to be “uncooperative” in terms of tax matters. How this brand new regulation affects income tax. What role Argentine tax authorities will play.


hrough Presidential Decree No. 589 (published on May 30, 2013, in the Official Bulletin) (hereinafter “Decree 589”), the Argentine Executive established a significant change in how income tax is regulated in relation to the so-called “low or nil taxation countries” (hereinafter and for the purpose of this contribution, “Tax Havens”). The collateral aspects of this regulation are many and exceed the scope of this article. However, we consider it appropriate to list a few preliminary considerations related to this recent modification. Along general lines, Argentine law (until this Decree was issued) had adopted the “black list” criterion when defining jurisdictions as low or nil taxation jurisdictions (Schedule A lists the countries, territories, jurisdictions and tax systems considered Tax Havens until Decree 589 was issued). The new regulation takes on just the opposite criterion, namely the “white list” approach. In other words, Income Tax Law’s administrative order will no longer define what countries or jurisdictions, domains or others are considered low or nil taxation jurisdictions, but rather, it empowers AFIP (Federal Public Revenue Agency) to “create a list of countries, domains, jurisdictions, territories, associated states and special tax systems considered to be cooperative for tax transparency purposes, publish it on its website… and keep this publication up to date, in accordance with the provisions in this decree”. As Argentine tax law refers to “low or nil taxation countries”, the Decree had to clarify that all references to those countries should be understood as referring to “countries not considered ‘cooperative for tax transparency purposes’”. In other words, until Decree 589 was issued, Income Tax Law’s administrative order itself contained a list of the countries considered


“In general, Income Tax Law favors application of the accrual method, for recognizing both income and associated expenses.” “Tax Havens”, which could only be amended by issuing a new decree. After current amendment, federal tax authorities have the power to publish the list of countries that will not be considered Tax Havens or, in other words, cooperative countries for tax transparency purposes. The treatment afforded to Tax Havens in Argentine tax law The amendment introduced by Decree 589 to the administrative order of Income Tax Law is particularly important given the more burdensome treatment Argentine tax legislation has reserved for all transactions carried out by Argentine taxpayers with parties domiciled in Tax Havens, compared to the transactions that these same taxpayers carry out with parties domiciled in jurisdictions not classified as such. For clarity’s sake, we will briefly mention some of the tax provisions somehow penalizing or increasing the tax burden in transactions between Argentine resident parties and companies or parties incorporated or located in low or nil taxation countries:

Therefore, parties domiciled in Argentine are required to assess the prices of transactions carried out with parties domiciled in Tax Havens through one of the methods provided by the transfer pricing provisions that is most appropriate according to the type of transaction in question. (b) The deduction of expenses representing Argentine-source income for parties domiciled in Tax Havens. “Black List” of countries, territories, domains, jurisdictions, associated states and special tax systems in effect through the issue of Decree 589. In general, Income Tax Law favors application of the accrual method, for recognizing both income and associated expenses. However, this law has set certain time limits for deducting expenses which at the same time represent Argentinesource income obtained by certain foreign parties (related parties). In this regard, section 18, Income Tax Law, establishes that when the recipient of income is a party domiciled in a low or nil taxation country, the expense deduction will not take place in the tax period during which it accrued, but in the tax period during which it was paid.

(a) Application of transfer pricing rules

What this provision has sought to do is to ensure a correlation between the deduction of the expense for tax purposes with the payment of Argentine tax (through withholding at the source) by the beneficiaries domiciled in Tax Havens.

Income Tax Law, section 15, states that transactions carried out by resident taxpayers with natural or artificial persons domiciled, organized or based in low or nil taxation countries shall not be considered in keeping with the practices or market prices between independent parties.

The restriction on the expense deduction is a timing issue. However, we have learned of a tax reform bill that attempts to completely restrict income tax deduction of any expense the counterpart of which is income for parties domiciled in Tax Havens, regardless of whether it is Argentine or foreign source income for those | Capital Finance International

Summer 2013 Issue Argentina: Buenos Aires

Schedule A “Black List” of countries, territories, domains, jurisdictions, associated states and special tax systems in effect through the issue of Decree 589 1. ANGUILLA (Non-Self-Governing Territory of the United Kingdom) 2. ANTIGUA Y BARBUDA (Independent State) 3. NETHERLANDS ANTILLES (Territory of the Netherlands) 4. ARUBA (Territory of the Netherlands) 5. ASCENCION ISLAND 6. THE COMMONWEALTH OF THE BAHAMAS (Independent State) 7. BARBADOS (Independent State) 8. BELIZE (Independent State) 9. BERMUDAS (Non-Self-Governing Territory of the United Kingdom) 10. BRUNEI DARUSSALAM (Independent State) 11. CAMPIONE D’ITALIA 12. GIBRALTAR 13. THE COMMONWEALTH OF DOMINICA (Associate State) 14. UNITED ARAB EMIRATES (Independent State) 15. STATE OF BAHREIN (Independent State) 16. GRENADA (Independent State) 17. FREE ASSOCIATED STATE OF PUERTO RICO (State Associated with the US) 18. STATE OF KUWAIT (Independent State) 19. STATE OF QATAR (Independent State) 20. SAN CRISTOBAL (Saint Kitts and Nevis Islands: Independent) 21. System Applicable to Holding Companies (Law of July 31, 1929) of the Grand Duchy of Luxembourg 22. GREENLAND 23. GUAM (Non-Self-Governing Territory of USA) 24. HONG KONG (Chinese Territory) 25. AZORES ISLANDS 26. CHANNEL ISLANDS (Guernsey, Jersey, Alderney, Great Stark Island, Herm, Little Sark, Brechou, Jethou Lihou) 27. CAYMAN ISLANDS (Non-Self-Governing Territory of the United Kingdom) 28. CHRISTMAS ISLANDS 29. KEELING ISLANDS 30. COOK ISLANDS (autonomous territory associated with New Zealand) 31. ISLE OF MAN (Territory of the United Kingdom) 32. NORFOLK ISLAND 33. TURKS AND CAICOS ISLANDS (Non-Self-Governing Territory of the United Kingdom) 34. PACIFIC ISLANDS 35. SOLOMON ISLANDS 36. SAINT PIERRE AND MIQUELON 37. QESHM ISLAND 38. BRITISH VIRGIN ISLANDS (Non-Self-Governing Territory of the United Kingdom) 39. VIRGIN ISLANDS OF THE UNITED STATES 40. KIRIBATI 41. LABUAN 42. MACAO 43. MADEIRA (Portuguese Territory) 44. MONTSERRAT (Non-Self-Governing Territory of the United Kingdom) 45. Eliminated by Decree 115/2003 (published in the Official Bulletin on 01/23/2003). 46. NIUE 47. PATAU 48. PITCAIRN 49. FRENCH POLYNESIA (French Overseas Territory) 50. PRINCIPALITY OF ANDORRA 51. PRINCIPALITY OF LIECHTENSTEIN (Independent State) 52. PRINCIPALITY OF MONACO 53. FINANCIAL CORPORATIONS SYSTEM (Law No. 11,073 dated June 24, 1948, of the Republic of Uruguay) 54. KINGDOM OF TONGA (Independent State) 55. HASHEMITE KINGDOM OF JORDAN 56. KINGDOM OF SWAZILAND (Independent State) 57. REPUBLIC OF ALBANIA 58. REPUBLIC OF ANGOLA 59. REPUBLIC OF CAPE VERDE (Independent State) 60. REPUBLIC OF CYPRUS (Independent State) 61. REPUBLIC OF DJIBOUTI (Independent State) 62. CO-OPERATIVE REPUBLIC OF GUYANA (Independent State) 63. REPUBLIC OF PANAMA (Independent State) 64. REPUBLIC OF TRINIDAD AND TOBAGO 65. REPUBLIC OF LIBERIA (Independent State) 66. REPUBLIC OF SEYCHELLES (Independent State) 67. REPUBLIC OF MAURITIUS 68. REPUBLIC OF TUNISIA 69. REPUBLIC OF MALDIVES (Independent State) 70. REPUBLIC OF THE MARSHALL ISLANDS (Independent State) 71. REPUBLIC OF NAURU (Independent State) 72. DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA (Independent State) 73. REPUBLIC OF VANUATU 74. REPUBLIC OF YEMEN 75. REPUBLIC OF MALTA (Independent State) 76. SAINT HELENA 77. SAINT LUCIA 78. SAINT VINCENT AND THE GRENADINES (Independent State) 79. AMERICAN SAMOA (Non-Self-Governing Territory of the USA) 80. WESTERN SAMOA 81. MOST SERENE REPUBLIC OF SAN MARINO (Independent State) 82. SULTANATE OF OMAN 83. ARCHIPELAGO OF SVBALBARD 84. TUVALU 85. TRISTAN DA CUNHA 86. TRIESTE (Italy) 87. TOKELAU 88. OSTRAVA FREE ZONE (city of the former Czechoslovakia)

parties. It is evident that if the tax reform bill is approved, the attempt will be to fully discourage any transactions between Argentine parties and parties domiciled in tax havens. (c) Assumption that the funds from Tax Havens constitute taxable income The provision that has perhaps attempted most ardently to hinder transactions with Tax Havens is the first section added after section 18, Tax Procedure Law. | Capital Finance International


Argentina: Congressional Building

“Currently, Argentina has signed over 30 international treaties with other States.�

146 | Capital Finance International

Summer 2013 Issue

In fact, this regulation established an assumption (which allows rebuttal evidence) in view of which funds from low or nil taxation countries, whatever the nature, item or type of transaction in question, constitute unjustified equity increases for the local borrower or recipient.

About the Authors Leonardo Favaretto is a Senior Manager of the Transaction Tax Area in Argentina. He joined the Transaction Tax area of Ernst & Young in 2008. Leonardo has developed strong expertise over 16 years in tax advisory services, tax planning and due diligence for local and international companies. He specializes in international and local business acquisitions and M&A consulting with a strong focus on mergers and reorganizations.

The unjustified equity increases represent net taxable income subject to income tax (35%) and omitted sales under value-added tax and excise tax. Despite the above, the regulation in question provides that as long as there is sufficient evidence that the funds from Tax Havens resulted from activities actually carried out by the taxpayer or by third parties in those countries or that they come from the placement of duly declared funds, the legal assumption shall not apply.

Leonardo Favaretto

Leonardo is a Certified Public Accountant, graduated from University of Buenos Aires in Argentina. He is also a member of the Professional Council of Economic Sciences of Buenos Aires. He is fluent in English and Italian.

What countries will be included in the “white list”? The consideration of a new classification of counties, territories, tax systems and jurisdictions to be excluded from the white list would be essential as any transaction carried out with a low or nil taxation country by the party resident in Argentina would bring about undesired tax consequences for this party, as we have outlined above. Currently, Argentina has signed over 30 international treaties with other States (including double taxation treaties and tax information exchange treaties). During 2012, it also adhered to the OECD’s 1998 Multilateral Convention on Mutual Administrative Assistance, which could expand the network of countries with information exchange agreements even further. However the list of low or nil taxation countries which has been abolished by Decree 589 defined 87 countries and jurisdictions. (see Schedule A) According to the new regulation, the following requirements must be met to be considered a “cooperative country”: • Sign an information exchange agreement or double taxation treaty with a broad information exchange clause. • Effectively comply with the information exchange (the decree attempts to clarify this expression by stating that the AFIP will be the agency laying down the items to be considered in determining whether there has been an actual exchange of information). • If the treaties have not yet been signed, that negotiations towards that end have begun. If these requirements are not met, it would seem evident -a priori- that the group of uncooperative countries will be much larger than the previous list of low or nil taxation countries.

He has given lectures at national universities and is a frequent speaker at tax seminars and has also written several articles dealing with Argentine tax issues.

Sergio Caveggia

Additionally there are already countries that were defined in the previous list that, in theory, should be moved to the “cooperative” category, given the information exchange agreements already signed with Argentina (The Islands of Bermuda, The Principality of Andorra and The Cayman Islands, among others). The above paragraphs have shown us that being considered a low or nil taxation country (in the former regulation) or an uncooperative country (in the current regulation) implies a more burdensome tax treatment and specific assumptions that are not applicable to jurisdictions or territories not classified as such. It is clear that Decree 589 will leave it up to the agency in charge of federal tax collection and oversight to define what counties cooperate or fail to do so with Argentina and to provide an ongoing update.

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 at national universities and is a frequent speaker at 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.

Economic players engaging in transactions with other countries should thoroughly analyze this new list so as to understand the tax effects and assumptions that may apply and come into effect accordingly. i | Capital Finance International


> Ernst & Young, Argentina:

Trusts, Tax Evasion and Money Laundering By Horacio LĂłpez


n June 30, 2013, it will be a year since General Resolution No. 3312 became effective, and in July it will expire once again, this time for 2012. This resolution introduced an annual reporting system to be implemented by parties acting as trustees of trusts set up in Argentina, as well as by trustees, grantors and/or beneficiaries of trusts set up abroad. That is, as regards personal assets tax, in some cases the “reporting agent� is also the taxpayer, e.g. the trustor or beneficiary, while in other cases it is not, which would be the case of the trustee. Trusts have been set up abroad for the past few years as a tax planning measure with regard to


personal assets tax, particularly in cases where a person intends to separate a portion of his equity and reserve it for one of his heirs. Setting up an irrevocable trust prevents risks associated with business issues that the trustor may experience and also avoids payment of personal assets tax, as the trustor gives up control of the assets, which are no longer available to him. What may happen with trusts whose beneficiaries live in Argentina is that they have not been duly reported by the trustor or the trustee. This could be due to different circumstances: they are not Argentine residents or they are Argentine residents but fail to comply with the regulation, | Capital Finance International

perhaps as a self-defense mechanism because the funds had not been reported or simply because they are not aware of the new regulation. In addition, what could also happen is that the trusts were not reported by the beneficiary. The reasons could be: 1. That the events allowing the beneficiary to be informed about his status as such have not taken place. (E.g. due to his age, marital status or even profession). 2. That these events have occurred but he is still unaware of his status. 3. That the beneficiary decided to assume the risks of not reporting his new equity to avoid paying the tax levied on these assets.

Summer 2013 Issue

However, new regulations regarding money laundering which have been introduced in some places around the world consider that these situations are not too different and that tax evasion also suggests money laundering. This could cause an Argentine taxpayer (albeit an irregular one in his payments) to be included in a report prepared by a foreign entity that identifies suspected money laundering. As a consequence of this new interpretation, in the core countries’ financial systems the regulation preventing financial entities from keeping unreported funds in their customers’ country of residence is becoming more applicable. Although applicable regulations are not yet entirely clear, it is well established that a written affidavit signed by the customer is not sufficient when there is evidence of tax evasion. One indication suggesting that the customer failed to report the funds is the use of a complex structure to make the related investment or deposit without reasonable grounds. It is probably arguable whether a trust is considered to be a “complex structure”. It may depend on the culture of each country and the knowledge of the person making the assessment. However, if we analyze the lack of “reasonable grounds”, it is clear that the trustor who is not also the beneficiary in his country of origin gained an advantage in terms of tax (and equity) from using such a structure and, therefore, the structure was used with reasonable grounds. But if the trust fund was not reported in Argentina and, consequently, nobody paid over the personal assets tax associated with the trust’s corpus assets value, there would seem to be no “legitimate” tax and/or equity advantage gained by those trustors who are also beneficiaries or for the beneficiaries who are aware of their status as such. i

Buenos Aires: Puerto Madero

“Setting up an irrevocable trust prevents risks associated with business issues that the trustor may experience.”

Therefore, for different reasons, equity used to set up a trust abroad could remain unreported to Tax Authorities, thus failing to pay the related taxes. This suggests that the taxpayer involved believes that saving the related tax amount is more feasible (and alluring) than being identified and penalized by tax authorities. On the other hand, we understand that regulations preventing money laundering are aimed at identifying the equity that some parties manage to accumulate through illegal activities. And, in general, we believe such regulations to be very different from those regulations aimed at penalizing parties who obtain income or hold equity from legal activities but have failed to pay the related taxes as required by the regulations in place. | Capital Finance International

About the Author Professional History • Certified Public Accountant, University of Buenos Aires (1991). • Post-Graduate studies in Management Development, Argentine Catholic University (UCA) in 2004. Experience in providing tax advisory services, public and private clients belonging to several industries, including manufacturing, services, retail and communications. Has participated as an E & Y internal training instructor and has lectured at outside training seminars about different tax matters. Professional Qualifications Professor of the Tax Theory and Technique I course at University of Buenos Aires, School of Economics. (1998 - present), Has published several articles. Active member of the AAEF (Argentine Association of Tax Studies). Permanent lecturer at the “Introductory course to tax specialization”. Member of IFA (International Fiscal Association)


> Ernst & Young, Brazil:

Brazilian Receivables Funds – An Evolving Investment Opportunity By Flavio Peppe & Eduardo Wellichen

Foreign investors and fund managers looking to obtain exposure to Brazil are beginning to investigate the country’s fast-growing securitization market. This consists of receivables-backed funds called Fundo de Investimento em Direitos Creditórios (FIDCs). These appeal to investors because of their relatively high yields and diversification benefits.


everal recent changes have made these vehicles more appealing to foreign direct investors and fund managers. First, regulators have released rules allowing foreign fund managers, through local subsidiaries or partnerships, to set up and manage FIDCs in Brazil, opening an opportunity for non-Brazilian asset managers to offer them to their domestic clients. Also, tax authorities and the central bank have ruled that foreign investors and funds can invest in certain Brazilian assets on a tax-exempt basis. The so-called Resolution 2689 defines FIDCs as a type of investment that can be tax exempt for foreign investors who meet certain requirements. FIDCs are similar to consumer loan securitizations elsewhere. They are backed by trade receivables, credit cards, auto loans and similar assets. As with securitizations in most other jurisdictions, the funds are structured as bankruptcy remote vehicles and continue to operate even if the source of the assets – e.g. a company that has sold the FIDC trade receivables – files for bankruptcy. Less risk-averse investors have the choice of investing in FIDCs backed by nonperforming receivables. FIDCs can be structured as either open- or closed-end funds. They are often rated by rating agencies based on the competence of the portfolio manager and credit support derived from a senior-subordinated structure. The originator usually retains the subordinated class of securities. The market for FIDCs began in 2001 and accelerated in 2003 when the government passed rules allowing different types of assets to be securitized. FIDCs became popular with domestic corporations seeking to raise capital by monetizing receivables because the local corporate bond market was and can still be


“The market for FIDCs began in 2001 and accelerated in 2003 when the government passed rules allowing different types of assets to be securitized.” difficult and expensive to access, depending on the size of the corporation and its own credit risk. FIDCs can also give banks and credit card issuers that sell receivables a way to free up their balance sheets to satisfy capital requirements and to do more business, or just to anticipate their cash flow on instruments with a lower interest rate when compared to the rates on corporate loans.

seasoning of portfolios originated during 2009 and 2010, when lending standards were lax. This led to higher-than-expected default rates in some FIDCs from that period. However, in a report on Brazilian asset-backed securities issued in May 2012 [Brazilian Consumer Loan ABS Index: Credit Market Dynamics May Lead to Increased Delinquencies in 2012, 22 May 2012], Standard & Poor’s reported that inclusion of new transactions with stronger-than-average FIDC performance from 2009 and 2010 caused overall credit metrics to improve by the end of 2011. The rating agency expects the FIDC loss rate to remain stable, reflecting the stable economic and credit conditions in Brazil.

The CVM acted in response to some instances of fraud by FIDC asset managers, which resulted in significant losses for investors. These incidents were caused by the inability of investors to conduct due diligence on their funds’ assets due to a lack of transparency. Instead they had to rely on asset managers who, in certain cases, they later discovered had conflicts of interest.

FIDC advantages The receivable funds have a number of advantages. First, the Brazilian government is loosening monetary policy to try to maintain and increase the momentum of economic activity. It has lowered its benchmark Sistema Especial de Liquidação e Custodia (SELIC) rate from more than 10 percent to 8 percent, and could lower it further. The FIDCs provide a way for investors to achieve their return objectives despite the falling interest rate environment, as the assets comprising the portfolio of the funds are, generally, acquired with a discount that provides a much higher return over the time of the investment when compared to the interest rates offered on federal government and private securities. Moreover, because the portfolios usually contain receivables from a diverse group of debtors, they have less concentrated credit risk than an investor would bear from purchasing a traditional corporate bond.

Issuance of FIDCs slowed in 2012 due to news coverage of the investor losses and fraud cases. Investors also saw some losses caused by the

The currency issues faced by foreign investors in FIDCs are the same as those they face when investing in other Brazilian securities or other

Transparency and accountability In mid 2012, Brazil’s Comissão de Valores Mobiliários (CVM), the country’s securities regulator, proposed amendments to the rules governing FIDCs (Rule No. 356 of 17 December 2001, and No. 400, of 29 December 2003). The amendments are intended to improve the governance and transparency of the funds, clarify the governance responsibilities of the managers and service providers and establish stricter accountability. | Capital Finance International

Summer 2013 Issue

Brazil: Rio de Janeiro

types of mutual funds available in the market. Investors can either decide that they want the currency exposure, or they can hedge it.

with prepayment risk when economic prospects improve, this renegotiation risk grows when the economy declines.

FIDC drawbacks At this point, the most serious concern for investors is the continuing lack of transparency into the quality of the receivables. One of the reasons the CVM has acted to clarify the roles and responsibilities of fund managers, originators and service providers is that there exists a conflict of interest in funds that obtain their receivables from their sponsors. The CVM is concerned that Brazilian banks may be selling sub-standard receivables to FIDCs that they own or otherwise control.

Final thoughts For investors and fund managers looking to purchase or launch FIDCs, this may be a good time to evaluate the opportunity. The CVM regulations regarding governance and transparency should raise confidence in the product and help guard against future troubles. And, with Brazilian companies and financial institutions eager to monetize their receivables, there should be a steady flow of assets from which to choose. If the regulations work as intended, and the economic and credit environment cooperates, FIDCs could open the Brazilian market to a new constituency of foreign investors.

As with some other types of securitizations, FIDCs bear prepayment risk. Like mortgage securities, their assets exhibit negative convexity, which means they lose value faster when rates go up than they gain when rates go down. This is an asset pricing issue that most investors will not be overly concerned about. However, it is important to note that FIDCs will not behave exactly as other debt instruments. And, along with conventional default risk, FIDCs bear renegotiation risk if the assets comprising the portfolio are not covered by an obligation from the seller to replace them in case of default. If a loan originator renegotiates a loan with a troubled borrower, and that results in a lower interest rate, that will reduce the income stream available to the FIDC. Paired

Nevertheless, investors’ due diligence process for FIDCs and their investment managers is very important, in particular to foreign investors seeking to acquire shares of a FIDC. An in-depth understanding of the type of receivables that will comprise a fund’s portfolio (i.e., corporate loans, trade receivables or personal and auto loans) is an absolute must have. Investors should also analyze the economic scenario to understand the potential risks of the segment in which the debtors are operating. Given the duration of many FIDC portfolios, it is important to gain this knowledge of the local market, and in particular, the quality of the receivables, before getting on board. i | Capital Finance International

Flavio Peppe, Partner, Brazil

Eduardo Wellichen, Partner, Brazil


> DEG:

Mexico – A Rising Star in the Automotive Universe By By Hans-Dieter Steguweit and Alex Wegenast

All over the Latin American financial community it can be heard these days that Mexico as a whole is quickly catching up with Brazil when it comes to higher growth, larger investment flows and industrial development. After many years of being a sleeping princess, Mexico has woken up to its challenges. While this could be felt over quite some years, the new presidency of Enrique Peña Nieto has accelerated change through an ambitious reform agenda and the building of a certain national consensus. The people of Mexico are very optimistic and chances are good their optimism will not be in vain.


hile the above mentioned may be new, the postwar development of the automotive industry in Mexico is a long story that began in the fifties of the last century, with Nissan building its first plant and Volkswagen building its famous beetle from 1963 onwards. Over the years there was massive investment by the big three (Chrysler, GM, Ford) and Mexico was developing a skilled work-force and acquiring significant production know how. Mexican universities today are training far more engineers than for example Brazil. Nevertheless, over recent years the automotive world in Mexico accelerated for several reasons: geography, free trade, local content, stable economic policies, cost, re-industrialization of the US. Mexico, with its 3,100 km border with the US, is easily accessible, in fact it is the busiest border globally. Logistics therefore are relatively easy (rail and road links have been improved over recent years) and supply chains crossing the border are a natural consequence thereof. On the other hand, Mexico‘s Pacific coast and its improving port infrastructure make it easy to ship to and from Asia, the same applies for the gulf coast access to Europe. This unique geographical situation was recognized by Mexican authorities in the nineties and led to the NAFTA agreement that was negotiated by President Carlos Salinas de Gortari,implemented in the mid-nineties and that quickly developed into a success story. Subsequent presidents took


“Nevertheless, over recent years the automotive world in Mexico accelerated for several reasons: geography, free trade, local content, stable economic policies, cost, reindustrialization of the US.” the idea further by implementing a large number of 43 free trade agreements, the most important ones of which, besides NAFTA, certainly are the ones with Europe (MEFTA) and Japan (AAE). Additional ones are being negotiated as, for example, the one with South Korea that might lead to more OEM investment in Mexico in the future. While there have been some serious issues, particularly with Brazil and Argentina over free trade in connection with import quotas for motor vehicles, the free trade strategy that Mexico is following has been a success story, providing easy access to markets globally including developing South American ones. As a result of the steadily growing number of OEMs investing in Mexico, that today include Chrysler, Fiat, Volkswagen, Nissan-Renault, Honda, Toyota, Daimler, Mazda, Ford, GM and are soon to include Audi, also an increasing number of 1st and 2nd tier suppliers have been attracted to the country. Therefore local content of Mexican-built vehicles is increasing | Capital Finance International

and certain risks of cross-border deliveries, like currency risks but also the risks related to large distances, are decreasing. Maybe the decision to go to Mexico has never been easier. The legal framework and economic policy of Mexico have improved steadily. An independent Central Bank with world class management as well as very prudent financial policies by successive governments over a 20 year period created an atmosphere of financial predictability and trust. Low inflation, a relatively steady exchange rate, a very liquid and increasingly competitive financial sector and a recently accelerating reform agenda result in a far better case for investment. The very recently announced reform of financial sector legislation will, if executed, result in even lower financing cost and improved competition by banks. Labor reform has been implemented and the long expected energy and tax reform is announced for the 2nd half of 2013. Whereas competing countries, particularly the famous BRICS, developed rapidly over the last decades, Mexico remained to be the sleeping princess not really noticed by many. While labor cost and structural imbalances grew in the countries mentioned before, Mexico created certain stability and financial predictability in an extremely open economy. As a result, unit labor costs decreased in relative terms, while logistics etc. improved. Consequently, labor has become very competitive while being skilled as a result of Mexico´s industrial tradition and of its growth that creates ever more interest within the automotive community. Supposedly a Mexico

Summer 2013 Issue

produced passenger car can be brought to a US customer more cheaply today than the same model built in China. That is remarkable. While all of the above is at least partially home made, a last factor playing into Mexico´s hands certainly is the revival of the US economy, jointly with a recent trend to re-industrialize the US with the help of low energy prices resulting from recent developments in oil and gas in the US.



US Imports – Market Share China Germany Japan






Source: USDOC

Figure 1 - Industrial Redistribution: US Imports - Market Share.

Jan- Mar 12


























Mexico´s automotive exports have grown by a stunning 143% since 1998 while unit production has doubled. 82% of today´s production of approx. 2.5 MM units p.a. is exported. This puts the country globally in an impressive 8th place in vehicle production and in a 5th place in automotive supplies. Several car models are exclusively produced in Mexico, such as the VW Beetle and in future the new Audi Q5. This will be produced from 2016 in Audi´s recently announced plant in Puebla state, a multi-million US$ investment that will bring work for almost 4,000 people in a remote location and that is only possible through the countries’ free trade agreement network. Audi has very ambitious local content targets that will lead to further investment at the supplier´s camp. Several other OEMs have announced new plants and plant expansions amounting to several billion US$ over a 3 year period. Everything runs smoothly so far, but certainly challenges will remain. Up to now, the domestic market is less developed and does not provide a steady sales potential at all times. Labor is available but not yet with all the skills needed. Security in Mexico remains a front page subject as well as an unreliable legal system, and local content for the automotive sector still has to be improved. The tax system is complicated and the cooperation with the local utility is not always a reason for joy. The domestic market only represents about 18% of total sales. This is mostly due to two factors: the import of used cars from the US (about 1 MM p.a.), mostly aged 10 and beyond, and the income distribution within the country that excludes large parts of the population from the market. Yet things are improving and Mexico´s demography bonus certainly is a dream scenario for Europe, with 26 being the average age and a 44 MM workforce to grow steadily over the coming years. Mexico´s universities produce 75,000 engineers every year and the issue of income distribution has been discovered by the government and will be on the agenda in coming months and years. OEMs in Mexico have taken initiative for many years in educating their workers themselves, thereby improving labor quality and loyalty. Several initiatives to provide not only excellent production know how but also development skills are being discussed as development engineers are still in short supply.

Figure 2: OEM Plants - Light Vehicles. Source: LAV & ProMéxico. | Capital Finance International


We at DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH, a subsidiary of KfW Bankengruppe, jointly with our long term export and project finance sister KfW IPEX Bank have taken the initiative to support Mexico and the automotive supplies industry on their way to excellence. DEG is financing long-term projects with senior debt and equity in order to help entrepreneurs in their decision making process to go to Mexico or to support the ones with a presence in Mexico. In that context, DEG, jointly with Lateinamerika-Verein, ProMéxico and

Rödl & Partner, has recently organized a forum for several dozen European automotive suppliers with the intention to inform about the market and share experiences with fellow competitors that already executed their move to the new world, some of them with financial support from DEG. DEG head office in Cologne as well as the DEG Representative Office (since 2003) in Mexico City are always happy to provide the necessary information and support, if needed. DEG is a “buy and hold” investor with a development mandate, a reliable and long term partner.

In general Mexico is not a complicated place to make business and things are improving constantly. And yes, security is an issue although not nearly as bad in everyday life for most areas as people in Europe or the US perceive. Mexico certainly also is hoping that Enrique Peña Nieto has the recipe for that problem as well. Hopefully he can deliver. Get ready to be there! i

ABOUT THE AUTHORS Alex Wegenast works for the German development finance institution DEG at the Representative Office in Mexico City. He took up the position in early 2013, after he had been working as Senior Representative and country manager for Bayerische Hypo- und Vereinsbank and then Unicredit in Mexico since 1998. His co-authour, Hans-Dieter Steguweit, works at the DEG Headquarter in Cologne and was involved in the organization process for the forum “Automotive Mexico”. Both work in the Latin America department of DEG, which has identified Mexico as strategic market for German Businesses and Equity & Mezzanine investments. With 160 MM new commitments in 2012, Mexico ranked second in DEG’s new business. If you are interested in working with DEG, have any suggestions or would like to go into more details, please feel free to contact us under at


Production Exports

Production: +102% Exports: +143%


P: 2,9 E: 2,4

2,5 2 1,5

P: 1,4 E: 1,0

1 0,5 0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: INEGI

Figure 3: Production/Exports 1998-2012 - Light vehicles. Source: INEGI.

› Stable overall GDP Growth and rising private income/consumption › Rising car sales in the domestic market › Recovery of the NAFTA-Countries pushes car sales › Solid business environment and legal framework compared to most BRICS Doing Business Index 2013 – World Bank

Mexican car production 2007 - 2012

1 Singapore 4 USA

20 Germany 39 South Africa

48 Mexico 91 China 112 Russia 130 Brazil 132 India 184 Chad

Doing Business Ranks from No. 1 to 185

Alex Wegenast


Figure 4: Mexico and its Automotive Industry seem to be on the rise. Source: DEG / KfW-IPEX-Bank. | Capital Finance International

> Summer 2013 Special: Ten Outstanding Female Business Leaders


opefully one day it will be pointless to produce a list of Ten Outstanding Female Business Leaders. However, at present, women are relatively poorly represented on the boards of major companies, too few are taken seriously as entrepreneurs and so for now we feel the need to highlight some of their achievements. Yes, things have improved but until the playing field is levelled the world is going to be missing out on a huge resource of talent. The obstacles faced by some of the women profiled here have been greater than most men have


encountered during their careers. It may be bankers failing to take women as seriously as their male counterparts or the challenges of completing a busy workload given the demands of family life. Only four per cent of Fortune 1000 companies have a female CEO and we believe that many of those companies would have been better led had the available talent pool been greater. Imperial Tobacco’s Alison Cooper has said “I don’t like to think we’re a commodity” but we say that while this is true on an individual basis, talent is a commodity and it is being wasted. | Capital Finance International

Summer 2013 Issue | Capital Finance International


> Ursula Burns CEO, Xerox, United States

Ursula Burns has a certain prominence in our minds because she became the first AfricanAmerican woman to run a Fortune 500 company. Yes, of course, she is a trail blazer in this regard but it was not for this reason that we included her in our list of Ten Outstanding Female Business Leaders. Burns took over at the helm at Xerox in 2009 from perhaps one of the best saleswomen to have headed a Fortune 500 company namely, Anne Mulcahy. The prime driver behind what Money Magazine describes as “the great turnaround story of the post-crash era”, Mulcahy brought Xerox back from the brink of bankruptcy. Burns was a key member of Mulcahy’s team and the women describe their working relationship as 158

a true partnership. So the succession of Burns came as no great surprise. The challenges Burns faces now are certainly no less problematic than those of her predecessor. As each day passes “making a Xerox copy” becomes less and less relevant to the future of the business. Xerox needs a leader to help drive the necessary changes that will ensure its long term security. An trained engineer with a Masters from Columbia and a reputation for speaking her mind, Burns is pushing forward a real transformation at the Company. Her first major step was the acquisition of Affiliated Computer Services for $6.4 billion in 2010. As Xerox brings increasing levels of service into its business model, the quality of leadership and | Capital Finance International

oversight provided by Burns is proving to be of critical importance. Having joined the company as in intern in 1980, Burns is in many ways a product of Xerox’s ability to deliver product development and innovation in-house. There are few companies with Xerox’s track record for invention. With these skills running through the veins of the company, it seems fitting that Xerox has been able to produce a leader of the calibre of Burns. We selected Ursula Burns because we believe she is the person who - at this critical point in Xerox’s history - will help ensure that the Company will still be a household name fifty years from now. Maybe the term ‘Xeroxing’ will take on significant and profitable new meanings.

Summer 2013 Issue

> Ibukun Awosika Business Leader and Media Personality, Nigeria Mrs Ibukun Awosika exemplifies the Nigerian entrepreneurial spirit, represents the true face of Nigerian business and highlights the opportunities that Nigeria presents to entrepreneurs. When Awosika took up work for a furniture company as a young, fresh-faced 25 year this was her first job after completing her studies. She was not satisfied with the way the company operated but developed a passion for furniture and decided to create her own business. She quickly set about doing things the right way, applied her high personal value set to business and Sokoa was born. With next to no start-up capital but by putting customers first, Awosika has built one of West Africa’s largest furniture businesses. She is a well-known personality and became an inspiration to many aspiring Nigerian entrepreneurs after appearing as one of the investors in Nigeria’s version of the popular business reality show Dragon’s Den. She also

hosts the popular television programme Business – His Way, which helps promote high ethical standards and is the author of a book under the same name. Awosika covers a wide range of business issues and relates them to the Christian teachings to show how through conformity with her religion, lasting business success results. Entrepreneurs across the globe would do well to regard Mrs Ibukun Awosika as a role model. Her approach to continual personal development, further education and doing the best job possible is exemplary. And her financial prudence and high moral standards are at the very core of her success. The fact that she so willingly and effectively shares her knowledge and experience makes her a model for many other successful business leaders too. In appointing Awosika to the board overseeing Nigeria’s new Sovereign Wealth fund, President Goodluck Jonathan’s government has made a proper and wise choice.

> Maria das Graças Silva Foster CEO, Petrobras, Brazil As the first female CEO of a major global oil company appointed by Brazil’s first female president, there has been much interest in Maria das Graças Silva Foster. But her acquired role at Petrobras should have come as no surprise. There is often debate as to whether it is best to promote internally or bring in a new face when looking for a chief executive. Foster may well have been an excellent choice because as Joseph Bower at Harvard would say, she is very much an “inside outsider” - and being a women has probably helped her achieve this. There is no doubting her insider knowledge of the intricate workings of the Company. Since starting as an intern after completing a Masters in chemical engineering, her entire career (including a stint as Secretary for Oil, Natural Gas and Renewable Fuels at the Ministry for Mines and Energies) gives Foster intimate knowledge not only of the company but also of the company’s largest financial stakeholder namely, the Brazilian Government. Foster, however, is not an outsider simply because she is a women in a largely man’s world: her Favela upbringing may well have helped give her an outsider’s perspective and this - combined with a no-nonsense approach - has helped mould a leader to take Petrobras forward while balancing the needs of a multitude of stakeholders. Petrobras is encountering challenges not faced by some of the other large oil companies, but expectations are high and we believe that Foster is the one to help Petrobras reach its full potential. | Capital Finance International


> Karen Agustiawan CEO, Pertamina, Indonesia Karen Agustiawan had her tenure as CEO of PT Pertamina (the Indonesian state owned oil company) extended for a further five years in June this year. In recent years most of her predecessors have not even completed a full term and it has been decades since a CEO at Pertamina has been reappointed. This is a major vote of confidence in Agustiawan’s efforts to turn Pertamina into a truly global player. Having studied engineering physics, Agustiawan kicked off her career with Mobil Oil in Indonesia and the US and only joined Pertamina in 2006 following several years at Halliburton. There is no doubting her technical ability and strategic thinking, but we feel it has been her focus on the human capital at Pertamina that will turn the company into a global player. The mission she has set for Pertamina over the next five years is ambitious saying, ‘Pertamina must be able to contribute at least 50 per cent of the country’s total production’. The past five years have given Agustiawan the time to create a team strong enough to make the big decisions needed to achieve this target. With Pertamina extending its reach on a global basis the Company has a leader with experience, courage and the skill to transform.

> Sheri McCoy CEO, Avon, United States Sheri McCoy is one of the relatively few global business leaders to have risen through the ranks of a major multinational. Having been overlooked in the search for a CEO at Johnson & Johnson, where she had risen to the position of vice-chairman during her 30 year career, she has taken on that role at Avon. It may be fair to say that Johnson & Johnson’s loss has been Avon’s gain. McCoy did not take over the leadership of Avon at the easiest of times: the company’s financial reputation was at a low ebb following the SEC probe into bribery charges and the business model was under pressure in key markets. Avon needed a new leader and in McCoy they not only have someone whose personal value set is an excellent match with that of the company but as chief executive that also brings to bear the ability to identify and exploit new opportunities and focus on the bottom line. Given Avon’s first quarter 2013 results there would appear to be good reason for the optimistic view that a successful new chapter in Avon’s long history is about to open. We wish Sheri McCoy and Avon well as the Company continues to empower women across the globe.

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Summer 2013 Issue

> Indra Nooyi CEO & Chairman, Pepsico, United States

Indra Nooyi has been CEO of PepsiCo since 2006 and chairman since 2007. PepsiCo are famous for their product slogans and in an era of company mission statements, the Company has developed the slogan: “Performance with Purpose”. Under Nooyi’s leadership, PepsiCo have been striving to achieve their mission and of course they are a moving target. However, there is no doubt that in PepsiCo’s case they have a leader who is up to the task. In fact, “Performance with Purpose” would be an excellent way of describing Nooyi’s

own career.” Everything with Purpose” might be even more accurate. There is, of course, no single factor that enables leaders to drive their organisations forward through uncertain times but maybe in Nooyi’s case it is her ability to identify and nurture talent and turn that talent into a strong, cohesive team. Nooyi seems to have the ability not only to empathise with others needs but to almost walk in their shoes. She has taken this as far as writing to the parents of her executive team explaining | Capital Finance International

how proud she is of their children. This attention to detail and thought behind the detail is what we feel sets Nooyi apart from the field since her days as an MBA student at the Indian Institute of Management, Calcutta. PepsiCo have survived intact the attempts to break up the company and look set to continue the global challenge to Coca Cola. Good reactions are to be expected after the recent R&D which is very much at the core of PepsiCo’s drive for “Performance with Purpose”.


> Cher Wang Chairman, HTC and VIA technologies, Taiwan

Cher Wang is chairman and co-founder of Taiwan’s tech giant HTC and VIA Technologies. Wang has encountered a rather different set of challenges to most entrepreneurs as the daughter of the late Wang Yung-Ching who was one of Taiwan’s most successful and wealthy industrialists. In certain respects it is harder to become a successful entrepreneur emerging from the shadow of wealth and reputation. For an entrepreneur this can be a real burden which many fail to overcome. By any measure Wang has


succeeded in proving her own capabilities. Upon graduating in economics from Berkeley, she started her first job at a US computer company. It was there that she formulated her ideas for a new company developing and producing smaller lighter devices. HTC was born in 1997 and has gone on to become one of the world’s largest smartphone developers. One of Wang’s key strengths has been her ability to identify and fill the needs of key strategic partners. This has enabled HTC to secure partnerships with major | Capital Finance International

mobile and software providers alike. But probably her greatest achievement to date has been in turning HTC into an ally of both Microsoft and Google. Wang certainly seems to have inherited much of her late father’s business acumen but maybe most important she has learned from the example of her parent’s high personal values set. This has made her the trustworthy partner that could bring to HTC the support of two rival giants.

Summer 2013 Issue

> Kiran Mazumdar Shaw Founder of Biocon, India

Kiran Mazumdar Shaw is the founder and managing director of Biocon which is one of Asia’s leading biotech enterprises. Shaw’s success can be explained in part by the low expectations many male managers had of a woman’s ability to fulfil certain roles in the 70s and 80s. Her upbringing was such that she was strongly encouraged to believe that she could do anything her brothers could do. Unfortunately she found that the estimation of others was rather different. After graduating in Zoology from Bangalore University she went on to post graduate studies at Melbourne

University with a view to becoming a brewmaster. Probably because of her sex, Shaw was unable to get the sort of employment she considered appropriate. As a result she used her scientific and brewing skills to found Biocon. Working from a garage in Bangalore with very limited starting capital she started manufacturing plant enzymes. Shaw may have had no formal scientific training but her business acumen was instinctive, a combination of an intuitive understanding of risk and team building expertise. And what a team she has managed to build over the past 30 years. | Capital Finance International

Biocon has become one of the world’s leading pharmaceutical companies driven by Shaw’s belief in fair play and innovation. Shaw believes in putting something back into society and has not only used her wealth philanthropically but has also given generously of her expertise. For a young girl bought up by a professional family that instilled in her a sense of fair play and the belief that anything is possible, she has certainly answered those who rejected her and must have delighted her proud parents.


> Zhang Xin Business Leader, China

Zhang Xin and her husband founded Soho - one of China’s most successful property businesses - a little less than twenty years ago. She has become one of the country’s most prominent self-made billionaires. There are thousands of Chinese entrepreneurs with similar rags to riches tales but what sets Xin apart is the sheer scale of her achievement. Of course Xin’s husband has played a major part in Soho’s success and it is


impossible to know how successful either would have been individually (although it would appear to be a fairly safe assumption that they would both have done very well). What is clear is Xin’s passion for the design of buildings, her focus on strategy and the ability to raise capital in developed markets. These have all been major factors in her rise to fame. Xin’s design decisions have been bold - making a major contribution to | Capital Finance International

the vibrancy of Beijing’s central business district. Maybe it is these strengths and her instinct for financial prudence ( Xin still refuses to fly first class) that has taken the business to the level that thousands of her fellow entrepreneurs can only aspire to. What is certain is that Beijing would not look the same without her.

Summer 2013 Issue

> Alison Cooper CEO, Imperial Tobacco, UK

Alison Cooper is the CEO of Imperial Tobacco and her track record since taking up this office in 2010 has clearly demonstrated her leadership skills. She is carefully manoeuvring the company through the challenges the tobacco industry faces while maximising profits and diversifying into an FMCG business. After graduating in Mathematics, Cooper worked for Deloitte Haskins & Sells (now part of PwC), joining Imperial in 1999. We thought it fitting to include Cooper not only for her leadership skills but for her forthright views on the proposed quotas for female board

member representation. Cooper said during a recent Bloomberg interview, “I am not someone who supports quotas because quotas are around the demand side of the equation and you need to look at the supply side. And quick fixes on the supply side are not necessarily quality fixes. I don’t like to think we’re a commodity.” We are inclined to agree with Cooper. If the achievements of Alison Cooper’s peers in our list of 10 female businesses are anything to go by, helping to facilitate women’s rise through the ranks to build up organisations can only add to | Capital Finance International

the talent pool. The more talented individuals we have - be they men or women - that can fulfil their full business potential, the greater the opportunities for employment and sustainable growth. Maybe policy makers should be making greater efforts to achieve this; the economic benefits of ensuring that more talented women are able make the kind of contributions of Cooper and her peers here have achieved should not be underestimated. So let’s forget about quotas and look for realistic and intelligent targets.


> Kellogg School of Management:

Is There a Female Leadership Style? By Valerie Ross; based on the research of of David A. Matsa and Amalia R. Miller

Data suggests the answer is “Yes”.


n recent years, women have been making their way in ever-increasing numbers to the uppermost rungs of the corporate ladder, ascending to leadership positions once occupied almost exclusively by men. Women now hold more than 15 percent of corporate officer positions and board seats in Fortune 500 companies, up from about 9 percent of each 15 years ago, and 3 percent of CEO spots, up from one-fifth of one percent. With more and more women earning business degrees—over a third of MBAs awarded in the United States in 2010 went to women—that trend is likely not only to continue, but to accelerate.


All of this got David Matsa, an assistant professor of finance at the Kellogg School of Management, wondering: will women at the top of the corporate world be different sorts of leaders than men are? And will those differences have any impact on the businesses they run? Earlier work in social psychology and management had found that men and women do indeed have disparate management styles, with women tending to interact and communicate with their subordinates differently than men. But, Matsa says, “managerial style also has another meaning for economists.” Rather than | Capital Finance International

look at how female CEOs and board members might act day to day, he was interested in what sort of larger strategic actions they might take and how those actions would shape their companies. When he looked at previous work in economics, he again saw differences between the genders, but little of the research examined leadership. Many of the studies were controlled experiments with the general population rather than businesspeople, comparing how male and female college students completed an economic game. “For all the patterns seen in those studies, it’s

Summer 2013 Issue

not clear if they’d be the same among people who rise to become corporate leaders, because corporate leadership is highly selective,” Matsa says. “A lot of the stereotypical leadership traits are traits that are associated with men.” In other words, women who have made it to the top of the corporate world might behave differently than undergrads in a lab. Norwegian Mandate So Matsa and Amalia Miller, an associate professor at the University of Virginia, looked to a real-world example. In 2006, Norway adopted a quota mandating that all publicly listed companies in the country had to hire more female board members; by two years later, the companies’ boards of directors had to be 40 percent female. Matsa and Miller examined how this marked, sudden increase in female leadership had impacted Norway’s listed corporations. Using accounting information for Nordic companies from 1999 to 2009, they found 104 Norwegian firms affected by the quota and matched them to unlisted Norwegian firms, as well as listed and unlisted firms in other Nordic countries, for comparison. These were companies similar in size, industry, profits, and so on, but untouched by the mandate to hire more female board members. In most ways, Matsa and Miller found, the quota had no effect on firms; revenues, most costs, and rates of mergers and acquisitions all stayed about the same. The costs were higher in one area, however. “We saw that labor costs were higher,” Matsa says, “but it didn’t seem like it was coming from higher wages as much as it was coming from higher relative employment.” Companies impacted by the quota were not laying off workers as often as companies unaffected by the new law.

“For all the patterns seen in those studies, it’s not clear if they’d be the same among people who rise to become corporate leaders, because corporate leadership is highly selective.” David A. Matsa

Will women at the top of the corporate world be different sorts of leaders than men are? Since the law forced otherwise similar companies to hire women in leadership roles at a given point in time, it let the researchers do something rare for an observational study: draw a fairly strong line between cause and effect. “It’s clearer there that it’s not something from the business environment that’s leading them to have women in the leadership of the firm” and causing the workforce differences as well, Matsa says. Instead, the quota changed only one thing about the firms, the proportion of women on their boards—and that changed how often the firms laid off workers. While the data cannot say definitively why this is, Matsa and Miller suggest two possible reasons. Female leaders may have different values relating to the workforce compared with men in the same position. For example, an earlier study of Swedish corporate board members found that women placed a higher premium on what are known as self-transcendent values, things | Capital Finance International

like benevolence and universalism, and less on self-enhancement values, like achievement and power, than their male colleagues. These differences might make leaders more sensitive to the needs of their workers, and less likely to lay them off even when demand is low. On the other hand, Matsa and Miller point out, female leaders may simply be retaining their workers because it can be a sound long-term economic strategy. “Layoffs save money in the short run but can potentially be costly in the long run,” Matsa says. Hiring and training a new workforce is a large expense that can be avoided by keeping the workforce you already have. Matsa and Miller also found that the differences in layoff rates after the quota was implemented could not be explained by the relative youth or inexperience of the new female directors. The average age and experience of boards was stable overall following the quota, and the relative decline in layoffs happened at firms whose boards were more experienced and older than average. Gender in the Boardroom In a follow-up study, Matsa and Miller looked at workforce reductions in the United States during the recent recession. Instead of gauging gender balance in the boardroom, as they had in Norway, the researchers looked at the gender of the majority owner of privately held companies. They investigated whether female-owned businesses in the United States would, like businesses with more female board members in Norway, lay off fewer workers than their male-run counterparts. Matsa and Miller compared 2006–2009 data for more than 2,000 privately owned, femalerun American companies and male-owned businesses that were similar in industry, size, and profitability. Again, they found that companies led by women were far less likely to reduce employment, making 25 percent fewer layoffs than firms run by men. The gender difference persisted even after accounting for the firms’ financial conditions and the owners’ages, experience, education, and financial wealth. This finding “helps to confirm that the Norway results don’t seem to be specific to the quota,” but rather something about how female leaders run their businesses, Matsa says. “Even in a setting without a quota, you still see a similar pattern.” It is likely, he says, that the same pattern holds across a variety of corporate settings. i

By Valerie Ross, a science and technology writer based in New York, New York. About the Research Matsa, David A. and Amalia Miller. 2012. “A Female Style in Corporate Leadership? Evidence from Quotas.” Working paper, Kellogg School of Management.


> Otaviano Canuto, World Bank Group:

China, Brazil Two Tales of a Growth Slowdown China and Brazil are both facing a growth slowdown, as compared to the period prior to the global financial crisis. They were both able to respond with aggressive anti-cyclical policies to the post-Lehman quasi-collapse of the global economy. In both cases, such policies led to a growth rebound by reinvigorating previous patterns of growth. This brought forth the exhaustion of such patterns and the need to transit to other growth regimes.


heir previous growth models were mirror images to each other, in the sense that ultra-high investment to GDP ratios in China contrasted with low ratios in Brazil. China climbed up the ladder toward an upper middle income status along the last three decades, becoming the second largest economy in the world. Brazil in turn has remained in its relative position, in a sort of “middle income trap”, notwithstanding its improved macroeconomic performance – combined with substantial poverty reduction - in the 2000s. Both countries are currently facing a common challenge of reforming policies toward new growth directions, as well as a legacy from the post-Lehman crisis response.

“The numbers are dramatic: per capita income has doubled for more than a billion people in just 12 years.” for more than a billion people in just 12 years (Chart 1). What was once a primarily rural, agricultural economy has been transformed into an increasingly urban and diversified economic structure, with decentralization and marketbased relations rising relative to the traditional government driven command-based economy.

China: From the Great Transformation to the Great Transition The Chinese economy has changed dramatically over the last three decades. While its per-capita income was only a third of that of Sub-Saharan Africa in 1978, it has now reached an uppermiddle income status, lifting more than half a billion people out of poverty. The numbers are dramatic: per capita income has doubled

Keeping that extraordinary pace of transformation over the next decades will demand a change of course (World Bank and DRC, 2013). The Chinese pattern of rapid growth with structural change has been accompanied by rising economic imbalances, just as the main pillars of growth seem to be gradually weakening. High and sustained GDP growth rates were based

Chart 1: China’s GNI Per Capita.

Chart 2: China - Prospects of Labor-related Sources of Growth

Source: Schellekens (2013).

Source: Schellekens (2013).

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on elevated investment to GDP ratios, which in turn were only possible with low shares of wage income and domestic consumption, as well as with cheap and repressed finance. Another factor was dynamic markets abroad willing and capable to absorb a huge Chinese export expansion. Today, the economic doldrums faced by advanced economies are challenging the growth pattern associated with twin current and capital account surpluses. Growing income disparities were a domestic flipside of that model, becoming potential sources of social strain, in addition to changes in the external environment. Schellekens (2013) highlights three mutually reinforcing paths of transformation ahead in the Chinese economy. First, a structural slowdown of growth looks clearly to be in the cards. The productivity increases and growth seen through transferring resources from low-productivity agriculture activities to industry – a typical feature of economies moving from low- to middle-income levels (Canuto, 2013) – has to a large extent already happened. On the demographic front, the old-age dependency ratio will likely double in the next two decades. Furthermore, gains in

Chart 3: China - Investment and Consumption as Shares of GDP

Source: Schellekens (2013).

Summer 2013 Issue

goods will move toward more sophisticated ranges. A second channel will be through the erosion of China’s current competitive edge on low-cost labor-intensive manufacturing. Notwithstanding some reasons pointed out by Schellekens (2013) for why the out-migration of those activities “may not happen overnight and may never play out fully”, a window of opportunity will open to those countries with appropriate endowments and policy actions to benefit from the Chinese domestic factor price evolution. Finally, a third channel of transmission will be China’s march up the value chain, establishing a new front of head-to-head competition abroad. Both winners and losers may be produced in the rest of the world, depending on whether a country faces the challenge by introducing its own structural reforms to support innovation and adaptation to the new context, including by strengthening its position in the range of highend goods and services.

Chart 4: Brazil - GDP growth and unemployment rates. Source: World Bank.

The metamorphosis of the Chinese economy may involve painful growing pains, including the risks of a hard landing that many analysts attribute to the current transition. A set of structural reforms will be essential, including a strengthening of the public provision of social services and protection, in order to induce lower household savings. Furthermore, as we outlined in Canuto (2013), the experience of economies that have succeeded in moving up the income ladder suggests a need to reinforce property rights and other market-economy features. It is in remolding banking out of a “command-andcontrol” system that, perhaps, the challenge will be highest. Particularly because of the legacy in terms of excess credit – especially through nonbanking institutions – and over-investment that followed the stimulus package after 2008.

Chart 5: Brazil’s Terms of Trade. Source: FUNCEX.

economic efficiency and technological progress based on absorption of existing, imported technologies have from now on to be increasingly replaced by local innovative efforts. The set of second-generation policy reforms necessary for that will require time to bear fruit, whereas lowhanging fruits in terms of productivity increases will be less available (Chart 2). Second, a required rebalance is expected. Higher shares of services and consumption, following rising wages, with a decrease in exports, savings and investment ratios to GDP, must accompany the increased reliance on domestic sources of aggregate demand. Government consumption is also to rise, in order to meet social demands, as well as the needs of operations and maintenance. The income gap between coastal areas and middle and western regions should fall as the pool of underemployed labor shrinks. Interestingly, the perception of rising prosperity by the population will likely be higher than before, with rising purchasing power, despite

somewhat lower GDP growth rates. Third, a shift up the value chain in both tradable and non-tradable activities shall augment the previous paths of change. A transition to more sophisticated production processes is a target being already pursued. Ripples of China’s Transformation Ripples of China’s economic metamorphosis will be felt abroad in the years ahead. One channel of transmission is likely to be through their demand for imports. Its growth rebalancing will tend to favor commodities more associated with consumption, like agricultural goods, while metals and minerals will be negatively impacted in relative terms by the investment slowdown (although the latter may be partially offset by a still rising demand for residential construction and durable goods in the medium term). Meanwhile the rising share of services will lead to import leaks depending on current trends toward increasing tradability. Current imports of capital | Capital Finance International

Brazil: The Twilight of a Consumer-Led Boom After the 2008-09 global financial shock, Brazilian unemployment rates have remained at low levels and the economy rebounded in 2010, as a result of aggressive fiscal and monetary crisis-response policies (Chart 4). However, the overall GDP performance has been lackluster, and prospects for 2013 look not much brighter. The sharp downfall of production, investment and exports of the Brazilian manufacturing industry in the last two years has signaled that something deeper is at play (Canuto, Cavallari, and Reis, 2013). Brazil had indeed a good ride, with a long spell of economic growth. Poverty rates and income inequality have diminished steadily now for more than a decade, with the labor market dynamics playing the major role, besides targeted social policies and a steady rise in access to education (Canuto, 2012). But some of the economic drivers from last decade have clearly been exhausted. 169

booming domestic aggregate demand (Chart 6). However, such pattern of growth was poised to exhibit a limited – even if long – breadth, unless boosted or superseded by other sources of dynamism. The growth spurt in 2010 was a sort of last vent of the previous pattern of growth, as counter-cyclical policies mainly anticipated the use of the remaining existing space for sustainable household credit.

Chart 6: Brazil - Domestic demand growth and investment ratios. Source: World Bank.

What happened to “animal spirits”? The subsequent fall in investment ratios – which remained all the way below 20% (Chart 6) - has taken place on the private-sector side: according to the Institute of International Finance (IIF) estimates, the ratio of private investment to GDP declined from 14.3% to 12.7% last year, more than compensating for the increase of 0.4 percentage points in public investments to 5.4% of GDP. So, why haven’t the entrepreneurial “animal spirits” waken up and taken the lead at some point of the long growth spell? Why have private sector investments retrenched more recently? First of all, it is worth noticing that low investment ratios since the 1980s have been a flipside of low infrastructure investments, a factor that has become an increasingly tightening bottleneck – and productivity deterrent - as the economy grew in size. Furthermore, while the macroeconomic dimension of the Brazilian “investment climate” improved, the pace of microeconomic reforms nearly stalled in the last few years. Key financial intermediation reforms have been implemented, but complex tax systems and costly business transactions still correspond to a heavy toll on the value added generated by private investments. Large physical investments face hindrances derived from complex, uncertain and costly processes of authorization and implementation.

Favorable external factors also supported the Brazilian domestic real-side economic dynamics. Commodity price rises and improved terms of trade - Chart 5 - enabled not only the strengthening of balance-of-payments conditions and external accounts, but also generated domestic positive wealth effects in a reasonably widespread way, through agriculture land and real estate. Notice that terms-of-trade gains have not fully reversed and commodity prices have been hovering around current levels.

Second, those factors became especially stringent on the manufacturing-industry side as the recent pattern of growth unfolded. While the resource-based tradable side of the economy was ring-fenced by a favorable price dynamics abroad, and non-tradable services could respond to rising wage costs by marking-up their prices, the non-resource tradable part of the economy faced increasing costs – real wages and service inputs, including infrastructure-related ones – and crushed profit rates. Despite creeping ratios of manufacturing import penetration, the surviving manufacturing park could chug along while domestic demand kept going up. That’s why, suddenly, the combination of rising costs and the perceived inflexion on consumer demand growth looked like a “competitiveness cliff” (Canuto, Cavallari and Reis, 2013).

The combination of favorable external factors (including wealth effects), productivity gains, improved household credit risk, and government policies of raising minimum wages at a pace above those productivity gains then sparked a self-reinforcing virtuous dynamic between steady decrease of unemployment rates (Chart 4) and

This is illustrated in Chart 7, where those effects are examined through the lens of different wage gains by consumers and producers. Nominal wages are deflated there not only by the index of consumer prices (IPCA), but also by the GDP deflator for the specific sector. Gains realized by consumers can be gauged by deflating wages

Chart 7: Brazil - Real average wages. Source: Canuto, Cavallari and Reis (2013).

Some structural reforms and policy refinements enacted mainly in the period spanning from 1994-2005 yielded results in terms of productivity increases along the first decade of the new millennium. I would highlight the consolidation of stabilization gains – in terms of lower macroeconomic risk premiums and correspondingly higher levels of sustainable credit across the board - after the government transition in 2003 with a reassured (and tested) commitment to fiscal responsibility and macroeconomic stability. Benefits from the postprivatization revamp in telecommunications, as well as institutional innovations improving credit risks in several fronts – e.g., payroll-bill loans, a new bankruptcy law, and improved recovery of guarantees – also helped. Steady technologyladen productivity gains in agriculture have also been remarkable. 170 | Capital Finance International

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by the consumer price index (IPCA). Clearly, the latter benefited from higher terms of trade. However, few producers could take partial advantage of better prices and pay higher wages, alleviating some of cost pressures. Demand for labor can still be argued as greater than in the absence of this external shock, and the economy moved toward full employment. Therefore, cost pressures revealed to be much more intense in non-commodity-related industrial sectors. Notice how real wage costs went up particularly after 2008. Third, the path to a reorientation of public policy chosen by the government has not lifted animal spirits as intended. The intensive resort to targeted tax relief and trade measures, and to expanding subsidized lending partially backfired as they generated a wait-and-see (or rentseeking) attitude by investors. The manifested proclivity to cap or drive rates of return in energy and infrastructure concessions has also shun investors. Confidence on policy making eroded further as those targeted fiscal measures were seen as a failed attempt to avoid anti-inflation fiscal and monetary policies, particularly as inflation rates slid toward the upper limit of the 2.5-6.5% inflation target. In a chapter apart, Petrobras has been overburdened with ambitious and conflictive objectives: raise corporate financial leverage to comply with its responsibilities on Pre-salt oil exploration, contribute to lower inflation by absorbing imported oil price hikes, and implement local-content requirements. Is investments and purchases – and corresponding multiplier-accelerator effects - have been below potential. Moving to an investment-led new growth cycle will be faster if attention is focused on those structural factors that have maintained investment ratios below the 20% ceiling, instead of attempting short-cuts with policy tinkering. A framework of public-private partnerships that leads to a more intense crowding-in of private

investment and management in infrastructure is necessary. The overall agenda of improving the investment climate and “doing-business” conditions must also be retaken. Furthermore, a review of the current pattern of government expenditures, with shrinkage of transfers non-targeted to the poor, should also open fiscal space for raising public investments. In this regard, the mass movement on streets last June, during the FIFA Confederation Cup, may have constituted a wake-up call for such a review. In what may be called a “football spring” – given that the beauty and costliness of newlybuilt stadiums seem to have constituted a trigger of widespread manifestation – the population complained about the current quality of public services (health, transportation, security, and education) and a perceived aloofness by the political establishment. Public sector management and governance issues have now come to the fore on the political agenda, and there is no sustainable way to respond to that but by undergoing a review of government tax and spending policies.

ABOUT THE AUTHOR Otaviano Canuto is Senior Advisor on BRICS Economies in the Development Economics Department, World Bank, a new position established by President Kim to bring a fresh research focus to this increasingly critical area. He previously served as the Bank’s Vice President and Head of the Poverty Reduction Network (PREM), a division of more than 700 economists and other professionals working on economic policy, poverty reduction, gender equality and analytic work for client countries. He also served as an Executive Director of the Board of the World Bank from 2004-2007. Outside of the Bank he has held leadership positions at the Inter-American Development Bank where he was Vice President for Countries, and for the Government of Brazil where he was Secretary for International Affairs at the Ministry of Finance. He also has an extensive academic background, serving as Professor of Economics at the University of São Paulo and University of Campinas (UNICAMP) in Brazil.

References Concluding Remarks Together with other emerging markets and developing countries, China and Brazil are among those countries expected to play a major role in rescuing the global economy from its current doldrums. Depending on their ability to tap on existing potential sources of growth, those countries may even reverse roles with advanced economies and “switchover” positions as growth locomotives in the global economy (Canuto and Giugale, 2010). However, as illustrated by the Chinese and Brazilian experiences – including the on-going inflection on their growth trajectories –appropriate domestic reforms and policies shall be in place for that scenario to become full-fledged. i

Canuto, O. and Giugale, M. (eds.), 2010. The day after tomorrow:

a handbook on the future of economic policy in developing countries, Washington: World Bank. Canuto, O., 2012, Bucking the trend: poverty reduction and

inequality in Latin America, Huffington Post, June 7. Canuto, O., 2013. Overcoming middle-income growth traps, Capital Finance International, winter 2012-2013, p.88-89. Canuto, O., Cavallari, M., and Reis, J.G., 2013. The Brazilian

competitiveness cliff, Economic Premise n.105, World Bank, February. Schellekens, P., 2013. A changing China: implications for

developing countries, Economic Premise n.118, World Bank, May. World Bank and DRC – Development Research Center of the State Council, The People’s Republic of China, 2013. China 2030:

Building a modern, harmonious, and creative society. | Capital Finance International


> Meets Founder, Chairman & CEO of Edelweiss Group:

Rashesh Shah


ashesh Shah is Founder, Chairman & CEO of Edelweiss group – one of India’s most diversified financial services conglomerates. An MBA from the Indian Institute of Management, Ahmedabad, he has spent more than 25 years in financial markets and corporate sector. He started Edelweiss in 1995 with a capital of Rs 10 million (about $1.5 million at today’s prices). It has since grown into a diversified financial services group with businesses ranging from Credit including Housing Finance, Financial Markets including asset management, Commodities, and Life Insurance. For the financial year ended on March 31, 2013, Edelweiss had a balance sheet size of about $2.5 bn, net worth of $500 million, a loan book of about $1.1 bn and employs over 4,000 people. Rashesh has served on the Boards of various companies and public institutions. He has in the past served on the Executive Committee of the National Stock Exchange – India’s biggest securities exchange and presently serves on a committee to review Insider Trading Regulations appointed by the Securities and Exchanges Board of India (SEBI), India’s stock market regulator. In a conversation with CFI, Shah talks about the challenges facing the Indian financial services sector, his experience of building an institution and role of a leader in today’s business world. Q: In 17 odd years, Edelweiss has become a powerhouse in the Indian financial services space. What challenges to you foresee going forward? Shah: In our journey so far, we have managed to expand our offering across all asset classes and customer segments. Today our customer range from global institutions like sovereign funds and pension funds, corporates, High Net Worth Individuals, mass affluent customers as well as economically weaker sections of the society. In the last five years we have launched six different businesses. Most of these businesses have now attained scale and now reached a stage where they need to function as standalone companies. It is incumbent that they have the necessary control over the functions that impact their ability to execute well. Given the opportunities that lie ahead, the hope is that in the next few years, each of these businesses becomes “Edelweiss” in its own right.

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“But key to the success of this decentralization process is also retaining common values, a common culture, flexibility in leadership and financial resources and central oversight over compliance and risk. It is a difficult task, but not an impossible one.” But key to the success of this decentralization process is also retaining common values, a common culture, flexibility in leadership and financial resources and central oversight over compliance and risk. It is a difficult task, but not an impossible one. Two other ongoing challenges are people development and customer centricity. Talent Management has always been a focus area for us. The fact that over half of our businesses are headed by people who joined Edelweiss at very early stages of their career and have risen through the ranks, progressively taking larger responsibilities, is testimony to the success of these efforts. To further streamline these leadership development efforts, we have put in place four-tiered leadership architecture that covers over 5% of the total employees. Specialized training and mentoring programmes ensures that these leaders are equipped to play progressively larger and more important roles within the organization. The financial services industry in India is not only tightly regulated, but also hyper-competitive. As a result not only is any innovation marginal, but also quickly copied by the competition. In these circumstances we believe being customer centric has the potential of giving Edelweiss long term competitive advantage. Last year we embarked on an ambitious and far-reaching programme of Customer Centricity covering the entire Group. A series of training programmes have been conducted to “train the trainers” who so far have trained over 700 employees across the Group. The goal is to have each employee of Edelweiss trained in the tenets of customer centricity over a period of three years. This process will help us institutionalize the approach and provide clients a unique ‘Edelweiss experience.’ Q: Take us through your leadership development initiatives in some detail. Shah: At Edelweiss, we have a very well defined, multi-layered programme of identifying and cultivating leaders, right from the early stages of their career. Once these potential leaders are identified they are provided with

a lot empowerment. There is a constant communication with this group to encourage them to think and act like leaders. This helps future leaders re-frame current perceptions about potential and brings alive future possibilities. People have different personality types and our job is to understand these personalities and then bring out their leadership qualities. There are the ultra-aggressive types, where our job is to moderate their drives in order for them to become more socially productive in their ambitions to maintain organizational values and harmony. Then there are some who are naturally reticent. Here our role is to make their dreams acceptable and giving these aspiring leaders the opportunity that they never overtly ask for.

“An MBA from the Indian Institute of Management, Ahmedabad, he has spent more than 25 years in financial markets and corporate sector.” For all of these future leaders our mantra is to get them to think like a CEO of the company. Once they start doing that and taking ownership of their decisions, the results, in our experience are astonishing. Q: You have led Edelweiss through several cyclical ups and downs. What is the role of a leader during a crisis? Shah: The true test of a leader – be that of a company or a country – is how he or she deals with the crisis. If we look through history as to how great leaders have withstood crisis a few common themes emerge. It starts with facing reality and recognizing there is a crisis and getting people together to understand the root causes. The next step is to also recognize that however bad things are, there is a possibility that it could get worse. This realization helps when leaders start looking | Capital Finance International

for solutions. Otherwise there is a danger of undershooting One tendency that people sometimes have is to go into an isolation mode when faced with a crisis. But great leaders have always recognized that a crisis can only be faced by gathering and motivating teams and get them to work in concert. To paraphrase Peter Drucker, Leadership is not just doing things right, but doing the right things; demonstrably and repeatedly. Doing this builds trust, which is the key to tackling any crisis. Finally, one adage that we have always followed at Edelweiss – Never waste a good crisis. Every crisis has the seeds of an opportunity. It allows you to carry out structural changes, chart out new courses and test out new ideas. All our new businesses at Edelweiss – from broking to life insurance have been started and built when the times were tough. It allowed us time to invest, recruit good talent, and test out models. By the time the economic cycle turned, we were ready with our businesses to benefit from the upside. Q: In your own experience which has been the biggest leadership challenge you have faced? Shah: The two biggest challenges for any organization are scaling up and then re-orienting a business that has gathered scale. For us the initial challenge was to get potential employees and investors to believe in our idea that a newly liberalizing Indian economy needed the new age diversified financial services provider that we wanted Edelweiss to be. We managed it through a combination of our conviction, grit and large dollops of luck. The second big challenge was when we decided to expand our business from being capital market centric and diversify into adjacent spaces like credit, commodities, housing finance and life insurance. It also meant re-orienting ourselves from a “wholesale” mindset and learning how things are done in retail businesses. It meant re-orienting and re-energizing the organization. It also meant that getting our people as well as investors to understand and buy into the vision that we had. The whole process has been a learning experience for all of us. i


Section 1

> Berggruen Institute on Governance:

Executive Global GovernanceSummary in a Networked World By Dawn Nakagawa

Section 2

In this complex, fast-paced world of the 21st century, our institutions of global governance and the models on which they were constructed, are becoming obsolete. In the face of truly global problems with systemic risks, the state-centered institutional infrastructure that we have relied since WWII, has proved largely ineffective. Fortunately, the hyper-connectivity that has wrought these new risks, is also providing a mechanism for managing them.

Section 3


The World Economic Forum’s Global Risks The global risk that respondents rated most likely to manifest over the next 10 years is severe income disparity, while the risk 2013 report is developed from an annual rated as having the highest impact if it were to manifest is major systemic financial failure. There aresystem also two risks appearing in he World Economic Forum every year state-centric of international governance survey of over 1,000 experts from“The industry, the top of both impact and chronichalf fiscal collection of five multipublishes a detailed report on perceived served us likelihood well for the– second of the 20th government, civil society global risks.academia The collection and of multiimbalances and water century. supply crisis (see Figure 4). coloredwho graphs and charts colored graphs and charts would be an were asked toitreview a landscape of 50 be an enjoyable would enjoyable read, were not a comprehensive list However, globalization has changed the rules of Figure 4: Top Five Risks Likelihood andinImpact of calamities of unfathomable proportions. This theby game and the arena which we play it. global risks. read, were it not a year the usual suspects of water shortages, major

Section 4 Section 5

Risks ual ustry, ty who 50


comprehensive list of Likelihood calamities of unfathomable proportions.”

financial failure and the diffusion of weapons of mass destruction are topping the list. Food shortages and failure to adapt to climate change have migrated a bit and cyber attacks inched up ever so slightly.

First, our problems are global. Climate change, global pandemic, the contagion of financial failures – these cannot be resolved by a few Very Unlikely Almost Certain countries working together, regardless of how powerful. Effective management requires Severe income disparity 4.22 shared standards and coordinated action at various The fact that globalization is wrought with 20th Century Tools in a 21st Century World levels on a global scale. Chronic fiscal imbalances 3.97 The global risk isthatnotrespondents mostInlikely to manifest systemic risks, news. The rated financial the past we relied on small groups of powerful over the next 10 years while the risk meltdown of 2008 was is thesevere global income wake updisparity, – mostly Western – nations working Rising together to Secondly, the leadership we relied3.94 on has lost greenhouse gas emissions ratedtoasthehaving impact if it were handle to manifest majorThe G7 working with the much of its credibility, as much for its actions, call extentthe of highest our interconnectedness risks ofis scale. 3.85 and therefore, our vulnerability. However as wetwoIMF the WorldinBank managed the Asian Water as supply for its crises impotence. Waging the Iraq war on false systemic financial failure. There are also risksand appearing continue wrap our collective around the – chronic currencyfiscal crisis and the Latin American debt premises, rooting out terrorism by any means the top to five of both impactpsyche and likelihood ageing 3.83 financial scale and scope of water such problems, the inability crisis. were managedof population necessary and unleashing the global imbalances and supply crisis (see Figure 4). Geo political situations Mismanagement of our institutions of international governance by the UN Security Council as we muddled meltdown, has compromised the reputation of 1 2 3 4 5 to manage them is also becoming increasingly through decades of the Cold War without a the United States as the world’s moral, political Average Likelihood Figure 4: Top Five Risks by Likelihood and nuclear Impactincident. The Western democracy-led, and economic compass. evident.


Impact Low Impact Very Unlikely

Severe income disparity

Major systemic financial failure


Section 6

Chronic fiscal imbalances


Rising greenhouse gas emissions


Water supply crises


Mismanagement of population ageing



Water supply crises


Chronic fiscal imbalances


Diffusion of weapons of mass destruction


Failure of climate change adaptation

3.90 1







Water supply crises


High Impact

Unforeseen consequences of life science technologies was the

4.04| Capital Finance biggest mover among global risks when assessing likelihood, International 3.98


This graph has been updated to correct an error in the version from 8 January 2013.

Source: World Economic Forum

Major systemic financial failure


Source: World Economic Forum

This graph has been updated to correct an error in the version from 8 January 2013.

Low Impact


Average Impact

Average Likelihood Figure 1: Top Five Risks by Likelihood and Impact.


High Impact

Almost Certain

while unforeseen negative consequences of regulation moved the most on the impact scale when comparing the result with

Summer 2013 Issue | Capital Finance International


“While it may be too early to abandon all institutions of international governance, we are making progress on managing systemic risks despite their incompetence.” Simultaneously, the fiscal crises in Europe that threatens the union and the general reputation for incompetence of the U.S. Congress, has thrown into question Western democracy’s assumed superiority above other systems of governance. When compared with the accomplishments of China’s state run economy, and the bold and decisive execution of successive 5-year plans, Western democracy appears directionless and confused. Also impacting the progress of our international governance institutions is the emergence of powerful new voices. As the West wanes in influence and might, emerging economies have stepped into the void. Not only China and India, but Brazil, Turkey, and South Korea, among others, have become relevant and active members of the global community. The G20 is an attempt to harness the ideas and resources of these newly influential nations by including them in the institutional infrastructure of international management. Comprising 19 of the largest and wealthiest nations, the membership of the G20 accounts for roughly 2/3 of the global population and almost 80% of global GDP. Not surprisingly, the alignment of priorities between the diminishing and the developing worlds has proved difficult. While these new players bring ideas, resources and new energy to our global forums, they also bring different beliefs, cultures and economic priorities. As Nathan Gardels and Nicolas Berggruen argued in their book, “Intelligent Governance for the 21st Century”, the economic and technological convergence that is the consequence of Globalization 1.0 has given rise to cultural divergence as the emerging powers embrace their cultural roots to redefine themselves against the waning hegemony of the West. The diverse mix of political systems at varying degrees of economic development represented within the G20 have not readily found common ground. Apart from the burning platform moment in 2009 when the group came together to avert a banking crisis, the summits have yielded little progress toward strengthening the international financial system as it was intended.


None of our forums of international governance is immune from the impact of our new leaderless, diverse and multipolar global order. The DOHA round, the WTO, the COP process, none has produced significant progress in years. The Rise of the Leaderless Network Thankfully, it turns out we don’t need them. While it may be too early to abandon all institutions of international governance, we are making progress on managing systemic risks despite their incompetence. Into the vacuum of international governance, sub-national actors are coming together to tackle global problems. State governments, corporations, NGOs and other forms of multi national organizations, are working across borders and making progress in areas where national and international actors have failed to. Among the most impressive examples are climate change initiatives coordinated at the regional and municipal levels. No longer willing to wait for action at the national level, mayors across the US and around the world have come together to commit to reducing green house gases, share best practices and advocate for action and funding from national governments. World Mayors Council on Climate Change has gained commitments from over 80 urban leaders internationally and created a climate registry to measure the impacts of programs they have implemented. The Mayor’s Climate Protection Center has recruited over a 1000 mayors from across the U.S. to sign on to an agreement to reduce green house gas emissions in their cities. The agreement commits these mayors to meet or beat the Kyoto Protocol targets and to advocate for a national emissions trading system as well as other programs and policies. Similarly, transnational networks of every variety are working together more frequently and intensely than at any point in history. Police forces are coordinating security protocols for terrorist threats. Hospital networks are collaborating on disease prevention and control measures. The curse of globalization is also its blessing. Our rich interconnectedness on multiple levels has given rise to opportunities for cooperation and collaboration not available to us 20 year ago. On | Capital Finance International

Summer 2013 Issue

issues ranging from terrorism to human rights, to finance and trade, officials are exchanging information, coordinating policies and enforcing laws through informal channels. Frequent informal interactions overtime foster shared perspectives and encourage policy convergence. This mesh of informal networks has developed spontaneously, out of necessity and opportunity, and though subject to limitations, they hold the promise of effective and sustainable risk management in the complex world of the 21st century. Networks are resilient, adaptive and flexible. Multiple nodes are empowered with knowledge and decision-making capacity. Accountability is shared and transparency is required for the system to work. Failure in one area rarely translates to systemic failure and often can be balanced by success somewhere else in the network. Participants gain legitimacy not only by contributing to the knowledge and information bank directly, but more importantly by enhancing the resilience of network by expanding the number of connections. Leaving our most threatening systemic risks to be managed by leaderless informal networks is a disconcerting notion. These networks rely on a coalition of willing parties with shared values. There is little accountability and no enforcement. But the model of centralized power and topdown decision-making of our 20th century governance institutions is becoming obsolete. Such hierarchies have not kept pace with the accelerating complexity of globalization and they are not able to withstand the increased transparency it has wrought.

About the Author Dawn Nakagawa is the Executive Director of the Nicolas Berggruen Institute (NBI). In this position, Dawn is responsible for building the institution to become an organization of global reach and influence. Prior to joining NBI, Dawn was the Executive Vice President of the Pacific Council on International Policy, a global leadership network dedicated to enhancing awareness of and developing solutions to global challenges. In her position she oversaw all aspects of the organization and drove several special initiatives including the Energy, Environment and Security Committee and the Equitable Globalization Committee. She also co-directed the project on California’s Adaptation to Climate Change, recruiting the members of the taskforce which ultimately was appointed by Governor Schwarzenegger to be the California Adaptation Advisory Council to the State. Prior to joining the Pacific Council, Dawn worked as a consultant for McKinsey & Company where she developed growth strategy for Fortune 500 companies in a variety of industries, including high tech, medical device, biotech, consumer products and retail industries. She holds an MBA from University of Chicago Booth School of Business, and an undergraduate degree in Political Science from the McGill University in Canada. Dawn sits on the board of the Values Schools charter school organization, on the advisory board of Saureyah an economic development corporation operating in Africa and is a founding member of the local chapter of the Awesome Foundation. Dawn lives in Southern California with her husband Gene and her two kids, Ty and Jada.

Daily revelations of incompetence and corruption among those at the top of our pyramids, have stripped our once respected institutions of the mythology from which their legitimacy emanated. As we have witnessed, the tragic fragility of governing institutions can be exposed by an honest, well-timed tweet. With public trust in government at historic lows, and social unrest at all time highs, creating empowered global institutions to govern is not realistic or sustainable. “Global governance without world government”, as Anne Marie Slaughter coined it her 2004 book, “A New World Order”, is the most likely path forward. While, it may be too early to shutter our institutions of international governance, it is not too early to perhaps repurpose them as forums for informal networking and expanding coalitions of the willing, rather than for brokering binding international agreements. As painful as it might be to abandon our old model of international governance, it will be more painful, and costly, to watch them continually fail. i | Capital Finance International

The Berggruen Institute on Governance – along with leading global thinkers and practitioners – is developing governance systems for the complex and rapidly changing world of the 21st century. By challenging long-held assumptions about political customs and the structures that support them, exploring and innovating new systems and investing in implementation through targeted projects across the globe, the Berggruen Institute on Governance is building systems to succeed in the 21st Century.


> Edelweiss:

An Indian Financial Powerhouse Edelweiss is a leading Indian financial services conglomerate that provides a wide range of financial products and services, serving a large diversified client base that includes individuals, institutions and companies. At the end of FY13, it had a balance sheet size of about $2.5 billion, net worth of $500 million, a loan book of about $1.1 billion and employs over 4,000 people.


delweiss was founded in November 1995 with an aspiration to become one of the leading financial services groups in India. With the economic liberalisation of the early 1990s, Edelweiss saw a huge opportunity in intermediating on capital flows from savings into investments. From initially providing advisory and investment banking services, Edelweiss has grown by consciously and strategically investing in expanding services in existing areas as well as adding a presence in adjacent markets. The Group’s entry strategy in every new business has been to find growing but under-served niches in the market. The Group has used its skills as an efficient intermediary between savings and investments to grow into adjacent and related markets. As Edelweiss moved from wholesale to retail, and financial markets to insurance, the Group also expanded access to the financial savings pool from 5% to nearly 30%. This has allowed Edelweiss to expand across asset categories and broaden its addressable consumer segments – its reach has extended from wholesale to retail segments and to rural markets now.

“The Group’s entry strategy in every new business has been to find growing but under-served niches in the market.” is likely to expand another five times over the next decade, giving the Group huge headroom for growth. Edelweiss has always believed that having a strong capital base is vital for any successful financial services company. The Group has raised

Edelweiss’s belief has been that it must add significant value by providing cutting edge products and services by focusing on technology, risk, research, analytics, robust processes and high quality people. Starting life as a Corporate Finance Advisory firm, Edelweiss launched its Institutional Equities business in 2000, soon establishing its leadership position. Starting 2006, the expansion and diversification picked up pace. It launched the Commodities business in 2006, Corporate Credit business in 2007, Retail Financial Markets in 2008, Retail Credit in 2010 and Life Insurance in 2011. This diversification has expanded the addressable revenue pool twenty times in the last five years. With the Indian economy expected to grow between 6-8%, this addressable revenue pool

178 | Capital Finance International

capital on a number of occasions from a variety of investors, including a public issue of equity in 2007. Edelweiss maintained its strong balance sheet and consistent profitability even during the 2008-09 crises. Key Businesses Credit: Edelweiss’s Credit business caters to a wide spectrum of clients -- from corporate to Small and Medium Enterprises to retail and rural. At the end of FY13, the credit business contributed 41% to the Group’s revenues with a total outstanding loan book of about $1.1 billion. Of this, the retail credit book accounted for $250 million. The credit book has gained from Edelweiss’s conservative approach and strong

Summer 2013 Issue

“Edelweiss has also fostered a strong philanthropic culture within the organisation by encouraging giving and volunteering for the Group’s Corporate Social Responsibility arm EdelGive Foundation.” risk management with Gross Non-Performing Assets forming only 0.43% of the total credit book. The asset quality of the credit book is a testimony to the attention Edelweiss pays to risk monitoring and management and the appropriate credit appraisal skills imparted through a rigorous training schedule. In fact, Edelweiss’ seriousness about risk can be measured from the fact that the Group has 120 employees dedicated to managing, monitoring and mitigating risk. There are few financial services companies in India employing such a large team focused exclusively on risk management. Financial Markets: The Edelweiss Financial Markets business – consisting of advisory services, broking, financial products distribution and asset management – offers its services to a wide range of client segments ranging from sovereign funds, pension funds, foreign institutional investors, domestic financial institutions, corporates, High Net Worth Individuals and mass affluent individuals. Edelweiss is the largest Indian Institutional Equities house with over 4.5% share of the market. Edelweiss’s 60-member research team publishes a wide range of reports – from thematic to fundamental and technical – including landmark reports on the rural economy and infrastructure. The research team actively covers nearly 70% of industry sectors in the Indian market and over 180 companies in these sectors. Its asset management business has over $500 million of assets under management in its domestic mutual fund and offshore alternate assets business. Commodities: Edelweiss Commodities business consists of two parts – collateralised trade financing for agri-commodities and sourcing and distribution of precious metals. In the agricommodities space, it has preferred access to 15 large centralized agri-produce markets across seven states. This has allowed it to cater to a large part of the value chain from farmer to enduser for their sourcing, inventory management and credit needs. The Group has an extensive

network of brokers, suppliers, and warehouse service providers across all the commodities that it deals in. In the precious metals space, Edelweiss is in the business of procuring/ importing of precious metals and distributing it to its clients who are either precious metals endusers (jewellers, manufacturers) or traders. Life Insurance: Edelweiss Tokio Life Insurance (ETLife) is a 76-24 JV with Tokio Marine of Japan. ETLife offers a large bouquet of diverse products to meet the basic needs of customers on education funding, wealth accumulation and enhancement, living with impaired health, income replacement and retirement funding. It also offers group products for credit protection and life protection. In less than two years after launching its operations, ETLife has scaled up its presence to 45 branches in 38 cities and has 3,400 Personal Financial Advisors. Within a short period of about 21 months it has already written over 29,000 policies. Culture of Compliance Edelweiss is governed by all financial regulators – such as, Reserve Bank of India (RBI), Securities and Exchanges board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Forward Markets Commission (FMC), National Housing Bank (NHB) – and has a consistently clean track record. Edelweiss Financial Services Ltd (EFSL) has 11 directors on its Board, of which seven are independent/ non-executive directors. The Board plays a vital role as a policy maker, sounding board for strategic initiatives and as an oversight body for corporate activities. This ensures that the Board’s actions are fair to all stakeholders and makes integrity an article of faith across the organisation. Edelweiss has also consciously ensured that major subsidiaries (making up ~85% of Group Income) have external oversight through independent director/s. Key Board Committees | Capital Finance International

Above: cr = 10 million

like the Audit Committee and Remuneration/ Compensation Committees consist entirely of independent directors, while all other Board committees including Risk, Investor Grievance, ESOP and Share Transfer have majority or equal participation of independent/non-executive directors. All members of the Board and members of the senior management abide by a comprehensive Edelweiss Code of Conduct. This ensures that every member of the senior management, while playing an important role in achieving the company’s business objectives, also leads by example in matters of ethics, transparency and customer centric actions. Philanthropy Edelweiss has also fostered a strong philanthropic culture within the organisation by encouraging giving and volunteering for the Group’s Corporate Social Responsibility arm - EdelGive Foundation. The Foundation’s mission is to leverage the capacity and capital of the for-profit world to equip and enable the social sector, to improve the lives of the financial excluded. So far, EdelGive’s not-for-profit activities have impacted more than 125,000 lives. It has achieved this by investing in over 20 organisations, providing over 6,000 hours of pro-bono support since its founding in 2008 and committing over $3.5 million. EdelGive’s focus areas have been education, livelihood and women empowerment. i


> Grant Thornton Hong Kong:

Women in Senior Management – Setting the Stage for Growth By Amy Chiang


The latest research from the Grant Thornton International Business Report (IBR) explores the global shift in the number of women at the top of the business world and examines ways to make this growth permanent and parity possible. In the first quarter of 2013, it reveals that women hold 24% of senior management roles globally, a three point increase over the previous year. It is worth noting that there has been a sharp rise in China, with 51% of senior management positions held by women, compared to 25% last year. Moreover, the proportion of businesses employing women as CEOs has risen from 9% to 14%, but just 19% of board roles around the world are held by women. However, progress is slower in the G7 group of developed economies, where economic performances have been stuttering, than in the high growth economies of Asia and the Far East. In the G7, just 16% of board members are women. This compares to 26% in the BRIC economies and 38% in the Baltic states. Changing perceptions Over the past year, women have grabbed headlines in every industry and every corner of the globe. In the arts, more female directors, producers and writers were able to get their work into cinemas, television and theatre. In politics, an increasing number of women won elections: South Korea, for instance, recently swore in its first female president. Approximately 17 countries have women as head of government, head of state or both. The corporate world also saw firsts: Marissa Mayer broke ground when she took the helm of Yahoo more than six months pregnant. Women breaking barriers was the conversation of the year – from the much-discussed piece in The Atlantic, “Why Women Still Can’t Have It All,” by a Princeton professor and former US


“Approximately 17 countries have women as head of government, head of state or both.” State Department official, Anne-Marie Slaughter, to Facebook’s chief operating officer Sheryl Sandberg and her new book, “Lean In: Women, Work and the Will to Lead”, which addresses how women can succeed in the face of gender barriers. Via ‘Lean In’ circles, Sandberg proposes to gather women to share their stories and create strategies for climbing the corporate ladder. The benefits of parity The conversation continues as to whether women will ever reach parity with men in the workforce. Though the past 40 years have seen a massive generational shift, with more women entering the workforce across the globe, more needs to be done to advance women to senior leadership positions. In 2012, though women comprised over a third of the workforce in the United States, they held a mere 14.3 percent of executive officer positions at Fortune 500 companies and only 8.1 percent of executive officer top-earner positions. Of the FTSE 100, women held only 15% of board seats and 6.6% of executive positions in 2012. In the Asia Pacific region, the percentage of women on boards was about half that in Europe, Australia and North America. The promising news is that the number of women in leadership roles is growing. The IBR survey, which includes both listed and privately held businesses, indicates a 3% increase in the number of women in senior management positions from 2011 to 2012, with 24% of | Capital Finance International

businesses with women in senior management roles globally in 2012 (compared to 21% in 2011). And more people are taking note that gender diversity at board and senior management positions promotes corporate growth. In a study tracking results from Fortune 500 companies from 2004 to 2008, those companies with the most women board directors outperformed those with the least by at least 16% in terms of return on sales and 26% in terms of return on invested capital. A shifting landscape of opportunity The increase in the number of senior management positions occupied by women takes the ratio back up to the levels that preceded the global recession. The slump hit women disproportionately, and only now is a turnaround at hand. The increase from 21% of women in senior management in 2011 to 24% in 2012 is a significant improvement, occurring in parallel with the recovery (albeit tepid) of the global economy. Regionally, Asia Pacific leads with 29% of senior leadership positions held by women, compared to 25% in the European Union, 23% in Latin America and 21% in North America. The country ahead of the pack in Asia is China, with 51% of senior management positions held by women, compared to 25% last year. Despite much negative press coming from India with respect to gender relations, the country might prove to be the next leader. With only 15% of the total employee base occupied by women, 42% of survey respondents said they had plans to hire more women, especially in senior positions. Education: the leap forward The consensus is that change begins with education. According to a recent World Bank report, there are more women than men studying in universities in 60 countries it researched. The same report attributes the great strides in women’s participation in the labour force to increased education. Specifically in Colombia, higher education led to the steepest increase in women’s labour force participation as well as representation in senior managerial positions. This could provide an example for Latin America, where just 32% of total employees are female, according to the IBR survey, and only 15% of

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survey respondents say they plan to hire more women in senior management. Since the early 1990s, in the United States women have been attaining bachelor’s degrees in far greater numbers than their male counterparts. According to the census, 2010 was the first year in which women earned more advanced degrees than men. In the European Union, 60 percent of graduates from universities in the Union’s 27 member states last year were women. Creating the pipeline for senior female managers Another key factor in promoting women in the workplace is talent management. According to a McKinsey report, “If companies could raise the number of middle management women who make it to the next level by 25%, it would significantly alter the shape of the pipeline. More women who make it to senior management share an aspiration to lead, and more believe that getting to senior leadership is worth the cost.” The problem is typically that in this mid-career space, women are leaving companies to start families, and companies need to find solutions to keep the pipeline strong. Meanwhile, in India, where 49% of those surveyed say they offer flexible working options, Kaku Nakhate says there is still much room for improvement: “There are certain infrastructural constraints that women executives who are rearing children face. Being provided flexible work hours, for example, is very important, but all companies don’t offer that. Unfortunately, there are rigid mindsets, mostly male, that don’t believe in giving women opportunities or creating an environment where they can work and express themselves.” On the flip side, flexible working conditions do not always lead to increased numbers and retention of women in top jobs. In Denmark and Finland, with 93% and 90% respectively offering flexible work schedules, women represent only 23% and 24% of senior management, and in both countries, fewer than 10% of respondents said they were seeking to hire more women into top roles over the next 12 months. In the United States, where 72% of respondents said they offered flexible working options, only one-third of total employees are women. A recent high-profile and much debated announcement from Yahoo! CEO Melissa Mayer, rolling back the company’s work-at-home policy, highlighted the intense debate over the value of flexible work rules. A memo from Yahoo! human resources informed employees that they would not be permitted to work remotely because “speed and quality are often sacrificed when we work from home.” Corporate talent retention policies and flexible work options are only one part of the puzzle. Women who remain in the workforce in midcareer and higher levels need to have strong

support networks at home. All of the female executives interviewed stated that family networks enabled them to climb the corporate ladder, even with strong cultural biases working against them. More encouragement needed from Hong Kong regulators According to the IBR, up to 74% of businesses surveyed in Hong Kong have a board of directors, in which, however, only an average of 27% members are women. There’re even 17% of local businesses that have no women in their senior management team. Encouragingly, over half (55%) of the Hong Kong businesses do support the introduction of quotas for number of women on executive boards of large listed companies. After a consultation paper was launched in September 2012, amendments have been made to the Corporate Governance Code of the Listing Rules, which requires (subject to comply or explain) listed companies to have their own policies concerning the diversity of board members and effective this year in September. While the new code provision does not explicitly require quotas for women on boards in Hong Kong, the new regulatory requirement is certainly a step in the right direction. We would also like to see more done to promote gender diversity in senior management positions and privately held businesses, as diversity is the key to growth and good corporate governance. i

“Over the past year, women have grabbed headlines in every industry and every corner of the globe.”

About the Author Amy Chiang CISA Senior manager, Advisory Amy has extensive experience in providing advisory services to clients in various industries, including manufacturing, technology, financial, and the retail industry. She specialises in providing internal audit services, internal control reviews, and IT security advisory and audit services. Amy has performed regulatory compliance reviews such as Hong Kong Corporate Governance Code, and internal audit. She is also experienced in Sarbanes-Oxley (SOX) 404 IT readiness and certification services for a number of clients across various industries. Prior to joining, Amy worked for a financial institution and was responsible for building and maintaining the IT governance and security framework for the IT department. She also worked in advisory services at Big Four accounting firms. Amy is a Certified Information Systems Auditor, and a member of Information Systems Audit and Control Association (ISACA). Contact details Room 2111, Wing On Centre 111 Connaught Road Central Hong Kong T +852 3987 1261 E | Capital Finance International


> Grant Thornton Hong Kong:

Increased Appetite for Cross-Border Transactions By Eugene Ha

With the recent eurozone negotiations, and other major political and economic events that happened over the past twelve months, it is understandable that many business leaders would remain cautious about their current and future commitment to mergers and acquisitions (M&A). Cross-border deals set to rise However, the new research from the Grant Thornton International Business Report (IBR finds an increased appetite for cross border acquisitions as demand is at its highest level since 2008. Despite the political and economic events of the past twelve months, cross-border M&A is driving acquisitive growth which has increased by 56% since 2008 and 18% since 2012. Whilst overall the survey results indicate that some businesses may be holding back on committing to acquisitions in the next three years, there is no doubt that many of those that will be considering an acquisition will be looking overseas to facilitate their growth. 44% of European businesses plan to drive growth through a cross border acquisition in the coming year. Out of all European countries, Spain (66%) is the most fervent about future cross M&A activity whilst, in contrast, only 46% of German businesses are looking to cross border acquisitions. As for BRIC countries, the response from Russia (increase of 117%) and China (increase of 81%), emphasise the development and growing financial strength of mid-market companies within these countries that now have the ability and interest in sourcing growth internationally. Countries in Asia Pacific especially Singapore and the UAE show the most interest in growing through cross-border acquisition. Interestingly, Australian seems to show the most support for domestic targets as the focus of their acquisition energy. In Hong Kong, business leaders in general have been conservative with just 18% of businesses plan to grow through acquisition in the next three years, down from 26% this time last year. As many as 80% of businesses confirm they have no plan to execute an acquisition, significantly higher than their counterparts in mainland China and the global average. 182

M&A activity The IBR results show that 28% of businesses across the globe expect to be participating in M&A activity in the next three years. Whilst a decrease in comparison to 2012, the results remain above those at the depths of the global down-turn in 2010. It appears that with many key global regional economic issues still to be resolved, there is more subdued outlook for global M&A activity compared to the apparent woptimism shown last year.

Financial growth Whilst M&A remains a key growth strategy, the ability to finance such growth in the current financing market is potentially impacting on respondents’ views on the likelihood of transacting in the short terms. When asked how they expect to finance their growth strategies, it is notable that bank finance slipped to 48% of respondents from 53% last year. On the contrary, the IPO funding option increased

“44% of European businesses plan to drive growth through a cross border acquisition in the coming year.� | Capital Finance International

Summer 2013 Issue

by 40% year on year with Polish respondents showing the greatest appetite for raising money through the public market (28%). As the private equity (PE) market continues to expand globally, it is notable to see Brazilian business the most expectant to raise PE funds (47%) to fund their growth, which is unsurprising considering the increase number of PE firms now present in South America. Most businesses in Hong Kong (88%) are looking to finance their growth in the next three years through retained earnings; while 29% of businesses looking to invest more on research and development. Acquisition rationale The most likely reason for engaging in M&A remains similar year to year. Accessing geographical markets (65%) remains the main motivation to participate in M&A and this has increased in importance this year. French businesses (77%) put the most emphasis on using M&A to access new markets. This further illustrates that for well managed and funded businesses, M&A is still the quickest and most effective way to gain a footprint and build scale in new geographies. Exit perceptions Business owners are often reticent about disclosing their long term ownership plans. This year’s IBR results illustrate this once more with globally only 8% of businesses, stating that they foresee an exit over the next three years, the lowest since 2008. This decrease indicates a reaction to turbulent 2012 and maybe a reflection of business owner’s views that they may not be able to attract the level of interest or price acceptable to them. 8% of businesses from countries across mainland Europe are generally less forthcoming or expectant to sell their business in the next three years. However French business owners showed an increased interest and are 25% more likely to sell in the next three years compared to last year. Only businesses owners in Netherland (14%) and Finland (26%) have the most confidence regarding a future sale of their business. Though | Capital Finance International

those from Brazil and South Africa expressed a far greater interest than the rest of the world, globally the trend is very similar with many respondents not showing an inclination to sell. In the current climate, selling to a competitor seems to be the most likely exit route for business. Whilst almost half of UK businesses expect to sell to a trade buyer, South African businesses see their most likely exit route being to management. Handing over to family, underlining investment made by PE firms and exiting through private equity are also viewed as alternative choices of exit routes for businesses in other economies such as New Zealand, Brazil and Vietnam. Chinese businesses eye on more acquisition plans Natural resources are very attractive to Chinese businesses, as half of its oil demand depended on imports. It is not hard to imagine that resource-rich developing economies would be the most popular acquisition targets. Considering economies with rich natural resources have intention to sell their businesses, this perfect attitude would match between Chinese buyers and foreign vendors foretell a possible increasing deal activity starting from 2014, after businesses have more thorough understandings of the approach of the new leadership of the Chinese government. Besides that, the eurozone is another target focus of Chinese cross border acquisitions. After a long struggle crisis, many European assets are undervalued and look relatively cheap to Chinese buyers. Coincidentally, Chinese businesses pointed out that acquiring established brand is the second most important driver behind their plans to grow through acquisition, where Europe is well recognised as a region of renowned luxury brands. This provides plenty of choices to potential buyers in mainland China. Although the current environment shows no significant sign of positive change, with many political and economic changers yet to come in 2013, M&A remains a key strategic tool to drive growth and build scale. i 183

> Grant Thornton Armenia:

The Mining Sector of Armenia By Ms. Hasmik Hovsepyan

Mining is one of the world’s profitable, yet challenging and unpredictable industries. The sector has seen rapid growth in Armenia in the recent years and is currently the third largest industrial sector of the country’s economy and accounts for about half of the export production of the country. Mineral resources overview The Caucasus region as a whole can be divided geologically into three principal terrains: Greater Caucasus, Transcaucasus and Lesser Caucasus. As part of the Lesser Caucasus mountain chain Armenia is rich in mineral deposits – iron, copper, molybdenum, gold, silver, zinc and others – as well as industrial stones such as marble and granite. The territory of the country can be divided into three zones in terms of mineral resources – Alaverdi-Kapan, PambakZangezur and Sevan-Amasia – characterized by different histories in terms of geological evolution and current deposits. • Alaverdi-Kapan zone – copper, lead, zinc, iron • Pambak-Zangezur zone – copper, molybdenum, rarely lead, zinc, antimony, gold, silver • Sevan-Amasia zone – chromium, gold, rarely mercury, silver, antimony. Historically mining in the country dates back to 3-rd millennium BC when copper and gold were mined in Metsamor area located to the north of today’s capital Yerevan. The first smelter in the country was built already in 18th century in Akhtala, north of the country and industrial scale production started early in the 19th century with the opening of Alaverdi and Kapan copper mines. The next milestone in mining development was the opening of the Zangezur Copper Molybdenum Combine in the early 1950s based on the explored molybdenum deposits in Kajaran, which is refered to being among 10 biggest in the world, and which produces around 3% of the world’s annual molybdenum output. According to United Nations Economic Commission for Europe (UNECE) studies in early 2000s Armenia had circa 565 deposits containing 60 types of minerals. Most recent data state over 670 mines of solid minerals, including 30 metal mines with confirmed resources. Their estimated gross value was more than US$ 120 billion, of which US$ 24 billion are metal ores: iron, copper, molybdenum, lead, zinc, gold (also in polymetallic ores), and aluminum, including large deposits. The total value of metals


“Known reserves of building and other stones in the country are 2.25 billion cubic meters.” accounts for 30% of overall potential reserves of mineral raw resources of the country. Nonmetallic minerals – in particular building stone – account for more than 60% of total potential mineral reserves; geological explorations have investigated 475 deposits. In addition to base metals in ores of mines registered in the state inventory, scarce and scattered elements such as rhenium, selenium, tellurium, cadmium, indium, helium, thallium, bismuth, other are discovered to exist. Until mid-20th century the perspectives for gold deposit mining were estimated to be relatively low, and gold deposits were not researched. However, given the success of copper and molybdenum deposits the country’s economic policy shifted to focusing more closely on mining, thus a number of deposits in Zod, Meghradzor, Margahovit, Tandzut, Hankavan and many others started to be explored. These gold occurrences consist of two principal types: quartz veins containing both gold and silver, found mainly in the north of the country, and gold-bearing polymetallic deposits, which occur mainly in the south. Considerable amounts of silver are present in Pambak-Zangezur zone, the Kajaran, Agarak, Jindara, Dastakert and Hankavan deposits. Metal type Copper-molybdenum Copper Gold and gold-polymetallic Polymetallic Iron Aluminum Total

Number of mines 7 4 14 2 2 1 30 | Capital Finance International

According to Mining Journal Special Publication, London 2005, estimates of the national gold resource inventory stand at around 190 tons in quartz vein deposits, and 117 tons in polymetallic zones, with additional 72 tons in porphyry-type deposits in association with copper and molybdenum. The Republic of Armenia takes a lead in the world with the abundance and the diversity of its non-metallic minerals, including deposits of industrial minerals, namely dimension stone, marble, granite, pearlite (leading producer in the former Soviet Union), obsidian, colorful tuffs, Armenian pumice-stone and basalt are wellknown. There are extensive reserves of rock-salt in the vicinity of capital Yerevan. Known reserves of building and other stones in the country are 2.25 billion cubic meters. The role of mining in the economy The mining sector forms a key part of the national economy. In regions where mining is part of the local identity, e.g. Lori in the north or Syunik in the south, mining is believed to be the answer to the massive unemployment serving as a critical source of foreign direct investments. Mining is the most rapidly growing sector of Armenia’s economy, contributing on average around 30 per cent of the country’s overall GDP growth. Foreign investors control a significant share of Armenia’s mineral industry. Leading investor countries are Russia (aluminum, copper-molybdenum, gold), Germany (copper-molybdenum), USA (coppermolybdenum), Canada (gold), UK (gold), China (iron) and others. Foreign-held mining companies are also a major source of tax revenues. Zangezur Copper Molybdenum Combine (Cronimet Mining AG, Germany) paid in taxes AMD 31,7 bn or US$77 mln in 2012 financial year, leading the list of top taxpayers’ of the country. Obviously, excessive dependence on mining sector has also its drawbacks, articulated explicitly during the financial crisis of 2008, when the GDP declined by over 14 per cent for which slowdown of mining sector due to global metal price decline played big role.

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Copyright: Grant Thornton | Capital Finance International


“The Republic of Armenia takes a lead in the world with the abundance and the diversity of its non-metallic minerals, including deposits of industrial minerals.” Challenges Although the sector has overcome the severe crisis, there are still many challenges that are facing the industry, the most important one being overexploitation of resources (yoy growth of over 30 %); environmental issues, such as pollution of soil, groundwater and air, problems with recovery of the vegetation and natural landscape; high transportation costs because of using the land routes to send the production to the ports of the Black Sea in Georgia. The problem of transportation costs is discussed in the framework of the investment program of the North-South road corridor joining south to the north of Armenia and Georgia to Batumi and Poti on the Black Sea. The project donor is the Asian Development Bank. Regulatory framework Among the focal issues of the industry are continuous improvements of regulatory framework of the sector. The chain of reformorientated work that began in early 2000 with the revision of the regulatory framework, then continued with the liberalisation of contractual mechanisms and the restructuring of the major mining companies and their privatization soon gave the expected results. In 2003 Armenia won an Outstanding Achievement Award at the inaugural Mines and Money Conference in London for its success in creating greatly improved investment environment. Currently, the types of mineral licenses include prospecting license for sub-surface prospecting operations granted for a period of up to three years; special prospecting license – for sub-surface prospecting operations granted for a period of more than three but not exceeding five years with the right to conclude, upon application, a stabilizing contract; mining license – for mining operations granted for a period not exceeding 12 years; and special mining license -for mining operations, granted for a period of more than 12 years but not exceeding 25 years entitling the holder to conclude, upon application, a concession contract. Holders of mining licenses and special mining licenses are required to pay royalties of


1% of the aggregate net-back value of sales of metallic minerals, together with an additional royalty. This is levied at an incremental rate of 0.1% up to a maximum of 0.8% where an operation’s profitability index exceeds 25%. Investment opportunities Today, Armenia’s mining sector positions itself as a competitive and viable industry contributing to the country image-building, portraying Armenia as promising business environment with favourable investment opportunities for doing business generally and for the mining sector in particular. From over 17 mining companies operating in the country the majority are operating under the umbrella of international renowned mining brands, such as Cronimet Mining AG (Germany), Lydian International (UK), GeoProMining Ltd. (Russia), United Company RUSAL(Russia), Dundee precious Metal Inc (Canada), COMSUP Commodities(USA), Global metals (USA), Fortune Oil Plc (China), etc.

Grant Thornton Services Grant Thornton has over 15 years of experience in providing tailored assurance, tax, and advisory services to mining companies locally, as well as abroad. The portfolio of the Company includes over 30 audit, legal and tax advisory, business consulting and professional support projects. At Grant Thornton we are well aware of the challenges that mining sector companies are facing, and are well equipped with knowledge, expertise and experience for helping them overcome the complexities and achieve the targets. We focus on understanding the core drivers of businesses, their goals and objectives and, with this knowledge, ensure they gain maximum advantage from our unique service offering. By identifying the key issues mining sector companies are facing, we offer clients tailored solutions combining global mining knowledge and local expertise to help them unlock their potential for growth. i | Capital Finance International

Summer 2013 Issue Yerevan: Capital of Armenia

About the Author Hasmik Hovsepyan is a Partner at Grant Thornton Armenia, member of Grant Thornton International and the leading audit and advisory firm on the market. She leads the Advisory service line of the firm, with more than 16 years of extensive experience in corporate finance, lead advisory, valuation and transaction support services, company and project management and general business advisory. She has long term experience in strategic business planning, financial management and forecasting, budgeting, financial modelling, business and investment valuations (including acquisitions), tax optimization, due diligence, market research, feasibility and sector studies, analysis of business activity, evaluation of restructuring and privatization options. Ms. Hovsepyan leads consulting projects for the state and public organizations, International Financial Institutions and private sector enterprises in such sectors as mining, energy, manufacturing, information technologies, telecommunications, beverages & food processing, hospitality, and others. She has worked with clients across the region, including such countries as Armenia, Georgia, Ukraine, Russia, Tajikistan, Kyrgyzstan, Turkmenistan, Uzbekistan and Mongolia. About Grant Thornton Grant Thornton Armenia is a member of Grant Thornton International, one of the world’s leading organisations of independent assurance, tax and advisory firms. The firm is a multi-professional group of over 130 experienced international and local public accountants and auditors, specialist advisers in finance, business and management, as well as tax and legal advisers working at the two offices in Yerevan. Grant Thornton firms help dynamic organisations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to solve complex issues for privately owned, publicly listed and public sector clients. For more information, please visit | Capital Finance International


> Louise Higginbottom, Norton Rose Fulbright:

Multi-National Cross Border Tax Planning – Reputational Risk?


ulti-nationals, particularly those with a high profile because their business is consumer-facing, have been under unprecedented attack from media, parliamentary/senate committees and Governments over the amount of tax being paid in the jurisdictions where their goods or services are consumed. Much of the criticism has been based on a less than full understanding of both the facts and the law. Some has ignored the distinction between tax evasion (illegal) and avoidance (legal, but unpopular with tax authorities). Little or no differentiation has been


made between those taxpayers who have relied on artificial and highly aggressive schemes, and those who may be paying little tax because they are using properly available domestic tax reliefs or following long-established principles allocating international taxing rights. Fiscal authorities have done little to try to differentiate between different cases, and have seemed content to allow the debate to run largely unchecked. How do multi-nationals minimise their taxes? There is no doubt that the global connectivity offered by the internet has transformed the | Capital Finance International

ways in which multi-nationals can do business, and has given flexibility to separate corporate functions and supply chains in a way which was never contemplated by those who historically settled the international principles on allocation of international taxing rights. Those principles facilitate the minimisation of tax paid in the jurisdiction where goods or services are consumed; for example, they look to whether a person is trading in (through a physical presence) a jurisdiction, not whether it is trading into (ie selling goods or services to people in) that jurisdiction. Furthermore, some types of

Summer 2013 Issue

physical presence are ignored (eg a warehouse storing goods for sale), and some steps to initiate dealings with customers can take place in a jurisdiction, provided the contract is not substantially concluded there. This may enable quite significant business activity to be carried on in the jurisdiction of consumption without triggering tax there. Royalties payable on intellectual property rights can now often be paid without withholding taxes. This means that if a local business is paying royalties for its use of global brand rights, this can be done without any local tax; the payment of the royalty will normally reduce the profits of the local business. Whilst transfer-pricing should ensure that a market rate only is paid for goods and services received from related companies, in practice this can be difficult for fiscal authorities to assess, especially where there are few true comparators to establish the market rate. Finally, “exporting” jurisdictions, such as the US and the UK, seem content to allow profits from international trading to be retained offshore, provided they are invested in growing the business. Many jurisdictions have attractive holding company regimes on offer. The result is that significant profits can be retained offshore, without attracting much by way of local or home country taxes.


“Royalties payable on intellectual property rights can now often be paid without withholding taxes.” | Capital Finance International

What can Governments do? At present, there is much Government protest that “something must be done” to ensure that multi-nationals pay their “fair share” of tax in the jurisdiction of consumption. However, fundamental change seems unlikely, since the current rules are enshrined in multilateral tax treaties and OECD models, and cannot be changed at the behest of one country acting alone. The development of sufficient international consensus to make wholesale changes – eg to tax profits where the goods or services are consumed, seems highly unlikely. Some change is likely as a result of the “Base Erosion Profit Shifting” initiative currently being undertaken by the OECD. However, the general consensus is that the result of this will probably be a change in emphasis in OECD practice (which most countries follow) around such matters as the values attributed for transfer-pricing purposes (eg, for the supply and exploitation of intellectual property rights) rather than wholesale reform. Notwithstanding the lack of ability to make significant changes to the underlying position, a range of measures are being used to put pressure on multi-nationals to change their approach. What is changing internationally? Fiscal authorities are gaining access to a far greater range of information to enable them to verify what a company says about the way in which its tax affairs are conducted. Historically, tax authorities could only collect information


about a taxpayer’s affairs in their own jurisdiction, and other jurisdictions would neither supply information, nor enforce tax due, to another jurisdiction. This is now radically changing. Multi-lateral and bi-lateral conventions on information sharing and enforcement are being adopted by increasing numbers of countries, and this will give tax authorities the same global reach as that of multi-nationals. Increasing transparency is being required from corporates as to how much tax they pay and in which jurisdictions. Some sectors, for example the extractive industries, already provide a significant level of information about where and what amounts of tax they pay; this is being out on a more formal basis in the US, in the EU and in Australia, although not all industries may be affected. Transparency formed a key part of the June 2013 G8 Lough Erne declaration on tax, although this seems to have stepped back from requiring public access to the information, and seemingly confines it to requiring the information to be supplied to tax authorities. What can specific jurisdictions do? Tax authorities may seek to modify taxpayer behaviours through other means. In the UK, constraints have been put on taxpayer behaviour by the introduction of an advance disclosure scheme; this requires devisers, promoters and users of tax avoidance schemes meeting certain requirements to notify HMRC in advance of or shortly after implementation. Users of the scheme then have to use a reference number when completing their tax return, thus making it more likely that HMRC will scrutinise that return more carefully. In addition, a General Anti Abuse Rule is being introduced, which will enable HMRC to neutralise the tax effect of certain schemes. However, both these initiatives are aimed at the more extreme end of the tax avoidance industry. They are unlikely to affect the tax planning put in place by multi-nationals, which tends to rely more on the gaps between different jurisdictions tax regimes than on specific avoidance schemes. One recent interesting initiative of the UK Government is to introduce rules under which tax record is taken into account in assessing bids when tenders are made for Government business. However, whilst the initial draft of this was very wide, the proposals have now been cut back, and it is only egregious schemes which will be taken into consideration. However, the threat of loss of Government business is likely to prove a deterrent to some. The UK tax authorities have also transformed the way in which they interact with large corporates. Emphasis is placed on open and co-operative behaviour, and real time discussion and information provision. Those who co-operate will find their tax affairs run more smoothly. Process has been put in place around agreeing disputed matters, to ensure “horse-trading”, splitting the difference and package deals can no longer be


agreed. HMRC have made it clear that if they disagree strongly with the stance of the tax payer, they will only accept the full amount of tax or litigate. The UK tax authorities have adopted even more stringent rules in relation to banks; the justification for this is that since banks benefit from the explicit or implicit public underwriting of their business, they should adopt a higher standard of behaviour than that for other taxpayers. So banks have been asked to sign up to a voluntary code of conduct, which requires them to abjure aggressive tax planning schemes, and to refrain from marketing them to their customers. To date, no sanction has been levied for non-compliance, but under new proposals HMRC will have the power to list those banks who have not signed up, and from 2015 to publish the names of those who have signed up but whom HMRC views as non-compliant. Should multi-nationals change their behaviour? So a fundamental change in the tax climate for multi-nationals is unlikely. Many of the initiatives currently being taken will not directly affect them, or will have only a marginal effect. So they could just continue as they are. However, reputation and brand are the life blood of a multi-national’s business; protecting this should be the prime driver of the executive and the board. The court of public opinion is a harsh one, and the perception that a corporate is taking unfair advantage of the current tax rules may damage its brand. Leaks and whistle-blowers can do damage. Also, tax structures which create artificial separations within the business, or which are complex to operate in practice, can harm business efficiency, and therefore profit. At worst, the structures may not be operated properly in practice, and therefore be vulnerable to attack from the tax authorities. Tax should therefore be part of the same governance program as any other business risk. Corporates need to be able to defend themselves from challenge by having a strong set of internal policies about the limits of tax planning and the processes under which any planning is approved and reviewed. Any planning should be looked at holistically, taking account of not just the potential savings but of the wider implications for the business in the long term. Conclusion It would seem unlikely that any fundamental change will be made to the basics of international tax, and therefore many of the current opportunities in this area will remain available. But the current flood of media comment indicates that tax is an area where reputation can and is being harmed, albeit what has been done is fully within the law. Therefore corporates should beware, and might need to apply an element of self-regulation when deciding on the appropriate structures to be used where tax minimisation is an object. i | Capital Finance International

Summer 2013 Issue

About the Author Louise Higginbottom is a tax lawyer based in London and is Head of our Tax, for Europe, Middle East and Asia practice. She deals with the tax aspects of asset and corporate finance. Louise’s specialist areas are tax-based asset finance and corporate finance, with a particular focus on the transport and energy sectors. Her previous experience includes acting for major UK lessors on tax-based leases of LNG carriers, advising on major infrastructure transactions, acting on PFI/PPP projects, and acting in significant M and A transactions in the energy and shipping sectors. She joined the legal practice in 1981, qualified in 1983 and became a partner in 1991. Louise is a qualified Chartered Tax Adviser (ATTI) and is a member of the Tax Section of the International Bar Association.

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Summer 2013 Issue


Capturing Value in Global Value Chains By James Zhan

Policymakers, especially in developing countries, are increasingly concerned that the net contribution of exports to their countries’ economy is being eroded by global value chains (GVCs), in which value is often imported from other countries or produced by foreign firms. ‘Value capture’ in GVCs depends on many factors, from domestic contents of exports and domestic productive capacity to the rate of reinvestment of the earnings of foreign firms. Policymakers have a range of tools at their disposal to maximize value capture and to minimize the risks associated with participation in GVCs.


oday’s global economy is characterized by global value chains (GVCs), in which intermediate goods and services are traded in fragmented and internationally dispersed production processes. GVCs are typically coordinated by multinational enterprises (MNEs), with cross-border trade of inputs and outputs taking place within their networks of affiliates, contractual partners and arm’s-length suppliers. GVCs coordinated by MNEs account for some 80 per cent of global trade.

technology dissemination and skill building, opening up opportunities for longer-term industrial upgrading.

“There is a strong positive correlation between participation in GVCs and GDP per capita growth rates, as GVCs have a direct impact on value added, jobs and income.”

However, participation in GVCs does not always yield positive results for countries. Technology dissemination, skill building and upgrading are not automatic. And environmental impacts and social effects, including on working conditions, occupational safety and health, and job security, can be negative – sometimes with disastrous consequences. But even looking purely at the added trade contributes an average of almost 30 economic impact of GVC participation, the GDP GVCs lead to a significant amount of double per cent to the GDP of developing economies, and growth contribution of GVCs also needs to be Value GVCs: added trade shares developing country counting in trade. Raw material extracted in one andcapture 18 perincent in value developed economies. placedby intocomponent, context. average country may be exported first to an affiliate in There is a strong positive correlation between a second country for processing, then exported participation in GVCs and GDP per capita growth ‘Value capture’ in GVCs – the value added in again to a manufacturing plant in a third country, rates, as GVCs have a direct impact on value exports that benefits the domestic economy which may then export it to a fourth for final added, jobs and income. They can also be an – depends on a number of factors. The figure consumption. The value of the raw material important avenue for developing economies to below illustrates the main factors in play. The counts only once as a GDP contribution in the build productive capacity, including through local value added contribution of GVC trade can original country, but is counted several times ESTIMATES 100% 25 in world exports. UNCTAD’s World Investment Report 2013 estimates that about 28 per cent or $5 trillion of the $19 trillion in global gross 75 40-50 exports in 2010 are double counted. Average ‘value capture’ in Patterns of value added trade in GVCs determine the distribution of the economic gains from trade between individual economies. These patterns are shaped to a significant extent by the investment decisions of MNEs. Countries with a higher presence of foreign direct investment (FDI) relative to the size of their economies tend to have a higher level of participation in GVCs and to generate relatively more domestic value added from trade. The economic growth and development contribution of GVCs can be significant. Value

developing economies: 60-75%


Total Exports

Foreign value added

Domestic value added

Domestic firms

Foreign affiliates


Labour and capital compensation




Reinvested earnings


Repatriated earnings

How much value do countries capture from global value chain trade? Value added trade shares by component, developing country average.

Source: Adapted from World Investment Report 2013. GVCS: Investment and Trade for Development. | Capital Finance International


“Investment promotion is not just about attracting new foreign investors, but also about staying in touch with existing ones.” be relatively small for countries where imported contents of exports are high and where GVC participation is limited to lower-value parts of the chain. In developing countries, on average foreign value added in exports is around 25%.

the TNC network, the overall size of the profit component of value added depends on intra-firm transfer pricing decisions by MNES and can thus be influenced by profit shifting to minimize tax liability.

However, even where domestic value added is relatively high, not all of it is preserved for the domestic economy. A large part (between onethird and half) of GVC value added in developing economies is generated by affiliates of MNEs. The lion’s share of the value added produced by foreign affiliates is still preserved for the domestic economy, through compensation for factors of production, in particular labour (wages) and capital. But the operating surplus component of value added (earnings) produced by foreign affiliates can have multiple destinations. It must pay for corporate income taxes in the local economy, it can be reinvested in the local economy, or it can be repatriated to the home country of the parent firm. Furthermore, where the value added produced by foreign affiliates is exported to parent firms or other affiliates within

What can countries do to increase value capture? First, policymakers can stimulate domestic productive capacity building and supply links of domestic firms with foreign affiliates of multinationals, through policies aimed at enterprise development (e.g. SME support, including for compliance with technical standards; clustering programs; improving access to finance; science and technology support; startup promotion; business linkages programs). An effective skills development strategy for the domestic workforce is also key. It is not just about export promotion anymore, but about nurturing the local supply base of exporting firms.

About the Author Mr. James Zhan is Director of the Investment and Enterprise Division at the United Nations Conference on Trade and Development (UNCTAD).

Global Investment Prospects Assessments, the Investment Advisory Series, Investment Policy Monitors, Investment Policy Reviews, investment promotion and facilitation, international investment agreements, the World Investment Forum, the UNCTAD Commission on Investment and Enterprise Development, international standards for accounting and reporting, entrepreneurship policy framework and training, corporate governance and social responsibilities, and intellectual property. He also leads the preparation of the United Nations World Investment Report and is chief editor of the journal Transnational Corporations.

The Division under his direction is the focal point in the United Nations System for investment and enterprise development issues. The Division, which comprises 100 international staff, conducts policy analysis, builds international consensus and provides technical assistance to over 150 governments. The key programmes and products under Mr. Zhan’s guidance include the Global FDI-TNC Information System,

Second, policymakers can encourage the reinvestment of earnings by exporting firms, first and foremost by maintaining a general trade and

Mr. Zhan has over 20 years of international and national experience in the area of investment, technology and enterprise development. This includes advising many governments in formulating investment policies and building investment promotion capacities, organising intergovernmental conferences and negotiations, and leading many research and policy analysis projects. He is coordinator of the UNCTAD Secretary-General’s Panel of Eminent Persons; and author (or co-author) of over 40 books and articles on economic and legal issues. Mr. Zhan holds a PhD degree in international economics and was research fellow at Oxford University.

194 | Capital Finance International

investment policy climate conducive to such investment, and by facilitating and promoting follow-on investments by foreign affiliates. Thus, investment promotion is not just about attracting new foreign investors, but also about staying in touch with existing ones (‘after care’) and matching opportunities for investment in local productive capacity. The fear that especially poorer developing countries capture little value from global value chains for their domestic economy has led to fierce debate among policymakers on the merits of proactive policies aimed at promoting GVC participation. The evidence shows that in most cases the benefits accruing to domestic economies can still make a significant contribution to economic growth and development. And policymakers have at their disposal concrete policy tools to maximize those benefits and to minimize the risks involved in GVC participation. i

About UNCTAD Established in 1964, UNCTAD promotes the development-friendly integration of developing countries into the world economy. UNCTAD has progressively evolved into an authoritative knowledge-based institution whose work aims to help shape current policy debates and thinking on development, with a particular focus on ensuring that domestic policies and international action are mutually supportive in bringing about sustainable development.

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