International Finance July Issuu 2019

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July 2019

UK : £4 ISSUE : 11 VOLUME : 07

Europe: ¤5.35

US: $6

Excelling through

Innovation Ahli United Bank leads banks in the Arabian Gulf region with a proactive stance on cybersecurity and fintech innovation

Logistics giants fight carbon emissions How Malta became the ‘Blockchain Island’

“Malta enjoys a stable political and economic environment with the sustained growth of the blockchain industry backed by investments in innovation.” Finance innovation, Malta | Silvio Schembri, junior minister for digital economy andInternational

July 2019 | 1



y ineptness or design, Donald Trump and Theresa May have kept the markets and global corporations on tenterhooks with their decision making across the last few months. Trump’s trade war against China is the first time in history a nation has used tariffs as a weapon of war, an analyst tells us. What’s happening is that, to save their backs, a number of manufacturers are moving out of China with Vietnam one of the gainers of the US-China trade war. This issue we look at the disruption the trade war has brought to the Southeast Asian supply chain. In addition, Britain is going to have a new prime minister and who that person will be has huge ramifications for the Brexit process. We take stock of how Brexit leaves the UK’s wealth managers with more trouble than they asked for and the unique position of the pound. What chance does an Island in the Mediterranean with a population of 475,000 have of becoming a global innovation hub in a niche technology? How can it even achieve scale? Whatever, the rest of the world might think of it, Malta is one of the few countries that provides regulatory certainty to blockchain and crypto companies. And the country is leveraging its first mover advantage in providing comprehensive distributed ledger technology laws to position itself as the global hub of blockchain innovation. While Chile is battling outdated laws to attract global startups to its flagship entrepreneurship programme — Startup Chile — great fintech innovation is happening further away as Southeast Asia leverages a perfect combination of factors to become a global fintech hotspot, as we discover. Insurance isn’t a popular subject in the Middle East, nor is it a matter of common discussion; but still Oman is making health insurance mandatory for citizens and expats alike. In the meanwhile, we try to understand what would help the Islamic insurance or Takaful industry flourish in the Middle East. Later this month, we would know who the next prime minister of Britain is — and that person’s positions will determine whether Britain will crash out of the EU in a ‘hard Brexit’ and whether the Europhile Scots will ask for another independence referendum. The times are exciting.


International Finance | July 2019 | 3




Using Technology for Leadership The bank is taking major steps toward fintech innovation In an interview with International Finance, Deputy Chief Executive of Ahli United Bank for the Banking Support Group Jehad Al Humaidhi explains how the bank is reinforcing its leading position in the market by leveraging technology, while explaining how the wider economy and markets will support banking in Kuwait in the coming years.



blockchain 20 The Island in europe

Oman trade war impacts SE 38 Why introduced Dhamani 70 Asian supply chain

Malta is offering regulatory certainty to bllockchain investors as a USP

Oman’s mandatory health insurance scheme has major implications

Health care


Malaysia’s break out moment

Malaysia is mounting a determined challenge to other SE Asian nations in healthcare tourism

4 | July 2019 | International Finance


regulars Editors Note






Manufacturing capacity is moving out of China. But is SE Asia’s supply chain ready?

Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Sangeetha Deepak, Pritam Bordoloi, Kedar Grandhi

12 16 32

A perfect combination of supporting factors makes SE Asia a fintech hotspot Chile is building Latin America’s startup hub through its flagship programme Brexit brings a plethora of challenges for Britain’s wealth management companies

50 60 66

Audit sharing and rotation: Solutions to Big 4 corruption? Logistics giants are massively cutting down on their carbon footprint

Gulf nations are building strategic ports and China and the US are interested

Production Merlin Cruz Design & Layout Vikas Kapoor Business Analysts Steve Lloyd, Sid Nathan, Christy John, Jane Paul, Mark Smith, Gwen Morgan, Sarah Jones, Ayesha Misba Business Development Manager Steve Martin Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews, Jessina Varghese Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436



Mustafa Kheriba


Jörg Rocholl


Arash Aloosh

Takaful companies must consolidate and adopt technology

Better regulations needed to prevent European crowdfunding stagnation

What impact does Brexit have on the pound?

Fax +44 (0) 208 181 6550 Email Press Contact Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144

International International FinanceFinance | July 2019 | July| 2019 26 | 5


Lagarde the ‘continuation candidate’ at ECB Christine Lagarde, the current managing director of the International Monetary Fund was nominated as the European Central Bank president. Largarde is set to succeed current President Mario Draghi. Christine Lagarde is seen as the ‘continuation candidate’ following Mario Draghi and is expected to adopt an accommodative stance to monetary policy. Her appointment removes the risk of a known hawk stepping in, according to City Index. So what should be Lagarde’s first priority? It is 20 years since the ECB was established. But even now central banks are not too clear about the details of ECB’s policy frameworks. Today, not only European central banks, but the public is also asking for clarity on the ECB’s policy frameworks. The last review of ECB’s monetary policy frameworks were conducted 16 years ago. Finland’s central bank has called for ECB to conduct a review of its policy framework. Christine Lagarde must now use her time at the ECB to offer a review of its monetary policy framework.

Deutsche I-banking cuts hit 1000s deutsche bank recently announced that it will slash 18,000 jobs worldwide by 2022. this decision comes in an effort to lower the bank’s adjusted costs to $19 billion in the next few years. Closing a major part of the trading businesses first had an impact on employees in its equities division in Sydney and Hong Kong. the bank is laying off employees from Hong Kong to Bengaluru.

Salman determined on Aramco IPO by 2021 6 | July 2019 | International Finance

the bank’s share traders in London, New York and tokyo were told that their jobs were going. in London, some staff kept away from work after being told their passes would stop working. the changes, which will shrink deutsche’s investment banking business, was to make the bank “leaner and stronger”. deutsche Bank employees in Bengaluru were informed that their jobs are at risk.

Saudi Arabia’s crown prince is determined to go ahead with the stalled plan to sell shares in Saudi Aramco by 2021. The state-run oil company is estimated to be worth more than $2 trillion. The crown prince said that Aramco’s IPO delay is only impacting Saudi’s Vision 2030 which is not ‘right’.

The delay first occurred in mid-2017 when the company realised that it had to enter petrochemicals. The crown prince said that he hopes to raise $100 billion by selling 5 percent stake in the company. This would set a high record beating Chinese retailer Alibaba’s largest global public offering which raised $25 billion in 2014.

Facebook’s Libra has bankers, regulators wary A senior official at UK’s Financial Conduct Authority said that Facebook’s new digital currency project Libra requires close examination from both the society and the government. Facebook’s Libra is facing more backlash from India although the social media giant hasn’t approached either the Indian government or the RBI seeking approval to introduce the currency in the country. India, being the third largest economy in Asia, is not open to allowing the currency to be traded in the country. The US and European banks are keeping away from Facebook’s digital currency in order to avoid backlash from regulators in their own crypto projects. That said, many banks are accelerating their crypto implementations to create a seamless payment ecosystem — and firmly believe that their projects would perform better than Facebook’s Libra initiative.

the US and European banks are keeping away from Facebook’s digital currency in order to avoid backlash from regulators Korea’s Financial Services Commission looked into what might happen If 2.4 billion Facebook users worldwide transfered one tenth of their bank deposits to Libra. In that scenario,

banks’ solvency and loan reserves would diminish. The FSC said that such a situation represents a threat to emerging markets from the relocation of the capital out of those countries.

as Hong Kong goes on strike, Singapore wins singapore is capitalising on hong kong’s extradition law turmoil which is causing capital flight and affecting investor interest. investors are perceiving Singapore as an equally attractive investment ground equipped with modern banking and financial services. the manner of mass protests in Hong Kong against a proposed extradition bill cannot occur in Singapore because of its stringent laws. Although there is no data to measure Hong Kong’s capital flight, several indicators imply that businesses and capital flows are slowly pulling out of the special administrative region. Political uncertainty is posing a major threat to its business and investment landscape.

International Finance | July 2019 | 7


Nigeria finally agrees to sign African FTA

Trade war: global manufacturers flee China Logistics

Everyone knows that China is the hub for hardware production because of the supply chain concentrated in the area and the presence of manufacturers specialised in making cuttingedge technology. But the Trump Trade War’s punitive tariffs are forcing global corporations to pull out of China, disrupting the supply chain. HP and Dell plan to shift nearly 30 percent of their notebook production to hubs outside China. Other global corporations including Microsoft, Amazon, Sony, and Nintendo also plan to relocate their game console and smart speaker manufacturing American firms that used to use China as their global

8 | July 2019 | International Finance

workshops for US-bound goods are exploring other Southeast Asian countries. Apple is seeking to shift 30 percent of its hardware production away from China. Apple’s main assembler Foxconn is moving its production by investing more than $200 million in India and Vietnam. Google has shifted much of its motherboard production to Taiwan. Most corporations, including HP with a manufacturing base in China, are concerned that the escalating tariffs might increase the costs of electronics. For more details on how the Trump trade war is disrupting Southeast Asia’s supply chain, read our indepth article on page 70.

Nigeria will sign the Africa Continental Free Trade Agreement (AfCFTA) to boost manufacturing across the African continent. The deal is expected to strengthen regional trade and companies will be able to access new markets. AfCFTA’s main objective is to assemble all 54 members of the African Union (AU) in a single market by eliminating major trade barriers. The manufacturing industry only accounts for 10 percent of AU’s combined GDP of $3.4 trillion. All in all the deal could bring competitive advantage to the sector. South Africa and Cameroon have already signed the deal. However, President Muhammadu Buhari agreed to sign the deal after reviewing the trade agreement’s impact assessment. Nigeria will support free trade as long as it is conducted on fair grounds.


Competitiveness: Singapore, HK beat US economy

The US is no longer ranked as the world’s most competitive economy. Singapore has climbed from third to top spot, and Hong Kong remains second on the IMD World Competitiveness Ranking index. Singapore has outperformed the US, which dropped to the third position on the index. The list is based on 235 data points comprising GDP, government spending, rate of corruption, and unemployment. Singapore along with other countries in the Asia Pacific climbed the ranking defeating the US because of advanced technological infrastructure and favourable business policies. Even Thailand advanced five spots to 25th position on the index. The country’s jump in ranking is largely driven by an increase in foreign direct investments and productivity.

Mainly, increased fuel prices, currency fluctuation, and weak high-tech exports has pulled the US’ ranking behind Singapore and Hong Kong. For Singapore, the availability of skilled labour coupled with suitable immigration laws and conducive business environment have led to its first position. The country has one of the world’s lowest corporate tax rates at 17 percent.

female employment rises in Saudi arabia economy

The Kingdom of Saudi Arabia’s private sector is downscaling its employment rate after it peaked 13 percent last year — the highest in over a decade. With that, private businesses are removing jobs to stabilise the swelling payrolls. The Kingdom has in some way returned to an older model of statedriven employment. The government, however, still remains the main employer of the nationals in the Kingdom. It has added 20,000 jobs since the third quarter of last year. Now, joblessness has become a persistent problem posing a threat to

Job reservations and the freedom to drive bring more women to work

Of the Gulf nations, the UAE and Qatar also climbed the rankings since last year. Qatar entered the top ten for the first time since 2013 and moved up four spots since last year. Likewise, the UAE moved up two spots from its seventh position last year — ranking in the top five for the first time. It also ranks first globally in productivity, digital transformation, and entrepreneurship.

young nationals entering the labour market. Saudisation has formulated few measures that have restricted the growth of jobs in the private sector. In the past year, the number Saudi nationals employed fell 2 percent leading to an economic slump. It appears that expats and Saudi nationals are losing jobs in almost the same sectors. The Kingdom’s business ecosystem is also hit by a slew of fiscal reforms such as taxes and fees. But what’s promising is that the number of working Saudi women has increased. The late King Abdullah bin Abdulaziz Al Saud drew certain retail jobs aside for Saudi women, and the Crown Prince Mohammad bin Salman has terminated a ban on female driving. Still female unemployment of more than 30 percent is looming in the Kingdom as women are actively seeking participation in jobs.

International Finance | July 2019 | 9


one-third of UK adults would like to switch banks banking

One in three UK adults have considered changing banks in the last 12 months over a key requirement: better digital experience. A poll commissioned by Dell Boomi surveyed 1,000 adults in the country on their banking experience. Of the respondents, 50 percent of them look for better interest rates; 47 percent want attractive incentives for new customers; 21 percent seek improved digital customer experience; and 19 percent hope for effortless inbranch customer experience. The reason why they still bank with the current provider is because 44 percent of them have a satisfactory

customer experience. That said, 39 percent of them expressed strong lenders support, while 37 percent cited a satisfactory digital customer experience. More than half of the respondents from 18 to 24 demographic emphasised on a seamless banking app. It appears that 59 percent below the age group of 35 want to modernise their banking approach. One in five respondents holding a traditional bank account also has a digital bank account with the likes of Monzo. They are seeking improved digital performance to replace their traditional banking that they perceive as ‘a bit old’.

With evolving technology 10 percent of the respondents haven’t visited their bank’s branch in over a year. But that’s only a measly percentage compared to 51 percent of them above the age group of 55 using their branch service frequently. A fifth or 22 percent of them are comfortable with the idea of their bank’s branch closing if it resulted in a good digital experience. The findings from the survey suggest that further investments are required in the banking industry to deliver robust digital services. With open banking, banks have to build transparency and open APIs to allow third-party developers to access account holder’s data. Only 21 percent of respondents have open banking services, while 66 percent of them are unsure of the facility with their respective banks — which points to lack of banking awareness in the industry.

How well do Europe’s largest banks protect customers from phishing? UK



Barclays HSBC Holdings ING Bank UK Lloyds Nationwide Building Society Royal Bank of Scotland Standard Chartered


Credit Suisse UBS Group AG

Sweden Skandinaviska Enskilda Banken Svenska Handelsbanken AB Swedbank AB

Denmark Danske Bank Nordea Bank



BNP Paribas Credit Agricole Credit Mutuel Group Groupe BPCE La Banque Postale SA Societe Generale



KBC Group NV


Germany Bayerische Landesbank Commerzbank Ag Deutsche bank DZ Bank AG Landesbank Baden-Wuttenberg



Banco de Sabadell Bankia BBVA CaixaBank Santander

Erste Group Bank

Italy Cassa depositi e prestiti Intesa Sanpaolo UniCredit SPA Data current as of June 19, 2019

Home and login pages have company-branded address bars; no “Not Secure” warnings present. No EV on home and/ or login page; no “Not Secure” warnings. No company-branded address bar; “Not Secure warnings present. Not applicable; company does not offer consumer online banking services.

PROTECT YOURSELF ONLINE Look for the full company name at the left of the address bar.


If the full company name is displayed in the browser address bar, it means the website or web page is authnticated and known to be accurate.

Always ensure pages that require personal information have a valid certificate.


This is symbolised by a padlock to the left of the URL. Without this, sensitive information, including credit card and address details run the risk of being exposed to prying eyes and potentially sold for a profit in the Dark Web.

Watch out for email phishing scams.


To avoid falling prey to phishing scams, never click on links sent from unsolicited emails. instead, always manually navigate to the company through your web browser.

The infographic outlines the findings of Sectigo’s Secure Impressions: Online Banking Study released in June, 2019. The study reveals how well the world’s largest banks in North America and Europe ensure and demonstrate security of customer information on their online banking websites. Sectigo (formerly Comodo CA) is the world’s largest commercial certificate authority and a provider of purpose-built and automated public key infrastructure (PKI) management solutions.

10 | July 2019 | International Finance


southeast asia becomes the fintech hotspot A large unbanked and positive government initiatives are top factors driving fintech growth in the Asean region SAMUEL ABRAHAM

The Asean region has witnessed the rapid growth of fintech companies over the last decade. The trend of rapid fintech growth seems poised to continue into the future with robust investor interest in companies in the region. In 2017, fintech companies based in the Asean region received investments totalling $ 5.7 billion. A Deloitte report said that this was expected to be exceeded by by 20 to 30 percent in 2018. A 2019 report by Tech Collective further augments this view. It said “The Southaast Asia region is ripe for tremendous growth in the fintech industry in 2019.” The primary reason for the same, it said was the fact that only 27 percent of the adult population across the Asean had an actual bank account.

12 | July 2019 | International Finance


A report from international lender Robocash further clarifies the extent of the unbanked population and the fintech opportunity present therein. It says, in Indonesia, only 48.9 percent of the population had a bank account in 2017, but 54.8 percent borrowed money. In the Philippines, only 34.5 percent had a bank account while 58.6 percent of people had made borrowings. While in Indonesia, only 49 percent of the population had a bank account, in Vietnam, this figure is quite low at just 31 percent. This disparity between the banked population and population particitpating in financial activities present, a huge opportunity for fintech companies in the region. Ajit Raikar, co-founder and CEO at Validus Capital, a Singaporebased peer-to-peer lending fintech startup, further reinforced this view to International Finance. Citing consulting firm, KPMG, Raikar said, “There is an unmet need for access to basic banking services. Only 27 per cent of the region’s 600 million inhabitants had a bank account in 2016.” This, he added, “is where fintech startups can come in to fill gaps and accelerate financial inclusion in the region.” He further claimed that his company alone had facilitated over SGD230 million in financing for Singapore’s small and medium-sized enterprises (SMEs). This, he said had a positive impact on over 300,000 citizens of the island state-city both, directly or indirectly. According to EY, there are more reasons than the one mentioned above as to why the region is witnessing a rapid adoption of fintech innovation. Its ASEAN FinTech Census 2018 report lists “rapidly expanding economies, young-urbandigitally-savvy population, increasing mobile and internet penetration apart from largely underserved, small and medium-sized enterprises (SME)


Unbanked Population








Vietnam Source: robocash

and consumer markets by traditional financial institutions” as the other factors driving growth of fintech in Southeast Asia. With regards to internet adoption, Southeast Asia is the fastest growing region in the world. Internet adoption was estimated at 58 percent in 2018, up from 53 percent in 2017. Citing Google and Temasek, a report by Robocash stated that the number of local internet users was expected to reach 480 million people in a year in this region. The report further predicted that the internet economy in Southeast Asia would increase to $200 billon by 2025. This is a four-fold increase from the $50 billion in 2017. So, while internet penetration is high, digitisation of financial services doesn’t seem to have really picked up pace. According to a fourth quarter 2018 report by Cento, Southeast Asia is the fastest growing digital economy, although less than 2 percent of the economy is digitised. This huge digitisation gap further increases the growth potential for fintechs in Southeast Asia. Justin Hall, partner at Golden Gate Ventures, an early-stage VC firm focusing exclusively on Southeast Asia, seems to have his thoughts in line with the earlier mentioned facts. When International Finance queried him about the unique promise he sees in Southeast Asia versus other regions, he said, “Southeast Asia is one of the fastest

growing, dynamic markets in the world. It possesses some of the most populous markets. Its emerging middle class is a boon to local economies and technology adoption. From mobile phones to internet services, infrastructure to online payments adoption is rapid. In simplest terms, Southeast Asia is a new growth opportunity in the same way India and China were before it.”

supportive governments Apart from these, the Asean governments need to be credited for the growth of fintech in their respective regions. In an effort to make its population get used to a cashless or a digital payment system, these governments have launched various initiatives that help create a conducive environment for fintech. Speaking on the same, Raikar said, “With many countries in Southeast Asia having a large unbanked population, governments today are embracing the ‘cashless society’ agenda more than ever before. Going cashless helps to create financial identities for these individuals and accelerate financial inclusion in the region.” Citing Singapore as an example, Raikar said, the government of this island city-state had launched initiatives such as the national QR code and NETS that further augur well for the future of fintech startups the region. “In its push for a cashless society, the Singapore government has launched a national QR code standard to unify

International Finance | July 2019 | 13


a fragmented e-payment landscape. It has also deployed NETS, an electronic payment service provider, to centralise the e-payment systems, bringing cashless payment to hawker centres and coffeeshops nationwide. To incentivise more hawkers to use the e-payment system, NETS has also launched an initiative to ensure hawkers get faster access to their funds from NETS transactions,” he explained. He further added that other countries in the Asean region such as Vietnam and Indonesia too were already working towards a cashless society. “Vietnam strives to become a cashless society by 2020 and reduce the number of cash transactions at large-scale retailers to less than 10 percent, while Indonesia has revamped its regulatory framework as it aims to become Southeast Asia’s digital hub by 2020,” Raikar said. Meanwhile, in the Philippines, the country’s central bank has established a regulatory framework called The National Retail Payment System or NRPS to support digitisation of financial transactions. The objective of this is the establishment of a safe, efficient, and reliable retail payment system in the country. According to the central bank’s website, the key outcome of the NRPS is “to increase adoption of electronic retail payments from 1 percent electronic payments in 2013 to 20 percent electronic payments by 2020.” In Malaysia, its central bank, the Bank Negara Malaysia had introduced a financial technology regulatory framework way back in 2016. Through this, the central bank sought to provide a regulatory environment that would be conducive for the deployment of fintech solutions. Its website states that this includes reviewing and adapting regulatory requirements or procedures that may unintentionally inhibit innovation or render them non-viable. As part of this process, the Financial Technology Regulatory Sandbox Framework (Framework) is introduced to enable innovation of fintech to be deployed and tested in

14 | July 2019 | International Finance

Internet Penetration in Southeast Asia





Size of Internet economy

$200 bn $50 bn 2025 (e)


Source: robocash

a live environment, within specified parameters and timeframes. Additionally, as recently as in September 2018, it launched the Digital Finance Innovation Hub in association with The United Nations Capital Development Fund and Malaysia Digital Economy Corporation. The objective of this was “to enable service providers, including financial institutions and fintech startups, to use technology in promoting inclusive finance, including through the introduction of products and services that meet the needs of the underserved in Malaysia.” Such initiatives by the governments in the region further augment the growth of fintech in the region. Commenting on the same, Raikar said, “The friendly regulatory environment coupled with the desire to drive financial inclusion and become cashless societies, provide fintech startups ample room for growth and development. The future is promising for the industry.” Commenting on the same, Joel Yarbrough, VP Asia Pacific at Rapyd, a global fintech-as-a-service startup with offices in London, Singapore, Silicon Valley, and Tel Aviv that enables any payment type for in-country or cross-

border commerce, told International Finance, “I’m very positive on the role that government and regulators in the region have played in creating that emphasis, but at the same time there is no ‘one answer’, there is a mix of many different answers, and the market needs to be encouraged to find the right one for each segment or use case. Things like interoperability, eKYC, strong authentication, and progressive regulation are all important, and the fintech industry overall benefits from governments innovating and competing with each other in these areas.”

open to innovation and abuse The interest of Asean governments in encouraging fintech companies is one among the various advantages they bring to the table. Empowered by emerging technologies, such as artificial intelligence, blockchain, and machine learning, these companies could help offer basic financial services such as bank accounts, loans, credit cards, and insurance to the large population that currently do not have the same. Technologies like blockchain in particular could drive down operational costs of remittances that are currently expensively taxed. It would also help several SMEs that are currently not being served by the existing financial systems in the region. Of course, as always, there are two sides to any coin and fintech too has some negatives. According to the Deloitte Singapore FinTech Festival 2018 report, the biggest risks related to fintech is its misuse for tax evasion, money laundering, or for making fraudulent transactions that bypass traditional financial systems. The fourth and final reason that is boosting the growth of fintech in Southeast Asia is the openness to use fintech products. A November 2018 report from Deloitte conducted in partnership with Robocash Group stated that, of the respondents polled, 82 percent of Asean customers’ showed willingness to use new fintech technologies and products, compared with 76 percent in Europe, 77


percent in North America, and 49 percent in Latin America. The report further said that countries in the Asean region had the highest potential to grow their fintech markets up to 2020. Yarbrough corroborated the Southeast Asian region’s fintech promise to International Finance. He explained, “Asean is a high growth, extremely digital, social, and mobile market. At the same time, there is a large population that is under-banked, under-supplied in credit, or that doesn’t have full access to international markets electronically. Given the openness to using the Internet for almost everything else, we see that same openness and education being a fertile ground for fintech adoption.” Despite the obvious advantages of the region, accessing trained fintech talent is a

product development to contact centres and compliance departments. That said, the governments in the region have already noticed this issue and are taking corrective measures. With regards to Singapore specifically, Raikar said, “Both the government and organisations in Singapore, have already taken steps to bridge this gap. These include initiatives such as The Adapt and Grow which aims to help Singaporean workforce transition into new job roles in growth sectors, and partnerships forged between corporations and educational institutions to create a vibrant entrepreneurial community such as NUS Enterprise setting up a cybersecurity startup hub with SingTel Innov8 as well as their collaborations with Singapore Airlines to promote the

Willingness to use financial technology and products






North america


south america

Source: deloitte

challenge for startups in the region. Citing EY, Raikar said that “Three in five (60%) of Southeast Asia fintech companies surveyed found that they lack the tech talent required for their business.” Recruitment firm Hays further emphasised the same with a focus on Malaysia. In a May 2019 article it was cited as saying that Malaysia was facing a shortage of talent to support the digitisation of its banking and financial services. Natasha Ishak, senior manager for banking and financial services at Hays further explained that the previous few years had seen the introduction of various financial products and services, and this had affected talent shortage across various domains ranging from

aviation industry.” This, Raikar said, will allow fintech companies to get the right talent needed and bridge the gap ensuring long-term sustainable growth. Meanwhile, Yarbrough opined, “On the government side, I think smart university and workforce training are important, particularly in critical domains like machine learning.” He however also said that the region was ramping up quickly the development of talent required to operate in the fintech space. “We have people moving into the region, moving from traditional financial companies, but most excitingly an amazing base of young talent that is educating itself and scaling quickly,” he added. So, whats interesting is it’s not just

startups that are embracing fintech. Large established companies are also using their existing platforms to provide financial services by using technology. In Asean region, fintech pioneers include Grab, Lazada Group and Go-Jek. Grab which originally was in the transport business is now offering payments, rewards and loyalty services apart from loans and insurance. On the other hand, retail company, Lazada Group now also offers e-wallet payments and SME lending. Meanwhile, Go-Jek in 2018, spun off its e-wallet service Go-Pay as an independent app. By end 2018, ithad partnerships with almost 400,000 merchants helping transaction volumes exceed $ 6 billion. So while the Asean definitely seems to be attractive for receiving fintech funding, the question arises as to whether the fintech innovations in the region, especially payments, were reaching a saturation point. Justin Hall of Golden Gate says, “We have barely scratched the surface of fintech. There is a still a huge amount of innovation and value-creation to be unlocked, and much of that is dependent on the new industries and verticals we will see emerging and evolving over the next few years. The explosion of ‘social commerce’, gig economies, IoT products, and data collection means that financial services will need to scale and evolve in very interesting ways to keep up, and I think we’re going to see really intriguing use-cases here that we don’t see anywhere else.” A perfect storm of supporting factors led has unleashed the fintech innovation spirit in Southeast Asia. Given the demographics, the openness to technology, the government support, and the quantity of investor funds flowing into the region, the pace of fintech innovation in Southeast Asia is set to accelerate in the future. And while there a few challenges for fintech to grow in the region, it is obvious that there are way more positives than negatives for fintech growth in Southeast Asia.

International Finance | July 2019 | 15


Building Latin America’s startup hub

Startup Chile’s executive director Sebastián Díaz Mesa tells International Finance how the Startup Chile is providing a fertile ground for fintechs despite major regulatory hurdles SANGEETHA DEEPAK

Over the last few years, Chile has demonstrated a stable and robust economy that has supported an innovative startup ecosystem and a few flourishing fintech startups . The country has made significant progress in financial inclusion. An 2019 Ernst and Young report says that 42 percent of Chile’s fintech companies are ready to compete in foreign markets and 44 percent intend to do so in the next one year. In 2015, Forbes recognised Chile as The best country for business in Latin America. The country has become a breeding ground for fintechs because it posseses a pool of highly qualified labour force coupled with a tax friendly regulation, backed by free trade agreements with more than 30 countries. The Chilean Government is spurring innovation through investments in startups and larger establishments that are seeking a market presence in Latin America. The report pointed out that 89 percent of startup founders in the country already have entrepreneurial experience — with 8 percent of them being women. Most founders are aged between 26 to 30 when they first started their companies. Startup Chile — an initiative by the Chilean Government through CORFO,

16 | July 2019 | International Finance


the Chilean economic development agency, is a government supported startup accelerator and Chile’s signature entrepreneurship programme. It is arguably the most significant reason why the country is positioned as the entrepreneurial hub of Latin America. Startup Chile was founded in 2010 with a vision to transform the country’s entrepreneurial culture and to put Chile on the global map as the hub of innovation in Latin America. The Wall Street Journal reported that three out of four startups fail despite raising capital. So, ultimately the value they bring up is not only the jobs they create, but also the skills that the entrepreneurs acquire in tackling the global market. The accelerator has time and again emphasised that its goal is to help startups to absorb higher benefits from the programme than just monetary assistance. Startups get $40,000 equity free in StartupChile’s seed program. Since its founding, it has accelerated more than 1,500 startups. These startups are exposed to mentorship and entrepreneurship training, in addition to opportunities in building a global network. Cabify, Vaijala, The Intern Group, CargoX, Keyword Tool, Doist, Data Campfire and Slidebean are some examples of how startups in Latin America have flourished on a global scale with the entrepreneurial guidance of Startup Chile. Many of these startups still continue to operate in Chile. As of 2016, Startup Chile’s cohort had collectively raised $30.5 million in Chile and more than $420 million abroad. These startups have been responsible for creating 5,162 jobs in the country and across the world as of that period. More than one-third of startups that go through Startup Chile establish an office in the country that ranks seventh on the global index for entrepreneurial activity. Startup Chile Executive Director Sebastián Díaz Mesa in an interview with International Finance explains the

startup Chile was established to prove to the Chilean ecosystem that it is possible to set up local businesses from Chile and to position the country as a startup hub for the entire region

significance of the accelerator programme and how it has helped startups in the country progress in the last decade. Diaz Mesa is a former strategic communications practitioner, founder of startups, and an academic as well. International Finance: How is Startup Chile fuelling Chile’s entrepreneurial ecosystem? Sebastián Diaz Mesa: Startup Chile was born to solve a myriad of problems related to entrepreneurial skills that still persists in Chile. The country has invested the largest amount of money in entrepreneurship and innovation in the entire Latin American region. However, the new companies, SMEs, and startups were focusing on the Chilean market only. So every time we have an economic crisis, for instance, it impacted these SMEs and startups — and all the money and effort put in was pretty much wasted

in the event of a crisis. In order to avoid those circumstances we are trying to help entrepreneurs access other markets. This way, they can avoid the impact of those economic crises and establish sustainable companies in the country. Because Chile is so far away from everything there is a huge cultural impact on our entrepreneurs — and it reflects while they are trying to approach new markets like Europe or America. Eventually they start to believe that they are not capable of competing with foreigners. Keeping that in mind, Startup Chile was established to prove to the Chilean ecosystem that it is possible to set up local businesses from Chile and to position the country as a startup hub for the entire region. As far as the policy goes we are planning to attract new entrepreneurs organically because at some point Startup Chile is bound to disappear.

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Back in 2016, we served several Chilean and global companies which shows in our numbers. At the beginning of Startup Chile there were no Chileans because they were unable to compete with foreigners — but that situation has now changed. Organically around 40 percent of Chileans in each generation are now prepared to compete with foreigners. So, in terms of entrepreneurial skills, Chileans are getting better with time. What kind of startups are Startup Chile targeting? Why? There are three main requirements for startups to become an eligible prospect for Startup Chile. First of all, the startups have to be technologybased, because technology is the only component that will help them to swiftly expand into other markets. The scope for scalability is quite high. That said, industrial 4.0 revolution is a continual challenge in Chile. So the development of technology-based startups will help address this challenge while creating new technology-based industries in the country. Secondly, startups should target a global market or problem because they require to access new markets and grow on a global scale. Lastly, they need to understand how they will be using Chile as a platform to grow. We know that Chile is located far away on the global map and hence our market is quite small. We are not asking the potential startups to establish their headquarters in the country but to somehow use Chile to scale globally. For example, they can set up their call centers or pay salaries in the country. The idea is up to them but they should have a strong reasoning for using Chile as their base. All in all, we require to capture value for the reasons we are accelerating. How progressive is Chile’s fintech support ecosystem from regulatory,

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the Chilean Government has identified that innovation is a key factor relevant to the country. It has created a large number of programmes to fill in the gap investment, and talent standpoint? I would say that in terms of talent Chile is becoming a fintech hub in the region. A study conducted by Ernst and Young mapped all the fintechs in the country. It seems that we have more than 130 fintechs in Chile right now, marking Chile as a global hub for fintechs in Latin America. However, there is a regulation gap for fintechs not only in the country but in the region as a whole that needs to be addressed. What is the value proposition that Startup Chile offers for fintechs looking to launch in Chile? We don’t have a specific focus on any industry and we can have as many fintechs as we can get. We are putting more effort in business development and not any technology in particular. So basically our aim is to help startups build connections with local market, global networks, and investors. Startup Chile has a huge corporate network. All the major corporations in the region come from Chile. So it’s a great opportunity for startups to connect and strike a deal with them. That’s

the value proposition of Startup Chile across all industries. How is the government helping build Chile as an innovation hub that can support global businesses and global operations for fintechs? How far has Chile progressed on that front? The Chilean Government’s involvement is huge. The state will step in when the private sector in Chile is unable to take care of a gap in the economic activity. The Chilean Government has identified that innovation is a key factor relevant to the country. It has created a large number of programs to fill in the gap. With that, the number of venture firms, corporate venture firms and startups are growing organically. So the role of the Chilean Government is to close gaps when required in strategic markets. What is the future of payment startups in Chile and Latin America? We don’t have many regulations. These are super easy markets to test on a pile of new products. It seems more companies are looking to bring innovative solutions to payments. The thing that we need to speed up is regulations because they are mostly framed for big banks and corporations compared to startups and entrepreneurship. On one hand, Latin America is focused on bringing fintechs and startups from all over the world but at the same time there is a struggle with regulations. What are Startup Chile’s plans to promote startup growth in the country, especially fintechs, in the next five years? We strongly believe that every single industry, especially with what we have here in Chile they need to work on the products — and this is not just for the financial industry.

How Malta became the ‘Blockchain ‘Blockchain Island’

Malta is trying to leverage its first mover advantage as one of the first nations to offer comprehensive regulation for distributed ledger technology even as legal uncertainty reigns worldwide

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SAMUEL ABRAHAM According to Gartner, blockchain will generate annual business value of more than $3 trillion by 2030. PwC interprets that data to say that possibly 10 percent of the world’s economic infrastructure might run on blockchain by that time. While there is a lot of excitement around blockchain with regard to how blockchain can break down barriers,


improve trust, and enhance traceability and transparency of transactions, a PWC survey notes that regulatory uncertainty is a key concern that mars the development of blockchain projects, followed by the lack of trust, and interoperability. Blockchain regulation is something that has seen a lot of knee-jerk reactions from governments in different parts of the world. Regulators worldwide have shown a mixed reaction to tokens and initial coin offerings (ICOs). Malta along with Switzerland and Singapore has moved toward forming regulations on tokens to speed the growth of blockchain development. The US on the other hand has shown a typical agnostic approach to regulation, leaving it to the different states to come up with their own regulations. The official People’s Daily of China, on the other hand, called for regulation of blockchain technology at the domestic level. The Chinese Communist Party’s official media, however, doubled down on the government’s commitment to harnessing the technology’s benefits. With the haphazard manner of blockchain regulation, companies are left to guess how regulators in their jurisdictions will regulate commercial activities migrating to the blockchain. PwC advises blockchain entrepreneurs to keep abreast with regulatory developments and to engage with lawmakers at all levels. What if the government of a state itself took a proactive stance to blockchain regulation while keeping blockchain entrepreneurs in the loop? That is what the Mediterranean island nation of Malta with its unique geographic position straddling Europe, the Middle East, and Africa has gone ahead and done, as it tries to position itself as the ‘Blockchain Island’. In the middle of last year, Malta became the first country in the world to provide an official set of regulations


Malta’s Triad of Blockchain Laws


Malta digital innovation authority act (Mdia): outlines the duties and the responsibilities of the authority that will certify distributed ledger platforms


innovative Technology arrangement services act (iTas act): regulates cryptocurrency exchanges and other operators in the cryptocurrency market


Virtual Financial Assets Act (VFA act): regulates icos, cryptocurrency exchanges, and wallet services providers among others

for blockchain cryptocurrency, and distributed ledger technology companies. The goal was to provide companies the ability to work in a regulated environment. The government understood the fact that serious entrepreneurs in the blockchain, cryptocurrency, and distributed ledger space needed legal certainty. In fact, the paranoia of operators in these sectors is that one or two years after they have set up operations and started growing their businesses, the ruling dispensations of the day might one day come up and tell them that their operations are not within law. Even though very few countries have legislated on blockchain technology, Malta wanted to gain a

first mover advantage by providing entrepreneurs the assurance of legal certainty. Malta became the first country in the world to offer a comprehensive DLT regulatory framework when parliament passed laws regulating the technologies in October. What’s unique about Malta’s laws are that they go beyond financial focused technologies and have a broad ambit while dealing with ICOs, cryptocurrency exchanges, and digital currencies.

Malta’s comprehensive laws The first law is the Malta Digital Innovation Authority Act (MDIA). The MDIA establishes the Malta Digital Innovation Authority while also certifying the DLT platforms. The focus of this law is on internal governance arrangements and it outlines the duties and the responsibilities of the authority that will certify distributed ledger platforms. The goal of setting up the MDIA is to provide legal certainty and to improve the credibility of the operators who use the platform. The second law, the Innovative Technology Arrangement Services Act (ITAS Act) involves the arrangement of DLT platforms and the certification of the platforms. The bill regulates cryptocurrency exchanges and other operators in the cryptocurrency market. The third law, Virtual Financial Assets Act (VFA Act) regulates ICOs, cryptocurrency exchanges, and wallet services providers, among others. The law went into effect in October last year. It gave companies registered in Malta that seek to launch ICOs six months to comply with the laws. The government also gave cryptocurrency exchanges one year to comply with the law. But does Malta as a destination for blockchain startups have a value proposition other than the regulatory environment? The government of Malta says that the Island nation’s overall value proposition is underpinned by a number of critical pull factors. In

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addition to the bespoke regulatory authority, MDIA, for distributed ledger platforms, the Malta Financial Services Authority also has a reputation for being meticulous and business friendly. In addition, Malta has a highly developed operational infrastructure to support innovative businesses highlighted by the presence of professional legal firms as well as a strong cluster of the top four and medium tier audit firms.

Malta’s Junior Minister for Financial Services, Digital Economy, and Innovation within the Office of the Prime Minister of Malta, Silvio Schembri, told International Finance: “Malta enjoys a highly stable political and economic environment. The sustained growth of the blockchain industry is being supported by investments in innovation that are planned for this sector just like those for the AI industry. Our strong ICT

“Malta enjoys a highly stable political and economic environment. the sustained growth of the blockchain industry is being supported by investments in innovation that are planned for this sector just like those for the AI sector” silvio schembri, Junior Minister for Financial Services, digital Economy, and innovation within the office of the Prime Minister of Malta

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infrastructure, which is 5G-ready, evergrowing gaming industry, and strong financial services sector, a tech-savvy population — the huge human capital that lies in our talent base — and our drive to be innovative act as solid foundations to deepen Malta’s first mover advantage in the Blockchain sphere.”

Great strides made Moreover, With the publication of the government consultation paper on the establishment of the Malta Digital Innovation Authority, the framework for the certification of distributed ledger technology platforms and related service providers and a Virtual Currency Act, Malta has made great strides towards making the country a leader in DLT regulation. “The three acts that are now in effect — the Virtual Financial Assets Act; the Malta Digital Innovation Authority Act and the Innovative Technology Arrangements and Services Act providing a holistic regulatory framework,” Schembri added. Malta did not stop there, and after a public consultation, the Malta Financial Services Authority published its fintech strategy based on six pillars: regulations, ecosystem, architecture, international links, knowledge, and security. “The two elements of this strategy which appear to be most anticipated by stakeholders are the setting up of a regulatory sandbox, under pillar 1, and the establishment of an innovation hub, under pillar 3. The authority plans to issue a consultation document on each of the six pillars of the strategy, with that on pillar 1 expected to be published in the coming weeks,” Schmebri told International Finance. Exante, a financial and technological company created by professional traders, with ten offices in Europe and Asia and more than 300 employees, is one of the innovative blockchain companies using Malta as a base. It claims to provide the greatest number of markets among brokers in Europe, and describes itself as the only one to offer cryptocurrencies since 2012. With regard to Malta’s


advantages as a blockchain hub, Patrick O’Brien, Exante’s spokesman, told International Finance: “Malta’s advantageous geographical location, being within three hours direct flight from other European financial centres was partly the reason behind Exante’s choice to move to Malta. With an accessible, respected, and forwardlooking regulator, we believe that the Island’s stable political arena was a perfect choice. Malta’s banking sector, composed of a combination of solid and reliable Maltese banks and major international banks, played a role in addition to the forward-thinking ability of our government in the blockchain and crypto space.” Exante on the whole encourages blockchain-initiatives made by the government in Malta and is actively involved in their implementation. Having established a highly-profitable hedge-fund bitcoin fund a few years ago while closely cooperating with many bitcoin exchanges, the founders of the company have amassed a wealth of experience in this technology. Exante shares its experience for carrying out other projects aimed at developing not only blockchain in Malta but other crypto technologies as well. Ana Benic, the founder and CEO of another blockchain startup based in Malta, NextHash, also speaks highly about the close interaction between blockchain entrepreneurs and the regulators in Malta. “Malta has already built up a sizeable crypto community that is bringing awareness about its blockchain prowess to the rest of the world. Not only today, but even more in the future, entrepreneurial world will not be limited by jurisdiction but by the availability of a digital community and infrastructure. In Malta the blockchain community itself very strong and, considering the size of the country, you can smoothly communicate with the regulator and your peers,” Benic told International Finance. NextHash, which trades under the brand Nexinter, is a digital asset

explore new evolving technologies and to deeply understand whether they will bring true innovation and sustainable growth. This is indeed an attractive environment for startups because of its agility and the infinite possibilities to extend their reach as well as the ability to comply with regulatory frameworks without major headaches.”

Challenges of scale

“We are also curious and eager to observe how the current exchanges will adapt and survive in a progressive regulatory environment. nevertheless, it is key not to mistake blockchain technology for crypto companies” Ana Benic, founder and CEo, NextHash

platform. Nexinter is currently operating as a regulated crypto exchange in the European Union using Estonian licences and the Maltese MFSA notification. With regard to Malta’ approach to technology innovation, Benic told International Finance, “Malta is keen to

What are the challenges that Malta can face as it tries to position itself as a blockchain innovation hub? With Malta’s limited population and size, how will companies scale smoothly after a point? “Malta has been one of the first jurisdictions to identify the opportunities associated with this new sector and has spearheaded the way in adopting a regulatory framework. Although the government has pitched the country as ‘Blockchain Island’, the challenges which lie ahead will be in retaining strong industry players who have or intend to relocate to Malta for purposes of making use of Malta’s regulatory framework,” says Exante’s O’Brien. Another question that rises is whether the Maltese immigration system will be flexible to allow growing companies to meet their talent needs by enabling smooth movement of talent from outside Malta. The strong economic growth that Malta is currently experiencing has had a significant impact in reducing the level of unemployment in Malta and consequently the availability of labour. “Over these last few years the economy has experienced an influx of foreign workers to support the growth in the various sectors of the economy including those in the blockchain space and related areas. As a result, the government has reviewed the process to allow non-Europeans to work in Malta to improve the efficiency with which such applications are duly processed to ensure that these meet the requirements of the industry,” says Minister Schembri. Malta’s main aim with regard to talent is to attract the best talent from

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abroad while supporting its local talent resources and industries. “Since blockchain is a new industry, not just for us but for the world itself, bigger countries that are now looking at what Malta’s DLT legislation as a blueprint. As a government, we immediately sought to take the necessary actions to strengthen the existing skills and prepare future generations to pursue a career in this new emergent industry. In fact, very recently, 19 students were awarded scholarship grants to pursue their Master’s degree in DLT. This was done through an investment of €160,000 and is interesting to note that the background of these students are in diverse areas such as law, finance, business and management. Through this master’s program we sought to fuse ‘stand-alone’ professions with a new emergent industry, an approach which is likely to mould such sectors as we know today,” added Schembri. Yet another challenge that companies in the blockchain field faced in Malta according to a Times of Malta report in March was the resistance on part of banks with regard to opening accounts for crypto and blockchain companies. The paper reported that banks were declining these companies requests to open accounts claiming that such accounts were outside their ‘risk apetite’. The companies on the other hand were complaining that the banks were not differentiating between cryptocurrency and blockchain even though the two were not always linked. With regard to the reluctance of banks to open accounts for crypto and blockchain companies, NextHash’s Benic said, “This is indeed one of the problems that the industry is facing as a whole. It is still an overall problem to open a bank account in Malta for crypto-related companies. Nevertheless, we deeply understand the challenge that banks are facing and we can disclose that we managed to obtain an account with the help of our policies and infrastructure. We still believe there is are some gaps between the regulator and the banks in Malta, as also

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“We also have other advantages, such as an English-speaking population and a favourable climate, with plenty of leisure opportunities, making Malta a great place to relocate to” eman pulis, founder, Malta Ai and Blockchain Summit

elsewhere in EU and around the world. Nevertheless, we are confident that such gaps will shrink over time and Malta will be playing a leading role to make it possible.” The Maltese government got itself involved to resolve the issue with Minister Schembri himself holding talks with banks and their stakeholders to for a better understanding of the industry. The Malta Financial Services

Authority (MFSA) and the Financial Intelligence Analysis Unit (FIAU) then jointly published a consultation document to provide guidance for credit institutions, payment providers and electronic money institutions that have the capacity to open accounts for entities using financial technology, according to the Malta Business Observer. Malta’s government did not put a number on the blockchain investments that Malta has attracted. However, the government highlighted the fact that under the VFA Framework, the MFSA has registered 13 VFA agents and the authority has received notifications from a number of entities who are operating under the transitory provisions. The MDIA also approved three systems auditors for DLT projects. The government considers this an important milestone since VFA Agents and systems auditors will both assist authorities throughout the supervision and licensing process. It believes that this will ensure market stability, integrity, and consumer protection.

packed summits Blockchain conferences organised in Malta are well attended by industry delegates from all over the world. “It is interesting to note the level of participation in recent blockchain themed conferences in Malta. These conferences attracted more than 5000 delegates putting Malta as an attractive jurisdiction to a substantial number of operators in this space,” says Minister Schembri, highlighting the global interest in the Maltese blockchain sector. Eman Pulis organises the Malta AI and Blockchain Summit, a successful forum which highlights Malta’s blockchain value proposition to the global technology community. “The Maltese Islands have a lot to offer, particularly in terms of their location — such a central position makes us an ideal point of connection between markets in Africa and Europe. We also have other advantages, such as an English-speaking population and a favourable climate,


with plenty of leisure opportunities, making Malta a great place to relocate to,” Pulis told International Finance. Besides providing companies and executives opportunities to network and do business in Malta, The Malta Blockchain Summit also works closely with initiatives such as Malta Enterprise. In November, the Malta AI and Blockchain Summit will also be launching Malta Week, which offers not one, but two shows. “We are inviting investors to come and explore what Malta has to offer in this show-packed week — and the synergy between the Malta AI and Blockchain Summit and the Medical Cannabiz Summit make it an excellent chance for a conversation on the myriad investment opportunities to be found when blockchain and medical cannabis cross paths,” added Pulis. So how does the government visualise Malta’s blockchain sector’s growth in the coming years? The government believes that the onset of the new legal and regulatory framework has established very strong foundations for the sector making its future bright. It says the plans for a regulatory sandbox, the development of a high-end incubation centre, and equally, the plans to attract venture capitalists and accelerators, will further strengthen the development of the industry in Malta. In addition, the government believes these developments will strengthen the overall ecosystem and attract the service clusters that are an integral part of a development strategy set for this sector. “We are on the right path and should continue to gain strategic competitive advantage in the global economy as leaders in the field while attracting investments and positioning the country as a hub for the application of emerging technologies and their development,” said Minister Schembri. Malta’ success in drawing further blockchain investments partly depend on how its competitors — both far and near — fare, especially with regard to the regulatory environment they offer.

Exante claims to provide the greatest number of markets among brokers in Europe, and describes itself as the only one to offer cryptocurrencies since 2012.

NextHash’s Benic is optimistic that regulators will progressively better regulate the crypto sector. She also believes that going forward, regulations will be progressively harder and licences will become harder to obtain for new entrants. “We are also curious and eager to observe how the current exchanges will adapt and survive in a progressive regulatory environment. Nevertheless, it is key not to mistake blockchain technology for crypto companies, where blockchain tech is the underlining technology behind the cryptocurrencies. We believe that companies developing just the blockchain technology and not dealing with financial instruments should be considered and regulated as regular technology companies.” Exante’s O’Brien is of the opinion that blockchain’s future is bright in the sense that in the same manner in which email became a ‘killer app’ for the internet, identity solutions will be a ‘killer app’ for blockchain. “While many would still argue the applicability of Blockchain on a global level, they cannot ignore the paradigm shift felt throughout the world. In 2018 alone, more than €2.1 billion was spent on blockchain implementation globally. The cascading effect increased investment in ICOs

by sixteen-fold and more than a dozen countries are officially developing their own cryptocurrency,” he says. Nevertheless, he sees the Asean nations as potential trailblazers in the global blockchain sweepstakes because of their tech savvy populations and the obvious demographic dividend they enjoy. “While the decentralisation movement largely began in the West, it has certainly made its way East, as jurisdictions in the region have come to shape global conversations and developments across the wider industry. One of the primary reasons the AsiaPacific region looks poised to be a trailblazer in blockchain is its consumer market. Not only is it big — the size of Asia’s middle class is expected to reach 3.5 billion by 2030 — but it is especially eager to embrace new technologies. The region’s enthusiasm for cutting-edge technologies can be attributed to its uniquely young, technology-curious population,” added O’Brien. But as of now, Malta is enjoying its moment under the Mediterranean sun as the world’s first ‘blockchain Island’.

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Ahli United Bank

Using Technology for Leadership the bank is taking major steps toward fintech innovation IF CORRESPONDENT

Ahli United Bank reported a 15 percent growth in net proďŹ t in 2018, the performance coming in line with the bank’s strategic direction. With its strategy, the bank is able to produce sustainable growth and sound financial and credit standing, despite political and economic upheavals in different parts of the world.

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In an interview with International Finance, Deputy Chief Executive of Ahli United Bank for the Banking Support Group Jehad Al Humaidhi explains how the bank is committed to reinforcing its leading position in the market by leveraging technology, while also explaining how the wider economy and markets will support banking in Kuwait in the coming years. Jehad Al Humaidhi graduated from the Kuwait University in Mathematics and Economics. After graduation, she joined the IT programming team at Ahli United Bank (previously known as Bank of Kuwait and the Middle East). She has been fundamental in developing systems, databases, and other advanced technology for the bank over many years. While helping the bank develop advanced technology capabilities throughout her career, she has also taken up major managerial roles, particularly since 2011. In 2011, she assumed the responsibilities of the technology, central operations, and administration hub before becoming the

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deputy chief executive of the bank for the entire technology and support functions in 2018. Jehad Al Humaidhi has vast experience in both conventional and Islamic banking as well as board-level experience in key technology boards of directors in Kuwait including the boards of K-Net, Ci-Net and Gulf Custody Companies. International Finance: Ahli United Bank reported a 15 percent growth in net proďŹ t in 2018. Being part of the Kuwait banking industry, what are the drivers of growth for Ahli United Bank? Jehad Al Humaidhi: The bank’s performance in 2018 came in line with the strategic direction, confirming its ability to produce sustainable growth and sound financial and credit standing, despite the political and economic instability in many parts of the world. The bank is inspired to provide innovative products and services and sustainable returns


balanced with high discipline, risk management and cost control. The bank keeps a firm grip on both liquidity and equity values. This commitment reinforced our leading position in the market. For the 12 months ending on December 31, 2018, Ahli United Bank reported a year of strong growth with net profits of KD51.3 million derived from the core business, a rise of 15.3 percent on the KD 44.5 million achieved in 2017. Net operating income has increased by 3.3 percent reaching KD84.4 million as opposed to KD81.7 million in 2017. The bank has enhanced its provisions coverage by adding more provisions as they might be required to ensure a higher quality of financial books and a loss absorber buffer. The increase in operating income underscores the strength of the bank’s business model focusing on corporate banking, retail banking, private banking, and treasury, all conducted within an effective risk and control framework. The return on average equity (ROAE) and return on average assets (ROAA) of 14 percent and 1.4 percent, respectively, continue to be among the best in the market. In line with the bank’s eagerness to meet customer expectations, we have used technology to make significant strides in achieving our customer experience milestones in 2018. By upgrading our technology and online banking applications, we have delivered state-ofthe-art mobile and online channels in the region. With the opening of our fully digitised branch in Avenues Mall in Kuwait in 2018, the bank is taking a major step toward fintech innovation for a new a new era of seamless operations and hassle-free banking. Global economic fluctuations can impact Kuwait’s revenue. Against this background, have the repercussions of these factors affected Ahli United Bank’s performance? And what has been the subsequent effect on the banking industry? Kuwait is an active player in the world economy, particularly in the area of hydrocarbons production, being a member of the OPEC. We always face challenges as business is underpinned by an economy that has a large share of its GDP coming from hydrocarbon sales. The state of Kuwait, by having one of the largest sovereign and savings funds in the world, manages to provide a reasonable buffer to absorb those temporary fluctuations with the help of a stable, balanced, and peaceful political landscape as well as balanced diplomatic relationships with other nations. Similarly, the fluctuations in the US and global interest rates also have limited impact on Kuwait because of prudent monetary policies that are also flexible with a currency pegged to a basket of currencies all operating

net profit


44.5 Mn 2018 kd51.3 Mn kd

up 15% yoy

net operating income



81.7 Mn



84.4 Mn

up 3% yoy

under strict supervision of the authorities and Central Bank of Kuwait (CBK). Ahli United Bank, and Kuwait banks in general, remain profitable, well capitalised, and liquid. What were the significant roadblocks encountered while achieving a robust performance last year? How were they addressed? The bank generally did not face real roadblocks in 2018, but only a few challenges. Our research capabilities and

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professional executive teams usually provide insights about the expected market movements and changes ahead of time. One of the top challenges concerns cybersecurity, with the number of attacks rising worldwide even against institutions that are known to maintain higher security standards. Ahli United Bank has addressed these challenges through further investments and allocation of capital to strengthen our systems in collaboration with the Ahli United Bank Group. A dedicated team that works around the clock is monitoring the networks and analysing portal activities. We conduct training sessions not only for employees but also for customers through our social media and online channels. Ahli United Bank always disseminates alerts through tellers, ATMs, and digital channels to create awareness among dealers and customers. Another challenge has been the compliance layer and the increasing cost of compliance. The bank has addressed the

“Successful digital transformation efforts always start with a clear understanding of the strategy, current and future state operating models, and risk appetite” 30 | July 2019 | International Finance

challenge by automating all main anti-money laundering (AML) functions and by closely monitoring customer behaviours with an end-to-end enhancement of its related procedural manuals. All activities are being supervised closely by the respective Audit and Compliance Board Committee of the bank. With inflation hitting the market due to higher utility bills and the gradual reduction of the government subsidies for the sake of economic reforms, Ahli United Bank has taken solid steps to cut unnecessary costs, streamline a number of processes, and automate others. We involved employees in initiatives to create awareness on energy savings and cost optimisation, which eventually resulted in Ahli United Bank having a cost-to-income ratio that is among the best in the market. What drives Ahli United Bank’s decision making and how is the swift adoption of digital technologies accelerating the transformation of your customer experience? The board of directors at Ahli United Bank provides a more than adequate and updated vision for the bank in general. The strategy is reviewed by the executive management whereby the commitment is created and tightened up with strict budgets. The strategy clearly defines time-to-the market with robust project plans and steering teams turning the plan to reality, while constantly measuring performance. With the overall global move towards digital transformation, we have identified opportunities and potential systems, and introduced products, services, and processes in a number of projects. Successful digital transformation efforts always start with a clear understanding of the strategy, current and future state operating models, and risk appetite. Organisations need to decide whether they are disrupting the market and leading digital transformation, or whether they seek to play a waiting game, monitoring the competitive landscape and reacting as needed to defend market share. Leaders then must consider the impact on people, including how easily they can adapt the culture of the organisation and behaviour of individual employees to new approaches and how customer interactions will change for the better. Ahli United Bank Kuwait has taken the lead and we have decided to create a digital forum which will realise several digital projects, then enrich the customer experience, save costs, and speed up the time to market. What are your views on the domestic capital markets? What are the necessary efforts required by policy makers to

COVER STORY enhance it and currently how are policy makers changing the course of the country’s capital markets? Boursa Kuwait’s had numerous achievements to its credit in 2018 that were in line with Kuwait’s State Vision 2035 and mainly focused on turning the country into a regional and, possibly, a global centre of commerce and finance. The bourse embarked this year on a path that prioritised international standards of operations that were aimed at attracting foreign capital and investments. One of the chief highlights was the Standard and Poor’s (S&P) rating, which affirmed Kuwait’s AA/A-1+ long and short-term foreign and local currency sovereign credit ratings, with stable economic outlook. Boursa Kuwait is also being upgraded to an ‘emerging’ market, starting from September 23, 2018. Also among the achievements was the Morgan Stanley Capital International’s (MSCI) intention to include the Kuwait Index in its 2019 annual market classification review for a potential reclassification from frontier market to emerging market status. Locally, the Boursa Kuwait has reclassified its indices to include three major indices: the Main Market Index, the Premier Index, and the All Share Index to emulate the stock exchange processes at global markets. The new classification aims to bolster transparency as well as increase liquidity and the number of shares traded. Boursa Kuwait also launched the over the counter market (OTC) back in November 2018. The fresh market aims to create a transparent environment by bringing buyers and sellers together using fully supervised mechanisms. To derive the benefits of well-functioning markets, adequate and well-defined regulations for issuers, investors, and intermediaries are critical. The markets require robust supervisory arrangements on an ongoing basis to protect investors from market manipulation and to manage systemic risks. Such a framework, in turn, needs to be anchored in a good investment climate that includes a sound corporate governance framework, reliable and quality accounting, creditor rights, property rights, and bankruptcy and competition law. Finally, markets need advanced infrastructure, exchanges, trading platforms, clearing houses, and custodians all working toward supporting market activities and investors relations. Kuwait is more typically known as a source of investment rather than a destination due to the size of its sovereign wealth fund, but the government aims to reverse this trend by attracting more foreign direct investment as a key economic

Kuwait’s public and external balance sheets will remain strong over the next two years, primarily underpinned by sizeable foreign assets accumulated in the country’s sovereign wealth fund. Ample financial assets, low debt, and a sound banking sector allow Kuwait to undertake the needed reforms from a position of strength and at a measured pace diversification tool outlined in Kuwait Vision 2035. The FDI focus is on high-quality direct investments since the country is not desperate for capital, but looking forward for added value, innovation, and transformation of the economy. It seems Kuwait stocks had outperformed most of their peers in the region last year. This means, the domestic stock market might capture the interest of international investors. How do you see this opportunity as a good fit to boost liquidity? Inclusion of the Kuwait market in an emerging market benchmark and an improvement in oil prices have helped Kuwaiti stocks outperform their regional peers in the past few months although trading continues at a lower level than is deemed desirable. This emerging market accession signifies the growing investor confidence in the Kuwaiti market as well as the rapid and successful implementation of reforms and wide-ranging developments that have enhanced international investors access to the Kuwait Stock Exchange. The inclusion is expected to lead to a significant inflow in foreign investment, which will boost liquidity in the domestic capital market and contribute to more balanced market conditions and stability. Kuwait is a prosperous country, largely financed by its oil revenues. How do you foresee its economic expansion in the next five years? Kuwait’s public and external balance sheets will remain strong over the next two years, primarily underpinned by sizeable foreign assets accumulated in the country’s sovereign wealth fund. Ample financial assets, low debt, and a sound banking sector allow Kuwait to undertake the needed reforms from a position of strength and at a measured pace. The national mission believes that the fiscal adjustment should be primarily expenditure-based, supported by non-oil revenue mobilisation.

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Brexit: Challenges galore for UK wealth managers

EU talent management and product distribution to clients are set to become more complicated for UK wealth management companies IF Correspondent The upcoming Brexit presents key challenges for UK wealth management companies with regard to investment management, distribution, and talent management. Wealth managers have to decide which products they would use for EU and international distribution as well as the location of the Markets in Financial Instruments Directive (MiFD) distribution firm. The

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delegation of the portfolio management services for EU funds is another concern. There will also be questions with regard to the strategic implications of the European operating model with regard to future distribution and the management of talent. In an advisory note to UK wealth managers, Ernst and Young says that wealth managers


should be prepared to face challenges with regard to maintaining delegation rights. The UK wealth management industry offers portfolio management services to a wide range of UK and EU investors. A variety of investors including individuals, trusts, and charities delegate the management of their portfolios to experts in UK wealth management firms. EY says that the EU would have difficulty isolating UK wealth managers as delegation rights are currently given to US, Chinese, Latin American, Japanese, Chinese and other firms. The EY note says that UK wealth managers need a clear idea of which entities and in what jurisdictions perform portfolio management and advice duties. In addition, UK wealth management companies need to decide how they would provide investment advice out of UK companies and through UK-based relationship managers to EU-based clients. They also need a clear idea of which activities out of the middle and back offices are delegated to which entity and out of which jurisdiction. Certain firms have used UK Open Ended Investment Company (OEIC) as their Undertaking for Collective Investment in Transferable Securities (UCITS) vehicle for distribution to international investors (UCITS) and UCITS by definition have to be EU-based. EY notes that if Brexit does not create an exception, the UK OEIC funds will become alternative investment funds (AIFs) after Brexit. AIFs are prone to be less attractive to international investors. In order to comply with EU regulations, UK wealth management firms have used UK entities to function in the role of distributors. After Brexit, these firms can be obliged to create EU entities to function in the distributor’s role. The implications of MiFD II, GDPR, and other regulations in the decision making of UK wealth managers will also deserve thoughtful examination. Also the cross-border advice model will have implications with regard to the management of data, cash, and assets.

II, for certain trades there is a user disclosure requirement with regard to why you are constructing the investment vehicle. That is, the intention should be explained. “Now for the London-based entity, when there is no exposure under a no-deal, can the EU prevent their holding agent from conducting transactions?” asks Williams. When MFID II was drafted, the EU worried about Singaporean and American hedge funds operating within the European clearing system through proxies. With London outside the ultimate ECJ jurisdiction, this concern gets exacerbated. UK wealth managers must anticipate a certain reaction such as an ultimate beneficiary disclosure requirement.

MFId II is important

“Again, this is not a problem for massive institutional funds, but for a hedge fund with an aggressive volatility-led investment strategy, it would either end up being able to work with impunity or it will be shut out,” adds Williams Williams says that the exact nature of Brexit really matters, as well as the details of the deal and the deals’ impact on fundamental factors. In the current time, wealth managers would find that the outcome is hard to control. The volatility created by the political uncertainty generated by Brexit might not be an issue of concern to UK wealth management companies, says Williams. “We have not seen much in the way of volatility spillovers and contagion during this time, so this might be over-stated. The majority of UK wealth managers are carefully diversified and operate in a manner that although they are not immune to Brexit, they are still not overly reliant on EU membership to fulfil the objectives. There is also the question of low interest rates —

Julian Williams, professor of accounting and finance at Durham University Business School told International Finance that regulatory issues are a concern with regard to Brexit for UK wealth managers that have EU clients. “MFID II is important. How will funds managed in the UK deal with MFID II? Where are securities going to be stored? What are the entities that have rights to the securities under MFID II? Will London based firms have easy access to Target 2 securities? Theresa May plan was that this problem would be shunted back for some years. We do not know what happens under a no-deal Brexit.” Consider a hypothetical wealth management fund with assets in the high hundreds of millions. This is not going to have separate specific branch offices in Europe, but might have a holding desk in Ireland to process trades under Target 2 securities in the event of hard Brexit. However, under MFID

Distribution After Brexit, UK wealth management firms can be obliged to create eu entities to function in the distributor’s role


uk fund managers need to understand the flexibility, agility, and preferences of their workforce before brexit

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will there be a prolonging of the current trend and a delay in a return to something approaching normality? Clearly the structure of the yield curve matters to wealth managers and this will be impacted by changes in Europe-wide fiscal and monetary policy as the impact (or lack thereof) of Brexit reveals itself.” From a wealth manager’s point of view, the distribution strategy of UK wealth managers after Brexit will depend on the competitive nature of the company, Mihir Kapadia, CEO of Sun Global which manages portfolios of professional clients, HNWIs, and ultra HNWIs told International Finance. “The distribution strategy will depend mainly on the company’s competitive standing, and this will undoubtedly become the key component to a firm’s success. Therefore wealth managers will need to ensure that they are in the best position possible to take advantage of any opportunities that come their way from Brexit,” says Kapadia.

need to understand the flexibility, agility, and preferences of their workforce. UK wealth management firms need a strategy to handle the uncertainty with regard to the foreign origin talent. Retaining EU talent will be a key concern that UK wealth managers need to tackle with regard to Brexit, says Kapadia of Sun Global. He cites Oxford Economics data which shows that 30 to 40 percent of the employees of wealth managers in London are not UK citizens. “Companies will need to ensure they are well prepared for any outcome in order to soften the blow. This is where firms need to put their employees at the forefront of their thinking. They should take into consideration matters such as identifying which proportion of the workforce will be impacted, whether the company is in place to handle the uncertainty and potential loss of staff as well as identify the flexibility and preferences of its workforce. Taking these into account will be instrumental for a company going forward in what will be a challenging period, but those who are prepared will be better off than those who are not,” adds Kapadia.

Look for domestic talent Kapadia says that the UK will still have access to a vast domestic talent pool and it is up to companies to ensure they are attractive destinations to work as the competition will be fierce. “By offering something different, they can be attractive to potential employees and this can be done in a number of ways such as graduate schemes or competitive salaries. Although there will be barriers, the industry now needs to take control of innovation more than ever before, and embracing innovation will set the best wealth management firms in the UK apart.” In the end Brexit is a political issue, politicians will decide the contours of how Brexit impacts various segments of the service sector. Williams says that while regulations are more rigid, in many ways companies do succeed to create elaborate arrangements to circumvent the regulations. “Services such as wealth management tend to be inherently less sensitive to the resulting political machinations as in terms of the management of assets they operate in a complex multi-jurisdictional landscape. Manufacturing, for example, is far more sensitive to Brexit impacts as physical products are dependent on complex supply chains that rely on relatively frictionless movement within the current EU states,” concludes Williams.

“companies will need to ensure they are well prepared for any outcome in order to soften the Brexit blow. This is where firms need to put their employees at the forefront of their thinking. They should take into consideration matters such as identifying which proportion of the workforce will be impacted, whether the company is in place to handle the uncertainty and potential loss of staff as well as identify the flexibility and preferences of its workforce” Mihir Kapadia, Ceo of sun Global

Access to talent Access to talent is another key issue for UK wealth managers that EY notes in its Brexit advisory. While the UK is recognised as having the capability to attract top talent from across the world, the question is whether UK wealth managers will be able to attract talent the same way as before after Brexit. At UK wealth management companies, a large part of the staff is typically individuals who are not UK citizens. Controlling the flow of people into the UK is one of the government’s key concerns, and wealth managers should be wary of the resulting measures. For example, they need to understand what proportion of their workforce will be affected. They also

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Turbo charging Takaful growth in the Middle east MUSTAFA KHERIBA

If Takaful companies can develop innovative and Shariahcompliant family Takaful products, life Takaful will grow substantially in the region

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Takaful, the Islamic insurance system based on Shariah law, has seen strong growth in recent years, underpinned by robust demand from Muslims as well as non-Muslims seeking ethical financial services. According to recent reports, the global Takaful industry reached $46 billion in 2017 and is expected to reach $52.5 billion by 2020. Unsurprisingly, the Middle East, with its majority Muslim population, has always been considered one of the world’s most important markets for driving the growth of global Islamic insurance, although insurance has not been as historically commonplace in the Middle East as it has been in Western markets.


Within this context, Takaful is seen as key to increasing consumers’ appreciation for insurance and delivering on customer expectations. So what is driving the Takaful market in the Middle East?

The Gulf leading the way Mostly led by the Kingdom of Saudi Arabia and the UAE, the growth prospects for Takaful remain strong in the GCC. The Takaful growth rate in these countries is well ahead of the conventional insurance market in the region. Moody’s data showed GCC Takaful firms’ published results for 2018 expanding at around 7 percent year-on-year. This is being driven by several factors, including regulatory changes as well as economic activity linked to planned events such as Expo 2020 in the UAE. Indeed, recent regulatory changes are a key driver to the future success of the Takaful industry here in the region. Not only has the spread of mandatory motor and medical cover increased the demand for Islamic insurance products, it has also had a beneficial effect on underwriting profitability and is expected to continue to do so. While Takaful insurance covers general insurance, as well as life, medical and health, motor and education plans, approximately half the written business in the GCC is made up of property and accident insurance. Life insurance has also seen a surge in demand and is becoming an important component of both estate planning and diversification. Therefore, regulatory changes, such as making other types of insurance compulsory, has the potential to significantly boost the industry over the coming years.

The keys to further success There are significant opportunities for Takaful operators in Middle Eastern markets, and primarily in the GCC, to provide sound Shariah-compliant protection that is in line with consumer needs and stands up to the international conventional insurance model. In fact, in the more mature Islamic finance economies such as Malaysia and Saudi Arabia, Takaful is price competitive with equivalent conventional insurance products, and has a significant proportion of nonMuslims as customers, especially those looking for ethically sound products. Nevertheless, while conventional insurance and Takaful might have similar economic drivers, Takaful players must distinguish themselves and double down on their Islamic principles rather than try and imitate their conventional counterparts. For example, developing differentiated brands and specialised products where new segments are served can still be priced for value. Takaful companies should in fact leverage the ethical differences and the spirit of mutuality they offer through their risk-sharing model and Shariah-compliant investments. All while maintaining price competitiveness and product diversity.

Then there are specific verticals where we see strong potential growth. Health Takaful is a rapidly growing sector in the Middle East again driven by the trend towards obligatory health insurance. Life Takaful penetration, at present, also lags far behind general and health Takaful, as Muslims tend to have greater inhibitions when it comes to life insurance. However, if Takaful companies can develop innovative and Shariah-compliant family Takaful products, it is reasonable to assume that life Takaful could grow even more substantially. Meanwhile, there is a shortage of Re-takaful capacity and this has left Takaful insurers with the dilemma of having to reinsure on a conventional basis. So strengthening Re-takaful operators would also assist the growth and expansion of Takaful insurance. Rapid technological changes and innovations will similarly help evolve the Takaful industry. Takaful firms are challenged with adapting new strategies to provide reliable cash flows and developing innovative protection and saving products. For this sector to remain competitive, Takaful operators should embrace technology in all operational, sales, and marketing strategies. One form of innovation is to explore new business models and partnerships at the level of bancassurance by tying up with Islamic Banks and taking advantage of the arising opportunities that Fintech and Insurtech present. Some of the UAE based Takaful insurance providers have also now invested heavily in the technological advancement and innovation of their product offering and service delivery Finally, the industry is also seeing a challenge in the form of increased capital requirements, such as currently under consideration in Saudi Arabia. Such factors mean that consolidation in the Takaful sector looks likely and what’s more, sensible. The combined Takaful groups that we expect to emerge will likely have stronger and more sophisticated businesses, positioning them to further drive the industry as a whole.

Mustafa Kheriba is the group chief operating officer of Abu Dhabi Financial Group and executive director of the company’s investment manager, ADCM. He also holds a number of executive directorships including managing director of Salama Islamic Insurance Company and Gulf Finance Company in the UAE and KSA, as well as serving on the boards of Shuaa Capital, Khaleeji Commercial Bank, Gulf Financial House and ADCorp.

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Why oman introduced dhamani

The mandatory health insurance scheme will provide Omani citizens with uniform access to healthcare services and improve insurers’ earnings SANGEETHA DEEPAK

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is that employers in the private sector are willing to provide medical covers to all workers in an attempt to attract and retain talent. Now the Oman government’s plan to implement Dhamani simply highlights the Last year, the Sultanate of Oman announced possibility of a much favourable health insurance environment that the Capital Market Authority is preparing for Omani citizens and reflects the draft law for a mandatory health insurance upon the scope for the industry’s growth in the coming years. rollout in the country. The move stemmed “Upon examining the presence from a decision made by the council of and extent of coverage of the ministers to create sustained and consistent private healthcare facilities, it has become evident that we need to institutional mechanisms across the country’s encourage the establishment of health insurance landscape more healthcare providers within stipulated patient’s rights and quality care standards,” Sheikh Al Salmi explained. The new medical policy — the Compulsory Private Currently, the number of employees in the private Health Insurance System, also known as Dhamani — sector covered by health insurance is 450,000, and is designed to provide a basic insurance coverage for the number is expected to reach above two million expats, their families, and tourists in the Sultanate. with Dhamani in place by the end of this year. Sheikh Abdullah bin Salim Al Salmi, CEO of Capital Standard & Poor’s GCC Insurance Outlook 2019 Market Authority, told International Finance, report found that Oman’s insurance market will “Dhamani is seen as a means to an end, rather than grow up to 10 percent this year. The forecast in part being an end in its own right. Dhamani is a multi-payer depends on Dhamani and its phased rollout which is system, where employers or sponsors pay for the health aimed at incrementally increasing the utilisation of insurance of their employees or sponsored-individuals.” medical services at private healthcare facilities. Currently, the Capital Market Authority is working Investment banking advisory firm Alpen Capital with relevant institutions to implement the council of in its GCC Healthcare Industry report said that the ministers’ decision to introduce Dhamani in gradual healthcare spending in Oman is expected to reach phases. In practice, each phase will be introduced $4.9 billion in 2022. The healthcare expenditure only after ensuring that the previous phase was on outpatient and inpatient services is predicted to successfully implemented. “Dhamani was designed grow at an annualised average rate of 10 percent to with the intention to facilitate proper health insurance $1.5 billion and $2.3 billion. The bed requirement is for employees and visitors. Inclusion of families and expected to grow at a CAGR of 3.2 percent through dependents of expatriate workers in Oman is subject to 2022. This means that there will be a demand for contractual obligations between employers (or sponsors) more than 1,100 new beds in order to have a capacity and employees,” he said. of 7,937 beds. In recent years, the insurance industry in Oman has It seems that Dhamani has come just in time to ease witnessed tremendous growth. The health insurance the anticipated burden on Oman’s private healthcare industry for the first time achieved a bigger market system. Although Oman’s healthcare industry is share in terms of total insurance premiums compared to small, it has outshone many of its peer countries the motor business, local media reported. Last year, the because of firm political will and dedicated workforce industry accounted for 33 percent of the total premiums, planning. The country adopts a free market economy with a significant growth rate of 30.5 percent between approach, where investment is key to driving the period 2011 and 2018. competition and market growth. So far, the industry’s robust growth has been “The Capital Market Authority believes that providing attributed to two reasons. The public is fully aware of the right incentive would attract more investments the importance of health insurance, and another reason

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in the insurance industry. For example, mandating the health insurance and a streamlined (electronic) claims and payment system, would provide the right incentives,” Sheikh Al Salmi explained. The Standard and Poor’s report observed that intimidating factors such as cut-throat competition, high operating and regulatory costs, volatile investment returns, and strict accounting standards would have negative side effects on insurers’ earnings in 2019. In order to stabilise these factors, the government “would require establishing the rules for a fair competition and equal playing field as manifested by strict monitoring to minimise market manipulation,” Sheikh Al Salmi said. In saying so, Sheikh Al Salmi is pointing to the fact that the health insurance industry is in need of increased provisions amid stringent standards and regulations to lower the weight on insurers’ earnings. In fact, “The prime benefit of Dhamani is the provision of effective and consistent means to ensure compliance with employers’ duties vis-à-vis health and medical care as outlined in the labour law,” he added. This approach is more forward-looking for insurers in Oman who are eager to secure their position in the overcrowded medical insurance market. With Dhamani, insurers will have an opportunity to tap into Oman’s extensive market potential to unlock premium growth. “Dhamani will help converting hidden operational costs to a single cost that can be budgeted and monitored systematically. It is hoped that such cost will go down in time, contingent on claim ratio,” Sheikh Al Salmi explained. The Capital Market Authority is also looking to bundle the care components of other insurance products such as life and repatriation, as well as workers’ injuries and compensation. In general, this will facilitate better risk management and reduce costs for insurance companies. Dhamani might end up hurting the insurance industry and the private sector if the pricing is not appropriate. For that reason, Sheikh Al Salmi said, “The minimum required basic health coverage necessitated careful selection of coverage and development of network criteria, bearing in mind employers’ cost tolerance range.” Dhamani is already claiming victory in small measures by stretching out its benefits to expats and Omani citizens in the private sector as well. Sheikh Al Salmi went on to note that

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Sheikh Abdullah bin Salim Al Salmi, CEo of Capital Market Authority

The four essential components of Dhamani 1. Unified basic coverage health insurance policy 2. Health information and claims management system 3. dispute settlement mechanism 4. Monitoring and evaluation

there will be an even distribution of healthcare services for Omani citizens. The scheme is anticipated to boost capacity in the healthcare system by reducing the current traffic and easing the burden on healthcare facilities, which in turn will lead to the possibility of extending medical services to other segments as well. In the case of expats, Dhamani will provide them with smooth access to healthcare services through the adoption of simplified procedures. “This is guaranteed by the adopted policy of no compromise on quality of care or delivery of employer’s duty of care, as well as continuous monitoring and refinement, especially as the Capital Market Authority has already identified roles and duties for insurance companies, and healthcare providers,” Sheikh Al Salmi concluded.



european crowdfunding risks stagnation

The lack of clear and consistent regulations as well as Brexit damage the prospects of the EU crowdfunding market JÖrG roCHoLL And dMItrY CHerVYAKoV Crowdfunding markets around the world have seen remarkable growth rates in recent years. In fact, between 2010 and 2017, an aggregate amount of almost $50 billion has been raised worldwide through this method of financing, which falls into four specific types: debt, rewards, equity, and charity. The first three are comparable to more traditional sources of funding, in that investors expect returns or other financial benefits, whereas charity crowdfunding acts on a purely philanthropic method. It is this debt-based method, which acts similarly to a traditional bank loan and tends to be peer-to-peer, that generates the most funding, totalling approximately $40.5 billion of the $50 billion pledged between 2010 and 2017 — a huge percentage of the market.

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With this significant growth, it is no surprise that crowdfunding has attracted increasing economic, political, and regulatory attention at an international level. Currently, the crowdfunding market is dominated by both the US and the EU, raising $25.8 billion and $16.9 billion respectively between 2010 and 2017. Over this period of time, US growth has been at roughly an 80 percent rate, and the growth has been 85 percent in Europe — although this has slowed in recent years. The EU has the highest number of crowdfunding platforms on the market, hosting just over 40 percent of platforms worldwide — which is of course extremely positive. However, the UK hosts a quarter of these platforms, and also raised 88 percent of Europe’s funds between 2010 and 2017 – making it by far the most dominant player on the European crowdfunding market, and not far off the US’ dominance worldwide. Other countries in the bloc act on a much smaller scale, with France, the Netherlands, Germany, and Italy, for instance, only making up 10 percent of crowdfunding raised within the EU.

Crowdfunding is a local source of finance Crowdfunding is also predominantly a local source of finance. It tends to be the case that investors fund ventures in their own countries, due to the fact they feel more knowledgeable in home markets, considering the political environment, and regulatory issues. This has meant that there is little to no cross-border activity when it comes to crowdfunding, which could prove problematic with regard to the UK’s

departure from the EU. Considering the UK’s dominance in the European market, Brexit is likely to have a significant impact on the overall volume of crowdfunding expected in the EU. It is therefore, important for EU nations that cross-border activity is encouraged, and they increase their percentage share of crowdfunding efforts both in the EU and worldwide. However, currently there is no clear and consistent regulatory framework in place in Europe on this type of funding. As operating under the supranational Markets in Financial Instruments Directive (MiFID) is perceived as being too burdensome, crowdfunding platforms mostly choose to obtain authorisation under national regulatory frameworks, which greatly impairs their cross-border activity and thus the overall development of the crowdfunding market. This did not change with the MiFID 2 framework implemented in January 2018, as it was still not specifically tailored towards the needs of crowdfunding platforms. In March 2018, however, the European Commission proposed a new framework — Regulation on European Crowdfunding Service Providers (ECSP) — which would attempt to encourage cross-border activity and act as an exemption from the restrictive MiFID 2 regulation. This new set of measures is aimed at addressing the major shortcomings of the current regulatory framework, and employing an EUwide regime instead of requiring investors to adopt domestic ones. If implemented, it looks to be a major step towards a more transparent and easily accessible Europe-wide market

What happens after Brexit? eU has highest number of crowdfunding platforms globally


UK hosts 25% of european crowdfunding platforms and 88% of funds raised

France, the netherlands, Germany, and Italy make up only 10% of eU crowdfunding

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that would therefore minimise the administrative burden for investors while also strengthening investor protections. Though this new framework does certainly move the EU in the right direction when it comes to the development of crowdfunding markets in Europe, it is not yet completely coherent. It is likely to still hinder cross-border activity and slow down the development of crowdfunding markets. In fact, in our research we identified three distinct shortcomings in the new regulatory framework that need addressing if we are to give maximum support to the concept of an EU-wide crowdfunding market, and provide startups and SMEs with much-needed access to this type of funding.

precise and transparent definition needed Firstly, this EU-wide framework needs to have a precise and transparent legal definition of crowdfunding activities. There has to be a common foundation in place so that there is no legal confusion for investors, enterprises, or platforms. The proposed framework does not have this, making it difficult for small, local firms who are seeking cross-border finance as they do not have an in-depth knowledge of legal regimes in multiple countries and therefore are unable find a financing model that best fits their needs. Creating a precise and transparent legal framework across the EU will ensure that all firms, no matter of their size, and investors understand the legalities of crowdfunding throughout the EU, not just in their origin countries. Secondly, this framework requires a much clearer stance on investor protection. In the current proposal of the framework, if service providers do not see the investor to be particularly knowledgeable, they were obliged to issue a warning. However, this does not necessarily prevent an investor from funding a project. Though this does reduce administrative tasks for providers, it is an extremely lax and unclear stance on investor protection. The framework must include a more refined requirement for agents who want to invest more than a certain threshold amount to undertake a ‘qualified investor test’. In doing so, it can be ensured that all investors who fund firms and their ventures through crowdfunding are fit and proper, and can prove they have the necessary knowledge and ability to participate in the crowdfunding market. And thirdly, the current framework proposal is too limited as it only allows crowdfunding offers to a maximum of €1 million per project over a period of 12 months. Although currently only around 15 percent of all funded campaigns are above €1 million, their combined volume amounts to approximately 50 percent of the total funds pledged to EU campaigns. Therefore, the threshold is extremely restrictive and damaging to the potential growth of crowdfunding markets. This maximum quantity of investment should

the current framework proposal is too limited as it only allows crowdfunding offers to a maximum of €1 million per project over a period of 12 months. Although currently only around 15% of all funded campaigns are above €1 million, their volume is approximately 50% of the total funds pledged to eU campaigns be raised to €5 million in order to enable the frictionless development of investment-based crowdfunding in Europe. Overall, the proposed framework certainly introduces a solid foundation for an EU-wide regulation on crowdfunding, however it does not go far enough in facilitating effective cross-border activity, or providing a clear and transparent framework, which could lessen the administrative burden on investors. If the European Commission looks to address these shortcomings, then it is likely we shall see the European crowdfunding market grow further collectively.

Jörg Rocholl is president and professor of finance at the European School of Management and Technology Berlin (ESMT). He is also the Ernst and Young chair in governance and compliance and his research interests are in the areas of corporate finance, corporate governance, and financial intermediation. Dmitry Chervyakov is an analyst at Berlin Economics and project manager of the German Economic Team (GET).

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What impact does Brexit have on the pound? ArAsH ALoosH And GABrIeL A. GIMeneZ roCHe

Major Brexit events trigger punctual forex volatility, but the pound stays at a stagnant 25% depreciated level versus the euro and dollar

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Ever since the Brexit vote in June 2016, the UK’s move to exit the European Union has had a significant impact on all aspects of life in the United Kingdom, as well as its neighbours across the English Channel. Although the most catastrophic economic predictions about Brexit did not materialise, probably because of the dragging process and the fear of a no-deal, the British economy is already showing disturbing signs. The UK is still enjoying positive annual growth after the Brexit vote (1.5 percent on average), but it is losing momentum and the latest official and para-official (for example, OECD) predictions show this trend shall continue.


Surprisingly, unemployment is at its lowest since 1975 remaining below the 4 percent threshold, while wages have been rising. But this can be explained by the fact that little new investment has been made on equipment and installations. As companies remain uncertain about the issue of the Brexit process, they prefer to hang on to workers, who are easier to lay off if the situation really turns sour. However, the most evident sign that things are not as bright as before is the impact on the value of the pound sterling. Immediately after the Brexit vote, the pound lost 55 basis points relative to other G10 currencies, and the accumulated depreciation relative to the dollar and the euro is around 25 percent to this day. But what actually are the potential impacts of Brexit on the value of British pound, which is important to the British people and firms, as well as the foreign companies and individuals dealing with the British pound directly?

Major concern of international companies The value of a currency and its fluctuations are the major concerns to international companies and to consumers of international products and services. For example, Crédit Suisse estimated that S&P 500 companies have lost around $244 billion as of cumulative forex transactions in the first quarter of 2015, following the large appreciation of the US dollar against other foreign currencies. Indeed, as American products became less price competitive, the foreign revenues of US firms decreased in US dollar value. In the case of the UK, a depreciated pound would represent a boon for British manufacturing companies as they become price competitive abroad, thus increasing their pound-denominated revenues. Nevertheless, this boon would not immediately manifest and it would surely not benefit the UK’s foremost economic sector, namely the City, its financial heart. The graph accompanying this story shows a British pound index constructed as an equally weighted average value of British pound relative to a basket of the G10 currencies, as used by Neoma Business School researchers Aloosh and Bekaert in 2019. The highlighted points are the major Brexit events on June 23, 2016 (Brexit referendum), July 13, 2016 (Theresa May became PM), January 17, 2017 (May’s first speech on Brexit), March 29, 2017 (May triggered Article 50 of the Lisbon Treaty), June 8, 2017 (May loses her parliamentary majority), December 8, 2017 (the UK and the EU agreed on the divorce bill), July 6, 2018 (May retreated ‘Chequers plan’ to sign off a collective position for Brexit negotiations), November 25, 2018 (May’s draft backstop

agreement raised anger among MPs), January 15, and March 12, 2019 (May lost historical and meaningful votes on her draft deal), and May 24, 2019 (May resigned). We can see that despite major Brexit events having marginal impacts on the value of British pound, none was as significant as the Brexit referendum in 2016. This translated fears of an immediate trigger of Article 50 of the Lisbon Treaty, which only happened months later. As the Brexit process dragged on, the pound stagnated at a depreciated level. Although major Brexit events trigger punctual forex volatility, the pound remains stagnant at its current 25 percent depreciated level in comparison with the euro or the US dollar. Another reason for this stagnation despite the convoluted political process of Brexit in the British Parliament is that the depreciation benefited large UK manufacturing exporting companies and the British tourism sector. However, the financial sector, which is historically the most important industry in the UK economy — employing 4 percent of the workforce and contributing £119 billion to the British economy (6.5 percent of GDP) — has been pulling out $750 billion of their asset holdings from

the less catastrophic fall of the pound relative to the euro can be explained by the strong commercial links between the UK and the eU. the latter represents 50 percent of British foreign trade both for exports and imports. However, the depreciation still reveals who is the weaker partner in the relationship, as the UK displays continuous deficits in its trade balance relative to the eU the UK and relocating their headquarters to other countries in Europe or elsewhere. These developments will have large negative impacts on the UK economy that can offset potential benefits of a weaker British pound.

European passport a competitive advantage The position of the City of London, which alone represents 50 percent of all financial output in the UK, as an international hub is supported mainly by two pillars. The first one is the historical position of the City as a hub for clearing operations in international trade. Given the UK’s presence all over the globe in the first wave of globalisation, its banks acquired a firstcomer position and know-how that constitutes much of the financial infrastructure allowing for the smooth acceptance of bills of exchange and other commercial papers throughout the world, especially Europe-Asia transactions. The second pillar is the ‘European passport’ for British bankers to freely trade in

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Changes in pound rates on June 23, 2016 Canadian Dollar/ Pound

-49 bp

swedish Krone/ Pound

12 bp

norwegian Krona/ Pound

73 bp

swiss Franc/ Pound Us Dollar/ Pound

Japanese Yen/ Pound

-110 bp

-272 bp

-113 bp

new Zealand Dollar/Pound

4 bp Australian Dollar/Pound euro/Pound

Pound Index

-38 bp

-55 bp

European financial places. Since the UK has fewer regulations and friendlier taxation for capital investments than the rest of its European partners, the ‘passport’ represents a competitive advantage to British banks in wooing American and Asian investors to make their portfolio investments in Europe through the City. Thus, it is very interesting to evaluate the value changes of the British pound relative to each G10 currency on June 23, 2016. One can see that the pound most strongly depreciated against the US dollar (-113 bp), the Swiss frank (-110 bp), and the Japanese Yen (-272 bp). These are probably the main suppliers of portfolio investors to the UK. Although the pound sterling depreciated against the euro, the loss in value was more moderate (-38 bp), while it even appreciated relative to the Australian and the New Zealand dollars (+14 bp and +4 bp), and the Norwegian krona (+73 bp). The less catastrophic fall of the pound relative to the euro can be explained by the strong commercial links between the UK and the EU. The latter represents 50 percent of British foreign trade both for exports and imports. However, the depreciation still reveals who is the weaker partner in the relationship, as the UK displays continuous deficits in its trade balance relative to the EU. Moreover, though the UK is an important trade partner for most European giants like Germany, France or Italy, it is not the most important one for them. Things are different for Australia, New Zealand, and Norway, with whom the UK would surely try to have more trade with, and who depend more on UK products than the other way around.

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14 bp

Consequently, the impact of Brexit on the evolving trade of the British pound proves a warning to investors from North America and Asia. It is becoming more competitive for them to invest directly in European financial places, like Amsterdam, Frankfurt or Paris, rather than passing through the City and risking a depreciation of their portfolios denominated in pounds. Furthermore, even though Brexit favours the British exporting and tourism sectors with a depreciated pound, it would take a long time for these sectors to develop enough in order to more than compensate losses in the financial sector. Whatever the issue of the Brexit, the main risk now for the UK’s economy is the loss of the ‘European passport’ of its bankers. Arash Aloosh is an assistant professor of finance at NEOMA Business School, Mont-Saint-Aignan, France. He holds a PhD in Finance from BI Norwegian Business School and previously spent two years at columbia Business School as a visiting scholar. Gabriel A. Giménez Roche is assistant professor of economics at NEOMA Business School.


Audit sharing:

A solution to Big 4 corruption?

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Global calls for reform get louder as political and business leaders fear that a crisis of confidence in the accounting industry could hurt global capitalism

SAMUEL ABRAHAM No other profession the world has seen its reputation being tarnished due to the ethical violations of its practitioners over the last two decades like the auditing profession. With the bankruptcy filing of Carillion in the UK in mid-2018, a discussion is raging in the country with regard to whether too few auditors are auditing too many companies in the UK. Global capitalism is lurching from one Big 4 audit scandal to another. A House of Commons committee appointed to study the Carillion saga came up with the finding that Carillion’s accounts were systematically cooked to present optimistic assessments of revenue while completely discarding internal controls. An audit company, which was Carillion’s auditor for close to two decades and was paid £29 million for its services, did not once qualify its auditing opinion of the company and simply signed off the outlandish figures presented by the directors. Yet another firm paid £10 million by Carillion for its internal audit services, failed not only in risk management but also in financial controls.

KPMG South Africa in a soup While UK’s parliament came down hard upon Carillion’s auditors, in South Africa, Big 4 audit firm was caught in a more disturbing scandal. KPMG suffered collateral brand damage after

it became known that the company had allegedly abetted the once powerful Indian-origin Gupta family in their shenanigans in the state capture issue. The firm was accused of helping the Gupta family, once called South Africa’s shadow government, evade taxes and indulge in corruption. Although KPMG denies any willful abetment of crime, it admitted to missing several red flags with regard to the family’s accounts. Eight senior KPMG South Africa officials had to resign including its CEO Trevor Hoole. Testifying to the truly global nature of the ethical decision-making challenges and Big 4 audit scandals is the fact that India is seeking to ban Deloitte Haskins Sells and a KPMG affiliate BSR and Associates for a period of time for their audits of a unit of Indian company Infrastructure Leasing and Financial Services (IL&FS) which nearly collapsed under mismanagement and has been placed under government control. According to Reuters, India’s Corporate Affairs Ministry informed a company law tribunal that the auditors ‘miserably failed’ to fulfil their audit duties for IL&FS Financial Services (IFIN). There was more bad news for KPMG from UK regulator Financial Reporting Council, which analysed KPMG’ s audits and reported that they were substandard. According to Bloomberg, the regulator said auditors at KPMG do not challenge management

enough, are not sufficiently skeptical, and are inconsistent in their execution of audits.

Fence eating the crop? It is clear that as far as global capitalism is concerned, the fence is eating the crop. How do investors ensure that their money is in safe hands if the gatekeepers of capitalism are abetting corporate malfeasance willfully or by implication? The UK FRC report has drawn sharp reactions for the reform of the industry including calls to dismantle the Big 4. The parliament committee in the UK believes that the wider economy risks a crisis of confidence in the audit profession as Carillion was not an isolated failure. The committee said that the failure was the symptom of a of a market that works for the audit firms but fails the wider economy with umpteen conflicts of interests. The committee’s final report recommended that the British government should refer the statutory audit market to the Competition and Markets Authority. The CMA review could consider the breakup of the Big 4 into more audit firms as well as severing off audit units from other professional services units. Not surprisingly, the auditors have opposed these terms and have instead suggested a system of joint audits or lending their staff to smaller firms, so that smaller firms could get a share of the work. Following the collapse of Enron and Arthur Anderson, the US addressed the auditing fraud issue by implementing the Public Company Accounting Oversight Board (PCAOB) through the Sarbanes Oxley Act of 2002. The monitoring of auditors has greatly increased in the US since the creation of PCAOB. Audit committees in the US are also said to have improved their willingness and ability to monitor auditors. Investors are eligible to

International Finance | July 2019 | 51


ask for strong audit committees of the board and pay more attention to what audit committees do. The US is a nation of laws and there is strong law enforcement. What happens when auditors make mistakes in countries where the law is not as strictly enforced as the US? The issue of ethical violations at auditors is no way restricted to the Big 4, but the Big 4 are symptomatic of the wider industry. If ethical decisionmaking falls by the wayside at Big 4 auditors, how do smaller independent audit organisations stop succumbing to the pressure to retain clients at any cost?

Smaller firms and pressure “The question in 2001 was ‘If Arthur Andersen, one of the largest and apparently most technically proficient practices was brought down because of malpractices, why can’t this happen to smaller firms? They are under greater pressure from the sheer power of larger corporate clients,” Wesley Montechari Figueira, managing director at VBR Brasil Group, an independent accounting firm in Brazil told International Finance. VBR has clients in manufacturing, retail, and energy and around 30 percent of its gross revenue comes from international clients operating in over 25 countries. Accounting scandals are not new in Brazil; neither are scandals involving the Big 4 audit firms. The Latin

American country’s former president Dilma Roussef was impeached for apparently cooking the books of her country’s accounts. In December 2015, the American auditing watchdog PCAOB fined Big 4 leader Deloitte’s Brazilian unit $8 million for the most serious misconduct uncovered by the body till then. A probe into Deloitte’s audit of Gol, a troubled Brazilian airline with shares listed on the NYSE, found that Deloitte’s employees in Brazil, including managers and partners, had doctored paperwork, concealed evidence, and withheld information from inspectors. Similar incidents were again recorded in Deloitte’s audits of Oi a Brazilian telecom company that filed for bankruptcy in 2016. Figueira is of the opinion that internal regulations and technology are of limited help in tackling the issue. “As in other professions, technology is replacing personal contact and while internal regulations can help govern ethical decision-making, they are not the only solution. Ongoing staff training, monitoring, and evaluation must complement regulations.” “What we have learnt from past malpractices in accounting is that Brazilian accountants must end their willingness to ‘accommodate’ dicey situations rather than confront them. This must stop. Brazilians tend to like

a ‘friendly’ auditor. The small and often non-existent fines imposed by our SEC, association of accountants, or other governing bodies, speaks volumes about the battle we still have with ethics,” adds Figueira. Deloitte Brazil faced the ignominious situation of an independent monitor overseeing its work till mid-2017. At that time, the PCAOB had just fined Deloitte Mexico $750,000 for tampering with documents in an audit done in the central American country. Operating out of Mexico, the team at independent auditor JA Del Rio claims that it has created a culture of learning from others mistakes. “We deliver an ‘unusual operations’ report every month to the relevant authorities, in compliance with our ‘prevention and identification of operations with resources of illegal origin’ policies. “Our internal risk team keeps track of our clients’ business behaviour and their activities through risk matrices while our compliance officer identifies and evaluates risks associated with bad practices, integrating compliance and anti-bribery guidelines within our policies and processes, Bernardo Del Rio, managing director at JA Del Rio told International Finance. With headquarters in Guadalajara and offices in Mexico City, Leon, Monterrey and Bogota, JA Del Río is a multilingual accounting firm focused on

“The question in 2001 was ‘If Arthur Andersen, one of the largest and apparently most technically proficient practices was brought down because of malpractices, why can’t this happen to smaller firms? They are under greater pressure from the sheer power of larger corporate clients” -Wesley Montechari Figueira Managing director, Vbr brasil, brazil 52 | July 2019 | International Finance


helping foreign companies do business in Latin America. Carlos Mercero, a managing partner at Shilton, Weyers & Associates, an Argentinian company that provides audit, tax, consulting and advisory services to over 250 local and international clients from a variety of sectors, told International Finance that while encountering issues, both in the audit and in tax returns, Shilton, Weyers, and Associates, always takes the technical viewpoint. “Our work and effort to detect client fraud focuses on the key point that all managers, at all times, face the same risk and the temptations of bad behavior. And this is perhaps the main lesson we should never forget; that the risk of fraud never disappears,” he adds.

Never done before In 2014, The head of the South African Revenue Service hired KPMG South Africa to conduct a forensic investigation into an intelligence unit of the national revenue service as well as four officers in the unit. KPMG SA’s report went on to suggest that the unit was using illegal methods and was therefore ‘rogue’ in nature. The report became a major embarrassment for KPMG as it came to be known that an auditor at the company had simply ‘copy-pasted’ the report from elsewhere. A commission appointed by the South African Institute of Chartered Accountants

(SAICA) to probe the affair concluded that when a person cuts and pastes a report, it is not only dishonest but unethical. After a KPMG international investigation into the South African unit, KPMG simply retracted parts of its report into the rogue unit probe — something absolutely rare in the world of auditing. Elsewhere in Africa, Egyptian Independent accounting firm Mazars Mostafa Shawki’s managing partner Dr Ahmed Shawki who keeps an eye on the African audit scenario told International Finance, “It is very dangerous for any accounting firm to mix politics and professionalism, and inconceivable that a big company can conduct a forensic audit, issue a report, and later withdraw it, as KPMG did in South Africa.” Mazars Mostafa Shawki serves over 1000 clients from two offices in Cairo and Alexandria, has 25 partners and employs 468 professionals. “One of the key learnings from the KMPG South African audit scandal is that every firm should have a centralised system for client acceptance and engagement. The completion of a standard form ensures due diligence is undertaken prior to the provision of professional services,” adds Shawki. “Those completing the client acceptance forms should be a centrally-located team of risk management professionals.” In the context of the accounting scandals in the emerging markets and

South Africa, Mazars South Africa partner Kariem Hoosain recommends that auditors should pay special attention to politically-connected clients and understand the relationships of employees charged with governance and key executive and management staff. “It’s also vital to exercise genuine professional skeptism, particularly where you have a dominant chairman, CEO, or other key executives in the client, and apply rigorous and consistent quality assurance policies and procedures, irrespective of the ‘great reputation’ of the client. Audit partners and managers should not become complacent.” Hoosain added that partners and managers should go that extra mile to perform additional work where higher risk has been assessed, and not be constrained by budgets. “Partners should have open and frank discussions with those charged with governance, where fee estimates are inappropriate to the risk profile of the client,” says Hoosain. Coming back to the FRC UK review of KPMG’s audits, the regulator reported that the decline in quality over the last five years was unacceptable and reflected poorly on efforts by the previous leadership to improve the work. “This is further evidence that problems at KPMG are profoundly systemic,” Atul Shah, a professor of accounting and finance at the University of Suffolk had then told Bloomberg.

“one of the key learnings from the kMpG south African audit scandal is that every firm should have a centralised system for client acceptance and engagement. The completion of a standard form ensures due diligence is undertaken prior to the provision of professional services” -Ahmed shawki Managing Partner, Mazars Mostafa Shawki, Egypt International Finance | July 2019 | 53


“They are a profit-maximising business rather than a professional firm with standards of independence, character and integrity. To reform the Big Four, we must address these cultural problems and conflicts of interest.”

Is rotation a solution? How do governments in the UK and in the emerging markets confront the looming crisis of confidence in the auditing companies and their audits? It is evident that the monopoly of the Big 4 has to be broken to increase the pool of auditors and opportunities must be created for gradually increasing the mid-tier auditors’ share of the top audits. In most markets including the emerging markets such as India, the Big 4 auditing firms invariably audit virtually all of the major companies and corner the most important audits. India had instituted a system of rotation of auditors through its Companies Act 2013. However, observers believe that this has not helped the smaller firms lay their hands on the major audit pie, because most of the major audits are rotated within the Big 4. The fact is that there is ample circulation of the same staff within the Big 4 audit companies ensuring that their culture remains the same. The aim of the Indian Companies Act is thus largely defeated. The issue of rotation is also being actively discussed in the UK. In Africa, currently there is no clear

move to limit the number of audits the Big 4 do or to rotate the auditors. In Egypt, the Financial Regulatory Authority is implementing rotation for public-listed companies every six years. In addition to the Big 4, three other big firms — BDO, Grant Thornton and Mazars — play a big role in the Egyptian audit market. Mazars Mostafa Shawki’s Ahmedi Shawki says that perhaps the implementation of a joint auditor concept is a solution. On the other hand, Mazars South Africa Partner Kariem Hoosain suggests a solution similar to the one suggested by the UK Big 4 in response to the parliament committee hearing. “There are some practical challenges associated with a rotation strategy. ‘Smaller’ companies may not have sufficient capacity and expertise to take on the work that the Big 4 would need to shed. A better approach would be to “phasein” mid-tier firms through graduated joint audit assignments. There doesn’t seem to a global push to do so, although it is under consideration in the UK.” In Latin America, smaller audit companies seem to be diffident that such an arrangement can be worked out in the region. And there is no desire to create pressure on the auditors as seen in the UK or Africa. Mazars Uruguay partner Luis Martinez argues “In many cases, there’s a problem of size and capacity;

only these very large firms can do the work. However I do concede, joint audit and rotation may help spread the workload across the market.” Mazars is an international audit, accounting, tax and advisory services organisation with more than 23,000 professionals operating in 89 countries. In the region it is rare for smaller audit firms to audit larger companies, although some do audit such companies, especially those not listed on the stock exchanges. Mexican company JA Del Rio Managing Partner, Bernardo Del Rio says “I think it could help, especially if national regulators required rotation. This could in effect open up the field for smaller firms as these subsidiaries individually could never compete with the head office of a large player in a specific country.”

Big 4 audit firm break up Angus Dent is a leading UK chartered accountant and former CFO and CEO of AIM- and TSX-listed technology businesses as well as the founder of UK business P2P lending fintech startup ArchOver. With regard to the UK, Dent told International Finance that the break up of the Big 4 as the political leaders want is easier said than done. “We need to break the oligopoly that is the Big 4, although that’s easy to write and hard to enact. Companies need more choice. Only with choice is there

“i think it could help, especially if national regulators required rotation. This could in effect open up the field for smaller firms as these subsidiaries individually could never compete with the head office of a large player in a specific country” -Bernardo Del Rio Managing Partner, JA Del Rio, Mexico

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competition and the audit service that the paying companies and users of the accounts need,” says Angus. Companies are complex, so auditing is therefore complex as well. The big four have large technical departments, which is a big overhead and a barrier to entry for smaller firms. “Perhaps we could see the two chartered institutes, ICAEW and ACCA, build a technical service to rival those of the Big Four. The ICAEW already provides a service to members, but currently it is not as well-resourced as a single one of the Big Four’s technical departments,” adds Angus. A shared technical service is one idea put forth as a solution to help smaller firms to gain a share of the top audits. “The existence of a shared technical department providing services to smaller firms could be very useful. This would overcome the main obstacle for smaller firms which is to have an efficient and strong enough structure to provide services to all types of clients, regardless of the size of the company,” says Shilton, Weyers & Associates Carlos Mercero. In Latin America, Mazars Uruguay partner, Luis Martinez is open to the idea “Technical departments need to be good, not large. And when a firm is global — and there are many global firms beside the Big 4 — resources can be shared, as in the case of Mazars. I like the idea of national bodies having

technical departments to help smaller firms.” However, Mazars South Africa Partner Hoosain is skeptical about the idea. “Technical assistance by way of shared-pooled resources can only have a very limited impact. The main issues to consider is a lack of specific industry experience, understanding the client and its operations, key risk drivers, group structures, related parties and so on and key audit team members’ independence from the client. There would also be other practical challenges such as investment, cost sharing, and prioritising requests from firms at ‘crunch’ times when reporting deadlines have to be met,” says Hoosain.

Reform should start from London So what reform can governments and audit professional bodies consider that are within the realm of possibility. In the UK, Angus Dent is of the opinion that limiting the number of audits of FTSE 350 companies that the Big 4 will help. “A simple start would be to say that the Big Four could only have a maximum of around sixty audits each of the FTSE 350 companies — that would spread things around and force some of the smaller FTSE 350 companies to seek the services of other audit firms. Two years later, the number of these audits that can be conducted by the Big Four could be dropped to forty each and so on.”

According to Angus, this would force more effective competition and give the bottom half of the top ten an incentive to invest in technical departments, or club together and put more money in to the ICAEW, knowing that they would get more work than they are currently able to snag. At present they don’t invest in audit services for larger companies because they see little or no return on it as a result of the Big Four’s oligopoly. Considering the global reach of the accounting scandals, Angus Dent believes that auditing reform started from the UK would have global impact. “Start in London and let the UK be the standard bearer for global reform. London is already a world centre for finance; let’s make it the world centre for quality audit, audits that can be relied upon. If that happens, the rest of the world will follow,” concludes Angus.

A simple start would be to say that the Big Four could only have a maximum of around sixty audits each of the FTSE 350 companies — that would spread things around and force some of the smaller FTSE 350 companies to seek the services of other audit firms” -Angus Dent UK Chartered Accountant and Founder, ArchOver International Finance | July 2019 | 55


asset-based financing is popular now than ever before

Asset-based ďŹ nancing in its various forms is still a lifeline globally for small enterprises that need funding in a matter of days KeVIn dAY Growth businesses have never before had so many choices in terms of ďŹ nancing or investment options to scale up. In the decade since the global financial crash, a variety of attractive, alternative finance options have emerged, such as state-backed SME debt funds, challenger banks, as well as those that have taken advantage of the advances in technology, such and crowdfunding and peer-to-peer lending platforms. However, the excitement and interest created by these more innovative platforms has meant that the rapid rise of more standard funding options, such as asset-based finance (ABF), has perhaps been overlooked. The pace of its recent growth and the scale of this form of lending is such that it probably still makes most important funding technique for SMEs seeking to scale up and achieve

56 | July 2019 | International Finance


their growth ambitions. The variety of different debt financing options available to high growth potential SMEs has grown significantly in recent years, as mainstream banks have lost their appetite for lending after the 2008 crash. In the UK, this has been further compounded by heightened tensions around Brexit, with the value of bank loans to SMEs falling by over half in the past year. This is where alternative debt options have filled the vacuum — challenger banks and tech-based alternatives such as peer-to-peer lenders and crowdfunding, now all offer to SMEs solutions for their growth needs, without having to surrender equity or accept tough terms from financial institutions. Indeed, recent figures from the Cambridge Centre for Alternative Finance show that in the UK, the alternative debt funding sector grew by over 30 percent in 2017, to £6.2 billion, with 68 per cent of this total committed to business funding. Challenger banks in recent years have been stepping into the so-called ‘business banking gap’, targeting the specific needs of the small business market overlooked by a number of the high street banks, such as flexibility with repayments and low interest rates. Governments in a number of developed countries have been looking to challengers to drive greater competition in their business banking marketplace, with the likes of UK based Starling Bank and Metro Bank recently winning state-backed funding from RBS to support growth businesses. In 2018, the Australian federal government issued restricted banking licences specifically for alternative lenders to support this same goal. Yet business loans do have their downsides — repayments clearly can impair cash flow in a small business, reducing options for growth for firms without the disposable working capital of a larger business

Rapid growth Peer-to-peer (P2P) and crowdfunding lending business models have proven increasingly popular in recent years across the world, simultaneously enabling SMEs to raise capital quickly at competitive rates without approaching a formal institution, while giving entrepreneurs an online platform they can use to communicate and solicit funds directly from potential future investors. A recent report by Transparency Market Research (TMR) estimated that the global P2P market will experience a CAGR of 48.2 percent over 2016 to 2024 before reaching a valuation of close to $900 billion by 2024. However, recent scrutiny in several markets, most recently the UK, recommending new disclosure requirements and risk management frameworks, could see lending on these platforms scaled back and have the potential to hit SMEs who have been relying on this form of finance. Asset Based Finance (ABF), both asset-based lending and

Growth rate of asset-based financing in emerging markets (2018)








14% Year-on-year



Since 2015 Source: Polish Factors Association invoice factoring, is in many ways the reliable yet understated, and perhaps underappreciated sibling to the other forms of alternative finance now available to growth businesses, offering SMEs reliable access to working capital with limited risk. Yet, recent figures show that almost three quarters of UK SMEs are still not aware of their ability to secure funding based on their turnover rather than their credit score, stunting their potential growth. This form of funding is expanding globally at unprecedented rates in both developed and developing markets across the world, with 2018 seeing a global ABF volume of lending against assets and invoices at approximately $3 trillion, translating to increases in the high single digits year-onyear. The drivers behind this growth are varied, but are not dissimilar from those pushing the more alternative forms of funding, most notably tighter banking covenants restricting SME lending in most countries worldwide. Although the pace of growth of ABF varies regionally, with more established markets such as the US and Western Europe growing more slowly (albeit from a much higher baseline), there is a strong demand in emerging economies in Central and Eastern Europe (CEE), Africa, and Asia-Pacific for this highly flexible financing option, particularly as SME and growth companies continue to proliferate.

Mature markets holding strong The United States is broadly accepted as the home of invoice factoring with the largest numbers — the Commercial Finance

International Finance | July 2019 | 57


Association estimated the volume for factoring in 2018 to be $101 billion managed by around 900 factoring companies. The same report estimates asset based lending to be a $465 billion business. The five largest economies in Europe — UK, France, Germany, Italy and Spain — account for around two thirds of factoring volumes across the continent, and are all showing an upward trend driven by SMEs adopting ABF as a driver of growth. With more than a fifth of the market share, the UK is the largest factoring market in Europe, but recent currency volatility has meant that in the last 18 months, as a percentage of European volumes, the UK’s market share has fallen slightly, and now France has almost caught up and is poised to overtake the UK market. Nonetheless, the combined turnover of British SMEs using ABF, both invoice factoring and asset based lending, is now more than £300 billion – when put in context, these businesses account for over a third of UK GDP, with demand expected to continue, given mainstream’s banks reticence to lend and the hunger for growth apparently not daunted by current geopolitical events.


there has been a remarkable uplift in the growth of ABF in Africa in recent years, culminating in a nearly 50 percent increase in invoice factoring in the last three years sources, has led to high levels of innovation and a rapid pace of expansion in fintech solutions to meet demand, as seen in the rise of challenger banks, P2P lenders, and crowdfunding platforms, among others. But it is ABF which continues to reliably deliver secure, low risk financing for SMEs and growth businesses worldwide, less exposed than its younger competitors. Furthermore, ABF management software functionality and transaction streamlining has rapidly evolved in recent years to match the more innovative funding sources. Platforms such as LendScape automate and streamline data capture, offer real time risk management, and provide insights and analytics into reporting.

Developing markets driving growth Looking east, the CEE region is driving growth in this financing sub-sector, supporting the region’s fast growing SME sector. Figures from the Polish Factors Association (PZF) show that its ABF market, primarily invoice factoring, is growing by nearly 20 percent year on year — for less established economies in the region, growth is at an even faster pace. Hungary’s factoring market saw a strong 58 percent expansion in 2018, while Romania’s invoice factoring market experienced a more moderate but nonetheless impressive growth of 14 percent. It is now broadly accepted that the African continent has the potential to significantly boost its economic performance, and as such is a market primed for growth business – it is estimated that the continent’s formal SME sector has an annual financing gap of over US $136 billion, and of critical importance here is that SMEs account for 90 percent of all businesses in this vast region. There has been a remarkable uplift in the growth of ABF in recent years, culminating in a nearly 50 percent increase in invoice factoring in the last three years, with indicators pointing to continued growth across the continent over the longer term. Although technological innovation is spreading amongst these countries, the pace of uptake is not matching the speed that small businesses need to expand – this is why ABF is proving such a useful tool in delivering much needed reliable working capital.

Asset based financing retains popularity This rapidly growing and critically important financing option is continuing to grow across the world, despite challenges from newer, alternative forms of SME financing. In the UK, Europe, and North America, it delivers to small businesses the additional support required to grow and innovate. For those countries with less sophisticated banking infrastructure, but with nonetheless hungry young businesses eagerly seeking to grow and become part of the rapidly globalising economy, ABF is an increasingly important financing option. As further funding options become available, there will no doubt be challenges to its position, but ABF is well-placed to retain its prominent position and will continue to ensure that SMEs and growth businesses can access the funding they need.

Faster business growth

Kevin Day Kevin Day began his career over 25 years ago as a software developer at HPD and has worked his way up the ranks, holding positions as a business analyst, product manager, product director, board member and COO.

SME funding requirements, driven partly by the scarcity of traditional bank loans and other more mainstream funding

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As populism paralyses climate change action, logistics giants are making profound progress

Logistics giants’ war on carbon emissions SAMUEL ABRAHAM

On May 24, the world woke up to watch climate change strikes by millennial and Gen Z youth all over the world. Across the world, hundreds of thousands of students walked out of their classrooms to impress upon their governments to act more quickly and resolutely on climate change. Climate protests by millennials are now planned in 1600 towns and cities in 125 countries, involving 1.6 million youth. The climate change policies of governments across the world can change drastically depending on their current political priorities. But the importance of climate change responsibility is not lost upon the movers and shifters of the world — the logistics giants. The world’s logistics companies are responsible for a sizeable chunk of the carbon emissions. While governments dilly dally on climate change action, the top logistics companies are making massive changes to the way they shift and move goods across the world, with the impact on the environment and the future generations in mind. Deutsche Post DHL and Fedex have unambiguously embraced the modern environmental zeitgeist with a slew of e-mobility and alternative fuel initiatives that have major short term and long-term implications. DHL is pursuing ambitious climate change goals. Under the company’s Mission 2050 initiative, it seeks to reduce logistics-related carbon emissions to zero by 2050. E-mobility is a priority at DHL and that’s were StreetScooter, an electric vehicle

60 | July 2019 | International Finance

startup acquired by DHL comes into play. DHL, today, has more than 10,000 alternative fuel vehicles on the roads across the world as part of a switch to e-mobility. FedEx has been pursuing a ‘Reduce, Replace, Revolutionise’ strategy to reduce its carbon emissions intensity. The logistics


company is doing transformational work in increasing the carbon efficiency of its legacy vehicle fleet. According to Fedex, its strategy focuses on reducing impacts and improving productivity while creating new, more efficient, and innovative solutions. Fedex claims that these efforts have contributed to a 37 percent reduction in carbon

dioxide emissions intensity on a revenue basis across the enterprise since financial year 2009, a period in which revenue grew by 84 percent. FedEx also reduced 2.7 million metric tonnes of carbon dioxide emissions through fuel and energy saving initiatives last fiscal year alone, the company claims.

International Finance | July 2019 | 61


streetscooters – electric delivery vehicles of dhl

E-vehicles take over logistics In 2018, DHL’s fleet already had 10,843 alternative fuel vehicles out on the road and more than 9,000 of these vehicles are StreetScooters — the electric delivery vehicle now designed and manufactured by Deutsche Post DHL Group. In addition, DHL uses 3,500 e-trikes and 7,800 e-bikes for postal delivery in Germany. “Partnerships with major cities are a particularly interesting aspect of our activities — we lead by example, demonstrating that e-mobility can become the norm in logistics,” Alexander Edenhofer, a DHL company spokesman told International Finance. “On the road to zero-emission logistics, Deutsche Post DHL Group wants to provide 70 percent of its own first and last mile services with clean pick-up and delivery solutions by 2025. Delivery by foot, bicycle, and electric vehicle are the modes of choice for reducing carbon emissions and local air pollutants in urban areas. More and more of our vehicles feature e-mobility solutions — from all electric drive vehicles and cargo bikes for short distances, to plug-in hybrids and fuel cells for longer distances,” Edenhofer added. DHL’s StreetScooter e-vehicles cover a distance of 75 kilometres on a charge and save 32,000 tonnes of carbon dioxide emissions annually. E-mobility solutions also make for smarter operations at DHL. The total cost of ownership

62 | July 2019 | International Finance

“partnerships with major cities are a particularly interesting aspect of our activities — we lead by example, demonstrating that e-mobility can become the norm in logistics” alexander edenhofer – deutsche post dhl spokesman

of StreetScooter e-vehicles have proven to be comparable to that of diesel vehicles. Even though the cost of purchase of e-vehicles are higher, DHL observes that the maintenance and wear and tear costs of StreetScooter e-vehicles are 60 to 80 percent lower than diesel driven vans. DHL Express has also announced that it will add 63 electric cargo vans to


its US fleet of green delivery trucks in 2019. And since April 2016, DHL Express in Paris has been operating one of the first ten 100 percent electric MAN eTGE vans. In FedEx’s Global Citizenship Report released to the media, the company announced that it will be adding 1,000 Chanje V8100 e-vehicles to the FedEx Express fleet in California. These e-vehicles can travel more than 150 miles when fully charged and are expected to save FedEx 2,000 gallons of fuel while avoiding 20 tonness of emissions per vehicle each year. FedEx added 445 electric vehicles in FY18, bringing the total number of its e-vehicles on the road to more than 2,554. On May 24, DHL Express and StreetScooter announced their collaboration on a new electric delivery vehicle. The new ‘H2 Panel Van’ will become the first 4.25 tonne electric vehicle with an added fuel cell, which will provide additional power and enable a range up to 500 kilometres. In a first step, DHL Express has ordered 100 of the fuel cell vehicles, with delivery expected from 2020 through 2021. Similar to the larger WORK XL, the H2 Panel Van will be realised in collaboration with Ford. The new van fits into DHL’s larger environmental goals. “With the H2 Panel Van, DHL Express becomes the first express provider to use a larger number of electric vehicles with fuel cells for last-mile logistics. This underscores our aspiration to be not only the fastest and most reliable provider on the market, but also the most climate friendly,” Markus Reckling, CEO of Deutsche Post DHL told the media. “The H2 Panel Van is another example of how Deutsche Post DHL Group is working towards its zero-emission goal for 2050,” Reckling added. E-vehicles on the road DHL’s StreetScooter e-vehicles are currently on the road in Netherlands and Austria as well. In addition, DHL has also sold 500 StreetScooter e-vehicles to Japanese logistics company Yamamoto. DHL considers Japan to be a market of interest as far as e-mobility is concerned. The StreetScooter e-vehicles have penetrated rural areas of Germany as well, as they are being used for the joint delivery of mail and parcels. Fedex Express is testing e-vehicles in China and Europe with the strategic goal of scaling the adoption of commercially viable e-vehicles in those markets as soon as possible. The logistics company also completed assessments to determine return on investment with regard to using electric forklifts instead of propane forklifts. In future, Fedex Freight plans to incorporate Tesla Semi tractors into its fleet. At the current time, Fedex is focusing on developing the charging infrastructure for e-vehicles with facilities to be upgraded to ensure that they can charge a number of vehicles at once. Fedex’ commitment to e-mobility starts at the top with Fedex Chairman and CEO Frederick W. Smith serving on the Electrification Coalition since 2009. The focus of the non-

DHL e-initiatives snapshot 2018







streetscooters – electric delivery vehicles

alternative fuel vehicles



alternative fuels will power 70% of dhl’s own first and last mile services with clean pick-up and delivery solutions

reduce logisticsrelated

CO2e to 0

Street Scooter

E-vehicle startup acquired by deutsche post dhl

75 kms covered on a charge


60 to 80%

tonnes of co2e saved annually

lower maintenance costs and wear and tear costs than diesel vans

International Finance | July 2019 | 63


profit group of business leaders is to enable the deployment of electric vehicles at mass scale. Fedex is making massive changes to its legacy transportation platforms to improve carbon efficiency through the Reduce and Replace parts of its strategy. With a focus on fuel saving behaviours and systems, Fedex has saved 655 million gallons of jet fuel since 2006 across 59 projects. The Fuel Sense programme saved 94 million gallons of jet fuel in 2018. Under the Replace strategy, Fedex’ s aircraft modernisation programme saved 109.6 million gallons of fuel avoiding more than one million tonnes of carbon dioxide emissions. The company also seeks to revolutionise its energy management approach — for example, it plans to introduce onsite micro grid pilots with higher investments in fuel cell technology and solar energy. Deutsche Post DHL implemented its Green Electricity Policy in 2018, which defines options for sourcing electricity and the process of purchasing electricity within the framework of the DHL Group’s environmental and energy policy. “We make sure that electricity generated from renewable sources or ‘green electricity’ is the primary source of electric power in the group and aligns with relevant sustainability guidelines,” said DHL’s Edenhofer. Overall, the use of green electricity across the DHL Group was already at 77 percent in 2018. Aircraft fly on alternative fuels An interesting part of these e-initiatives at logistics companies is the effort to fly aircraft on alternative fuels. Fedex’s goal to obtain 30 percent of jet fuel from alternative fuels by 2030 reached a milestone last year. Red Rock Biofuels, which will supply low-carbon, renewable jet fuel to FedEx Express, broke ground on its bio refinery in Lakeview, Oregon in July 2018. The first delivery of alternative jet fuel is anticipated in 2020. Also in FY18, the ecoDemonstrator, a Boeing 777F built for FedEx Express, became the first FedEx plane to fly 100 percent on biofuel during a short-term period that also tested and gathered data on 35 new technologies. The Boeing 777F EcoDemonstrator is equipped with lasers, cameras, and flies on 100% biofuel. It has a cargo bay outfitted with rows of computer test stations. DHL, until now, has not operated aircraft with low carbon emission fuels. However, the company has conducted tests in this regard and is working on options for running aircraft with alternative fuels in the future, a company spokesman said. According to the report from the Intergovernmental Panel on Climate Change (IPCC) it requires far reaching transitions to the use of energy resources and transportation and the operations of the industry and infrastructure to limit global warming to 1.5 degree Celsius above pre-industrial levels. That includes reducing carbon emissions to 45 percent below 2010 levels in the next decade. Is this a realistic target? If you consider

64 | July 2019 | International Finance


FedEx Transportation Eficiency Gains and Cost Savings FY18 Fedex Initiatives cost saving estimates

$394 MN Aircraft fleet modernisation & FedEx Fuel Sense operational improvements

emissions avoided metric tons co2e

1,970,391 cost saving estimates

$65 MN Fuel-efficient driving vehicle technology improvements, alternative fuel usage and electric vehicles

emissions avoided metric tons co2e

240,171 cost saving estimates

$134 MN emissions avoided Intermodal rail transport

metric tons co2e


the rise of populism across the world and the hostile reaction of populists to climate change action, there might be limited action from governments to tackle the disaster the world is facing. However, millennials and the Gen Z can be assured that the top logistics companies of the world are incorporating vast operational and infrastructural changes to reduce carbon emission intensity as a real measure not just a corporate social responsibility programme or a token slogan for reputation management. It’s time other industries took note.

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International Finance | July 2019 | 65

Mideast port building: A clever neutrality is key The Gulf Arab nations are building new ports by astutely leveraging their relationships with China and the US and without precipitating a conflict IF Correspondent

66 | July 2019 | International Finance

The Middle East governments have been heavily investing in port projects as part of their economic diversification strategies since the early part of this decade. These Middle East ports lie on major transhipment routes through which much of the world’s crude oil is moved and the governments in the region seek to control the supply of crude and leverage the power of the ports to benefit their economies. Equally important is the fact that a number of projects related to the diversification strategies are closely connected to the development of these ports. A key aspect of the development of these ports is the involvement of China or Chinese companies. How does this fact affect the relationships of these Gulf states with the world’s extant superpower the US? How will these Gulf economies manage to make the make the ports a success amid the



Asia. Experts believe that the port has the potential to develop into one of the largest ports in the Middle East, primarily because of its strategic geopolitical location. Tehran’s frequent threats to block oil shipments passing through the Arabian Sea passageway have marked Duqm port as an alternative hub for shipping. The port sits on the Arabian Sea and could also provide smooth access to the Indian Ocean for commodities such as oil and gas arriving from the Gulf states. With the port, the maritime industry will gain access to the Middle East as in the case of Jebel Ali without having to venture into the Strait of Hormuz, which is a strategic link between the Middle East crude producers and key markets in Asia Pacific, Europe and North America. It is through this passageway that a third of oil shipments pass. Duqm’s geopolitical status suggests that it is halfway through with challenging Jebel Ali by opening up major port access to the main sea channels. increasingly bitter rivalry between the US and China?

oman’s singapore The port town of Duqm in Oman is modelled on the world’s maritime capital Singapore. Duqm is investing efforts in its maritime activities to become a major transhipment regional hub, connecting the Gulf to the world’s busiest maritime routes. Significant developments in Duqm’s economic zone include a multi-purpose harbour, a refinery targeting 230,000 barrels of crude oil per day, and the region’s largest dry dock with an estimated capacity of 200 ships each year. The port is equipped with a ship repair yard and drydock facility, which is the first of its kind in Oman. With that, Duqm is expected to become the centre of Oman’s non-oil economy. The port is rapidly changing the maritime power equations in West

China’s BrI For China, the Duqm port is critical to its Belt and Road Initiative, which is a state-backed campaign for global dominance and a strategy to boost Chinese investments around the world.

duqm’s economic zone include a multi-purpose harbour, a refinery targeting


barrels of crude oil per day and the region’s largest dry dock with an estimated capacity of

200 ships

each year. the port is equipped with a ship repair yard, and is the first of its kind in oman

Wanfang, one of the top Chinese investor companies actively involved in Duqm’s development has pledged to invest more than $10 billion in an effort to establish a Chinese industrial city. The investor is aiming to introduce more Chinese investors to the area. For that reason, it executed several campaigns in 2018 across many Chinese prefectures. It appears that the Omani authorities have provided the investor with all the necessary facilities, including foreign manpower. The investor was also granted permission to set up a Chinese engineering company in Oman. These developments suggest that Oman and China have moved to the next phase of their strategic partnership, pointing to the fact that the Chinese influence in the port town is only expected to increase in the coming years. The port is seen as a likely operating base for Chinese businesses near chief export markets in the Gulf, the Indian subcontinent, and East Africa that they are planning to develop. In addition, Duqm is in close proximity to some of the raw materials which the Chinese companies might require for that purpose. For example: the oil and gas resources in the Gulf. In addition the Duqm port is connected to the Mineral Line railway link that Oman is building as part of its diversification strategy. The outcome of Chinese investments will benefit Duqm and Oman as Oman’s state finances have been hurt by low oil prices. But it is uncertain whether these Chinese investments worth more than $10 billion will materialise because of the undue pressure on Chinese companies and the current economic conditions. However, if the investments take place as promised, then Oman will see financial gain to the tune of more than half of its current foreign direct investment. Duqm’s competitive advantage is that it is still new unlike Jeddah or Dubai. Although it requires time to mature, it is considered a better prospect than

International Finance | July 2019 | 67


those ports. Because of Duqm’s strategic geopolitical location offers wide access to Arabian passageway, it is seen as a lucrative port destination. But what’s more appealing is that it is situated outside of the Strait of Hormuz, uprooting any likelihood of conflict for the shipments when regional tensions rise. Chinese investments in the Middle East have incrementally increased in this decade. A research operation at Italy’s Torino World Affairs Institute ChinaMed observed that in 2009, China accounted for less than 1 percent of the foreign direct investments in the region. The Belt and Road Initiative in part is responsible for the increase. The ratio rose to more than 5 percent in 2015. Three years ago, China was ranked as the top foreign investor in the Arab world, pledging $29.5 billion in investments, according to Kuwait’s Arab Investment and Export Credit Guarantee. The country was followed by the United States as the second biggest

68 | July 2019 | International Finance

investor accounting for $7 billion worth of investments. For now, Oman Wanfang is planning to develop over 11 square kilometres. This way, the Chinese will become Duqm’s biggest prospective foreign tenants. The company’s first facility is a $138 million complex built to store building materials and distribute them in the region. The complex is expected to be complete in 18 months. The permission granted for the project will drive more negotiations between Oman Wanfang and the Omani government. It might also aid Chinese investors in Duqm to obtain loans from Chinese banks, largely controlled by the Chinese government. Another fact pointing to the Chinese government’s efforts in strengthening the ties with China is that it recently borrowed $3.55 billion from Chinese financial institutions. This deal is said to be the largest by a Gulf borrower in the Chinese market. Despite these developments, analysts do not expect China to shift all of its

‘regional trade activities’ to Duqm because the UAE still remains its top trading partner in the region.

Allied projects A number of key projects allied to the Duqm port are also coming up in the surrounding area. For example: Oman Oil Marketing Company will construct an in-port bunker terminal at the Duqm port. It has already secured the board’s approval for 30,000 cmm of tankage capacity. On May 13, the company’s board also approved the required ancillary equipment and facilities for the terminal. Another project is the Duqm Refinery and Petrochemical Industries’ contract to John Wood to provide designs for a proposed onshore petrochemicals complex in Duqm’s economic zone. With the continued developments, Duqm Port recently signed four lease agreements for a nearly 70,000sq m logistics land to be leased out for 24 years. The logistics land will mainly


accommodate the sector-related industries for import of goods. The port is a joint venture between the Omani government and the Belgian consortium led by Antwerp Port is assigned to take charge of several roles including port authority, terminal operator, and landlord.

China here, China there Kuwait is another Gulf Arab country leading the region with high investment port infrastructure. The Mubarak Al Kabeer port on the Bubiyan Island which is valued at $16 billion is Kuwait’s key logistics project that is believed to be the driver of economic growth and a lynchpin of its Kuwait Vision 2035 diversification strategy. If Iraq and Kuwait do not clash over their differences with regard to the development of the Mubarak Al Kabeer port, traders and companies are expected to prefer the port with least cumbersome procedures, rules and regulations as well as the lowest export and import tariffs. The Mubarak Al Kabeer port on the eastern coast of Bubiyan Island can pressurise Iraq’s narrow window to the Gulf. If both countries prioritise economic gain over political point scoring, the development of the port will be seamless. The primary economic purpose of the port is to serve the markets in Iraq and beyond and Kuwait has an eye on the European markets as well in the long term. Allied to Kuwait’s Mubarak Al Kabeer Port project is the $9 billion mega project of the Silk City. Stretching from Mubarak Al Kabeer Port to Al Subiya, where the causeway comes ashore, Silk City is another lynchpin is Kuwait’s diversification plans. In the wider strategy involving the Silk City, China is again a major player. Kuwait and the People’s Republic of China signed several memorandums of understanding including one to start building the first phase of Silk City. The Silk City, in fact, fits into the maritime component of China’s Belt and Road Initiative. The Mubarak Al Kabeer port completes a string of ports

the Mubarak Al Kabeer port on the Bubiyan Island which is valued at

$16 billion

is Kuwait’s key logistics project Allied to Kuwait’s Mubarak Al-Kabeer port project is the

$9 billion

mega project of the silk City

that China is involved in the Middle East region. These ports include the Khalifa Port in Abu Dhabi, Duqm in Oman, Jizan Port in Saudi Arabia, and Port Said in Egypt. Kuwait connects this necklace of ports by connecting the overland routes of the New Silk Road through Asia and into Iran and Iraq Currently, Kuwait houses the world’s sixth largest oil reserves. The project will help the country to widen its capabilities and reach out to the Red Sea, the Mediterranean, Turkey, and Eastern Europe.

no conflicts with China It appears that China’s presence near Mubarak Al Kabeer Port is likely to be favoured by Kuwait because the People’s Republic of China is often recognised as a neutral party in that part of the region. So China’s position is relatively secure in the region. Although the countries in the region have conflicts with each other, they seldom have conflicts with China. With Duqm, a key concern is that China’s main geopolitical rivals hold considerable stakes in the port. India, for instance, has developed a major interest in the Duqm Special Economic Zone including Sebacic Oman, a $1.2 billion project for the largest Sebasic acid plant in the Middle East. India has also signed an agreement for the development of a $748 million Little India integrated tourism project. The UK is also signing a deal to setup a permanent naval base in Duqm. Recently, the US confirmed a strategic port deal with Oman which will secure

better access for US ships to the Gulf region. More importantly, the US has to reduce the need for ships to pass the Strait of Hormuz. In a statement, the US embassy in Oman had said that the agreement reinforced both countries’ efforts to promote ‘mutual security goals’. The US’ interest in Duqm port is strategic. The Duqm port can easily harbour large ships and is big enough to even turn around an aircraft carrier. China will not be pleased with the US trying to firm up its presence in Duqm. In the past, China has explicitly expressed its disapproval of the US military facilities. However, the US perceives the Chinese investments in Duqm as a commercial move and not a military arrangement. The US is relatively relaxed about the Chinese involvement in Duqm despite its obvious interest in the port. The reason is because a portion of the Duqm industrial zone reserved for the Chinese does not have any exceptional developments as yet and the US believes that the Chinese might not invest all the amount that they promised. Despite the fact that the presence of China in such a key project like Mubarak Al Kabeer is bound to make Kuwait’s global ally the US wary, Kuwait is seen as cleverly leveraging its relationships with both sides to its own benefit. It is in Kuwait’s interest to maintain friendly relationships with its neighbours especially Iran and Iraq and develop a port which has the potential to serve the Mediterranean and Europe. The tug-of-war between the US and China over Duqm has implications for Oman. However, so far Oman has managed to keep this rivalry form developing into a conflict while leveraging relationships with both superpowers to its advantage. The ability of the Gulf states to maintain a smart neutrality amid the heightening US-China conflict while ensuring the support of the geopolitical rivals to develop their logistics infrastructure and economies is seen as astute diplomatic manoeuvring.

International Finance | July 2019 | 69

Trump trade war impacts SE Asian supply chain Trump’s escalated trade war with China is seeing

manufacturing capacity move to Southeast Asia; but can Southeast Asia recalibrate its supply chain in time? SANGEETHA DEEPAK The trade dispute between Beijing and Washington has risen sharply after Chinese media reports said that Beijing will not cave into Trump’s trade demands with any more concessions. With that, attention is shifting to Southeast Asia as manufacturing companies accelerate the shift to the region or start sourcing from there. What does this trade war induced shift mean for the supply chain in the region? Are companies able to recalibrate their supply chains in time to meet US consumer demand? China, often referred to as the factory of the world, is seeing companies re-shore their production to other Southeast Asian countries because of the fear of punitive Trump tariffs, if they continue to exporting out of the mainland. China’s exports to the US are more than four times the amount of US exports to China — and so, Washington has some credibility in asking for a rebalancing of bilateral trade. The reality is that Southeast Asia has been the backyard of Chinese manufacturers for over a decade now. The region, therefore, has been part of the US-China supply chain for some time now.

70 | July 2019 | International Finance


Economists had anticipated this transition in supply chain to take place eventually with or without the trade war. The reason is that Southeast Asia had reduced its exposure to the West and has been working closely with the Chinese manufacturing companies since at least two decades. China’s industrial powerhouse Guangdong, for instance, is no longer the low-cost industrial hub it used to be because of rising wages and significant environmental changes. “Southeast Asia has been part of the extended supply chain from China since early 2000s — the countries and companies in the region reduced their exposure to the west by working with the Chinese companies after the Asian financial crisis. Also, since the 2008 global financial crisis, the Chinese manufacturers have been establishing even more closer links through joint ventures or foreign direct investment in the region, driven primarily by rising labour costs in China and the need to diversify risks. This means that Southeast Asia was a destination ready for the shift away from China,” Abhineet Kaul, director public sector and government consulting, Frost and Sullivan, Singapore, told International Finance. “The Asean China Free Trade Agreement in 2002 also helped in this trend bringing average tariffs between Asean and China to under 1 percent. The trade war, in my opinion, has just accelerated the momentum towards Southeast Asia,” adds Kaul.

Japanese companies check out In light of Trump’s recent tariff threats, Japanese multinational Casio and print-maker Ricoh have moved part of their production from China to Japan and Thailand. This way, production capacity has moved to Southeast Asia from China. US imports from China declined 13.9 percent in the first three months of 2019. Last year, the American Chamber of Commerce in China and the European Union Chamber of Commerce in China conducted two separate surveys which found that these tariffs could lead to an increase in production costs and a decrease in profits for businesses on the mainland. Southeast Asia is poised to become the biggest beneficiary of the trade war according to Japanese investment bank Nomura. Importers in the US and China are sourcing goods from Southeast Asia and some parts of Northern America

US imports from China declined 13.9 percent in the first three months of 2019. Last year. These tariffs could lead to an increase in production costs and a decrease in profits for businesses on the mainland to dodge the punitive tariffs their governments have imposed as tit for tat on certain goods. Nomura economists highlighted that Vietnam stands to benefit the most from trade diversion. Last year, the country’s largest export to the US was electrical machinery. Bloomberg in a report said that American exports from Vietnam increased 40.2 percent in the first quarter of 2019 compared to the previous year, pointing to the fact that it could supersede the UK as a US trade partner in the next few years.

Vietnam benefits Vietnam’s foreign investments in the first quarter spiked by 86.2 percent to $10.8 billion and its GDP rose 7.9 percent as a result of increased exports to the US and China. Beyond the busy streets of Vietnam’s capital city of Hanoi, manufacturing units are making men’s garments for American brands such as Hollister, Bonobos, and Express. Also, Apple’s main assembler Foxconn is moving more of its production out of China by investing more than $200 million in India and Vietnam. What is attractive about Vietnam is the low-cost labour, decent tax incentives, and close proximity to China. But, the Chinese manufacturers are struggling to recruit workers around Ho Chi Minh City and are forced to set up factories in the remote parts of the country, that are lacking in the necessary infrastructure and skill sets. Frost and Sullivan’s Kaul told International Finance that the rise in import tariff collection in the US indicates that companies have not been able to recalibrate their supply chains in time for the trade war, hurting both US importers and consumers as well as Chinese exporters. “The top companies in China which had trade ties had invested

International Finance | July 2019 | 71



to diversify their supply chain to Southeast Asia and to Mexico, Brazil, and parts of Africa, as the costs of labour was increasing in China. For example, one of the top bicycle companies in the US, Bicycle Corporation of America or BCA, a subsidiary of Kent cycles assembles frames imported from China from Shanghai General Sports in Kunshan. They had planned to import frames from Cambodia even before the trade war. However, while capital expenditure takes time, the rise in tariff hit businesses immediately,” says Kaul.

Guangdong vs Vietnam China’s southern manufacturing base Guangdong has a population of 104.3 million, while Vietnam has a population of 95.5 million. This means that Guangdong has the capacity to draw migrant workers from the rest of China if necessary — which is not possible in Vietnam. Economists believe that the impact of the supply chain shift on Vietnam’s economy will be small but noticeable.

Gdp gain estimates of southeast asian countries from us-china trade war in Q1

7.9% 2.1%



1.3% Malaysia

Southeast Asia is on the brink of a new economic cycle. The region’s lower-middle income countries such as Indonesia and Cambodia have a chance to grow because of the Trump Trade War. Companies are incentivised to boost their production capacity in Cambodia because of its good investment incentives and tax exemptions. Luxury brand Steve Madden is shifting its production to Cambodia from China and will have 15 percent of its products sourced from its Cambodian plant this year. Taiwanese electronics manufacturing company Pegatron has moved some manufacturing of networking gear to Indonesia, and the shipping has begun from the Bataam Island. In recent years, Taiwanese manufacturers have been setting up manufacturing plants in different parts of Southeast Asia with the intention of diminishing their dependence on China as part of the government’s New Southbound Policy. Laptop maker

72 | July 2019 | International Finance

Compal has established production lines in Vietnam, Wistron has set up facilities in the Philippines, and Inventec in Malaysia. Taiwanese companies that opened factories in China to manufacture electronics for American multinationals are moving their production back to Taiwan. These companies assembling devices from Chinese production bases have established a crucial link in the global tech supply chain because the likes of Dell and Hewlett Packard typically just slap their labels on the Taiwanese-made electronic goods. Taiwan’s GDP increased 2.1 percent in the first quarter, according to Nomura economists. Companies in China are also becoming aware of Malaysia’s electrical and electronic (E&E) sector which is the fourth biggest beneficiary of the trade war, particularly because the remaining Chinese imports comprises electronic products. Analysts have said that products from Malaysian companies in the semiconductor and chip-related industries might be in great demand as a result of trade diversion. Another positive for Southeast Asia is that Malaysia is a fellow signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), offering companies a preferential access to markets such as Australia, Canada, Japan, Mexico, and Indonesia. Despite the migration, companies with an extensive manufacturing base in China will have to maintain a small portion of their capacity on the mainland. Companies will have to prepare themselves to make long-term, strategic decisions if Trump decides to impose another round of tariffs on Chinese-made consumer goods. Kaul explained that the challenge for those companies exists in two parts: The first part is regarding the investments from China into ASEAN and other part is about the exports from ASEAN into the US. Although Southeast Asia is expected to benefit in the long run through trade wars and high investments in the region, limitations in foreign direct investments in some sectors will bring some challenges. Chinese investors will face behind-theborder barriers related to trade, such as logistics, licensing, and competition for skilled manpower with competitors from other East Asian countries. For exports, some countries in Southeast Asia such as Singapore have free trade agreements with the US, but there is no ASEAN-US FTA. This means that the US can raise tariffs on select Southeast Asian countries in an effort to ‘punish’ them for accepting Chinese investments and for being a backdoor to the US market, says Kaul. “What the trade wars indicate is that the status quo is no longer accepted and that tariffs can be used as a tool for war to ‘punish’ countries for issues not related to trade. This is uncharted territory for humans since the first time humans bartered to trade,” concludes Kaul.


no respite for Canada’s oil and gas investors

Regulatory uncertainty and limited scope for market access is forcing investors to pull out of major oil and gas projects in the country IF Correspondent

Investors are losing confidence in Canada’s oil and gas sector owing to a federal government that seems to be ideologically hostile to the country’s hydrocarbons sector. In addition, regulatory uncertainty in the sector is resulting in a loss of employment opportunities and investments worth billions of dollars. So until Canada resolves those challenges related to regulatory uncertainty and market access, the sector will continue to spiral downward, the Canadian oil and gas industry has warned. The Petroleum Services Association of Canada (PSAC) in its Midyear Update to the 2019 Canadian Oilfield Services Activity Forecast for the second time reduced its forecast for the number of wells drilled to 5,300 across Canada this year. The figures suggest that there was a 20 percent decline or 1,300 wells lesser from the original forecast of 6,600 wells in November last year. PSAC has developed its updated forecast on the basis of an average natural gas price

74 | July 2019 | International Finance


of C$1.65/mcf (AECO), crude oil price of US$57.00/barrel (WTI), and a US-Canada exchange rate at an average of $0.75. The concerns of the industry are quite justified. On a provincial basis, PSAC is planning to drill 2,685 wells in Alberta, which fell from 3,532 wells in the original forecast. The estimated number of wells in Canada’s westernmost province British Columbia’s have also fallen to 375 from an estimated count of 382 in the original forecast. For Saskatchewan, the revised count stands at 1,960 wells compared to 2,422 wells in the original forecast. In addition, Manitoba is expected to have 260 wells drilled, indicating a jump of 5 wells this year. Also, Eastern Canada’s well count has been increased from 9 to 20 between forecast versions— suggesting a bright spot for boosted activity in the country. That said, PSAC is also forecasting activity this year which is much more than plain drilling in an effort to include maintenance work and site closure. In a recent report 2019 Crude Oil Forecast, Markets and Transportation published by the Canadian Association of Petroleum Producers (CAPP), Canada’s oil sector is being deprived of an important opportunity where it can benefit from the global commodity price and get a reasonable market value for Canadian resources.

production to grow CAPP in the report estimated that the country’s crude oil production will continue to grow until 2025. The growth pace will be much slower than previously anticipated. It predicts the Canadian oil production to grow at a rate of 1.44 percent by 2035, which measures less than half of the industry’s estimate in its 2014 outlook. It was during that period when oil prices rose above $100 a barrel, renewing hope that new pipeline projects might be under way by 2019. However, the forecast has turned out to be very different from what Canada’s oil industry had anticipated five years ago. The country is still witnessing a significant pipeline infrastructure deficit and major setbacks in projects. For example, a few takeaway capacity projects were cancelled over these years coupled with persistent sector issues such as regulatory uncertainty and delay in Canada’s pipeline capacity as well as access to new markets. Last year, the country was put in a difficult spot where it had to sell off its oil at a significant discount. With that, Canadian producers were set back by nearly $20 billion in lost profits, observed Canadian public policy think tank the Fraser Institute. However, the Albertan government took the necessary measures such as imposing temporary caps on production to ease the loss. There is only a slim chance for Canada to achieve sector competitiveness as oil production is exceeding the pipeline capacity. Also, CAPP in its 2019

original forecast for no.of wells to be drilled vs revised forecasts Alberta original - 3,532 revised - 2,685 sasketchewan original - 2,422 revised - 1,960 Source: Canadian Association of Petroleum Producers

report said that the country’s scope for taking advantage of the expected growth in global oil demand in emerging Asian markets is limited. According to CAPP, Canada’s total oil production is expected to grow by 1.27 million barrels per day to 5.86 million barrels per day from now to 2025. Last year, the country’s oil production stood at 4.95 million barrels per day. This estimation is less than half the estimated figure that CAPP made in 2014, representing measly 1.44 percent annual increase in growth rate. CAPP in its 2019 forecast said, “This year’s constrained production outlook is due to inefficient and duplicative regulations, reduced investor and producer confidence, and uncertainty around additional transportation capacity.” The noted constraints and uncertainties “are having and will continue to have negative impacts throughout Canada’s economy — from diminishing investment to loss of employment and reduced government tax and royalty revenues,” it said. Also, Canada’s capital investments in oil and gas sector is predicted to decline to $27.6 billion this year compared to the 2014 forecast of $60.4 billion. To make things worse, CAPP and industry experts said that there will be no new pipelines built in the country under the federal government’s Bill C-69. Between May and April this year, 3,000 workers in Alberta’s oil and gas sector lost or left their jobs. Alberta’s economy is experiencing a lull as oil and gas jobs drop, with a noticeable shift toward healthcare and education employment. Bill C-69 is stalling the review of major oil and gas projects in the country, including pipelines. However, the Trudeau government in its defence said that it only plans to take responsible initiatives to develop resources, while many

International Finance | July 2019 | 75

“we must find a path forward for Albertans to get fair value for all of the production in the province. we’ll be working with the new Alberta government to achieve this goal of getting 100 percent of Alberta’s crude oil production to market.” - Mark Little, President and CEo, Suncor Energy


believe that the outcome of such changes will prevent new projects from progressing in the sector. This in fact has encouraged several energy companies to seek opportunities outside Canada. CAPP in its 2019 report said that capital investments in Canada are expected to reach $39 billion this year, compared to $81 billion in 2014. This significant difference in spending was evidently shown in markets where the Canadian oil and gas stocks stood at a 52week low by mid-June. For example, energy company Japan Canada Oil Sands (JCOS) has invested $2 billion in projects near McMurray. The company is looking to expand its existing projects. Its major owner is JAPEX with a 94 percent share. JCOS President Satoshi Abe said that the company has various options to explore considering that it is headquartered in Japan.

Forced discounting Canada will be forced to sell oil at unreasonable discounts as persistent sector issues have crippled its chances to reach global energy markets. All in all, the sector challenges come back to the country’s pipeline issues, Abe said. The Senate passed two disputable natural resource bills on June 21, following which another bill was passed. The third bill in fact strengthened a ban on offshore oil drilling in the Canadian Arctic, curbing the possibility of future oil and gas development in the region. Bill C-48 which would legally put an embargo on oil tankers in northern British Columbia is expected to receive royal assent after it was accepted at third reading in the Senate. That said, Bill C-69 also passed at third reading, and it would overhaul the environmental review process for major projects. Both bills are largely perceived as measures to provide balance and stability to the Liberal government’s decision to approve the Trans Mountain expansion pipeline, which is part of Prime Minister Justin Trudeau’s efforts to focus on environmental and economic development.

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Bill C-69, which most oil and gas lobby groups believe will stop the development of major new infrastructure projects in the country has been examined over several months. Significant export projects such as Trans Mountain, Keystone XL and Line 3 have faced defeat in recent years, which in turn has hurt investor confidence in the sector. Overall, experts believe that it has also affected the Canadian economy. Even Bill C-48 which puts a ban on oil tankers in northern British Columbia was also believed to stop developments in Canada’s oil and gas sector. The federal environment minister rejected nearly 80 amendments designed to boost investor confidence mainly because the minister’s duty is to protect Canadians from the oil and gas sector which is known to adversely affect the environment. However, these amendments if passed would have injected tens of billions of dollars into Canada’s economy. The reason investors are losing confidence in the sector is because energy companies are required to spend nearly $1 billion to get approval on a new pipeline, in addition to the line costs ranging between $6 billion and $15 billion. And with regulatory policies hostile to the sector’s development, there is very little scope for investor interest. Canada needs pipeline capacity and more efficient regulatory policies to scale up investment opportunities in the oil and gas sector. In this regard, major Canadian producer Suncor Energy’s president and CEO Mark Little said in comments directed to International Finance, “We believe that for investment to return to the province, we must find a path forward for Albertans to get fair value for all of the production in the province. And to that end, we’ll be working with the new Alberta government and the industry to achieve this goal of getting 100 percent of Alberta’s crude oil production to market so that we can receive a fair global price.” Until the federal government changes its stance there is probably no respite to the falling investor confidence in Canada’s oil and gas sector.

arab investors hover over indian oil sector The Kingdom of Saudi Arabia and the UAE’s developing interest in India’s refining sector shows the latter’s appeal to the Gulf region IF Correspondent

India’s state-owned oil companies’ capital expenditure has hit a four-year low with public sector undertakings such as ONGC and IOC seeing a decline in capital investments. They are planning to invest Rs. 9.36 billion in exploration, refining and petrochemicals during the fiscal year 2019-20. However, in March, these public sector undertakings proposed an investment of Rs. 8.9 billion. Reports suggest that they will invest nearly Rs. 9.4 billion. Even the estimated increase in the proposed investment is lower compared to the years prior to 2018. The period between 2017 to 2018 saw investment of Rs. 13.2 billion; in 2016-to 2017 it stood at Rs. 10.4 billion, and in 2015 to 2016 it was Rs. 9.7 billion. The decline in investment has come at a time when India is seeking an increase in domestic output to reduce oil imports. The country’s import dependency of crude oil reached 84.7 percent last year and the pace of growth of local oil production has stalled. In fact, India’s oil and gas import expenditure was estimated to $109 billion last year — and expenditure during the current fiscal year is expected

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to increase to approximately $130 billion. Factors such as rising international crude prices and sharp weakening in currency have dampened the sector’s growth in the recent past. The government has acknowledged the country’s oil import dependency with measures to ramp up production and reform the Hydrocarbon Exploration Licensing Policy. But the sector also needs an increase in hydrocarbon production to stabilise the growing demand. The Modi government has outlined a roadmap to reduce the country’s oil imports by 10 percent by 2020. Finance Minister Piyush Goyal during his budget speech in Lok Sabha, the lower house of the parliament, said that a highlevel inter-ministerial committee has made recommendations regarding the matter. Jonathan Markham, Upstream Oil and Gas Analyst at GlobalData told International Finance, “India’s oil production is forecast to have a minor amount of growth as a new deepwater project being developed by ONGC in the Krishna-Godavari basin will compensate for declining production from


mature onshore and shallow water fields.” The sector’s growing demand also points to the fact that India is the largest energy consumer after China in the region. A report published by BP Energy Outlook found that the country’s share of total global primary energy demand is expected to double to 11 percent by 2040. The country’s heavy reliance on oil imports has opened up a myriad of investment opportunities for oil-rich countries in the Gulf. These countries are interested in investing in India’s oil and gas sector as they seek major control of South Asia’s petroleum market. For example, the Kingdom of Saudi Arabia has expressed interest in India’s refining sector. The Kingdom’s oil minister during his visit to the country last year met Indian businessman Mukesh Ambani of Reliance Industries. After that, the minister tweeted that the world’s largest oil exporter Saudi Aramco and Reliance Industries are discussing joint investments in petrochemicals, refinery, and communications projects. Saudi Aramco CEO Amin Al Nasser also emphasised that the company has an interest in Reliance Industries after a string of discussions took place over opportunities in the country’s refining sector. Saudi Aramco along with its partner Abu Dhabi National Oil Company has acquired a 50 percent stake in $44-billion mega refinerycum-petrochemical project situated in Maharashtra. Aramco’s CEO Amin Al Nasser said in a statement that he is quite positive of the company’s investment in India. The new site for the project will be at Raigad district, which is 100 km south of Mumbai. Initially, the refinery was proposed to be built at Nanar, a village in Ratnagiri district. The refinery with an anticipated capacity of 1.2 million barrels per day is expected to improve India’s fuel supply. Currently, Reliance operates two refineries at Jamnagar with a total


capacity of 68.2 million tonnes each year. According to several media reports, Reliance is planning to expand its only-for-exports special economic zone refining capacity to more than 41 million tonnes from 35.2 million tonnes.

Aramco to remain invested Aramco will continue to remain invested in the project under the terms of the agreement signed last year. India has been perceived as an investment priority for Aramco because the company has identified sufficient growth potential in the country with

india plans to expand its refining capacity by

77 percent to about

8.8 million barrels per day by 2030

approximately 8,00,000 barrels exported by Aramco to India. India is a captive market for crude oil, especially with companies like Reliance focused on expanding petrochemicals which requires crude for manufacturing. So, the Kingdom’s heightened focus on India’s refining sector is in line with its strategy to build a global empire for the crude it produces. This way it will also get a foothold in the country. Aramco is also interested in retailing fuel in India. A refinery in the country could be treated as a base to export oil to European and American countries lacking fuel reserves. The kingdom’s petrochemicals major Saudi Arabian Basic Industries

Corporation (SABIC) is also scouting for opportunities in the country. India’s refining capacity of 247.6 million tonnes exceeds the demand of 206.2 million tonnes. The International Energy Agency said that this demand is expected to reach 458 million tonnes by 2040. Like most major producers, even the UAE is seeking investment opportunities to lock in customers in India — the world’s fastest growing fuel market. In March, it said that it is exploring refining and petroleum projects in addition to storing crude in the country. For this reason, it has rented space at the underground strategic oil storages built at Mangalore and Padur in Karnataka and Visakhapatnam in Andhra Pradesh. Last year, India signed an initial agreement to lease out a part of underground strategic oil storage at Padur to ADNOC, and another pact to fill half of the 1.5 million tonne storage in Mangalore. Strategic Petroleum Reserve entity of India has constructed 5.33 million tonnes of emergency storages to meet its oil requirements over 9.5 days in those locations. The country is open to foreign oil companies storing crude on the basis that the stockpile can be used by New Delhi in emergency situations. The UAE is trying to ramp up investments even though it supplies very little crude to the country. Sultan Ahmed Al Jaber, Minister of State in the United Arab Emirates and CEO of the ADNOC said that India is on their agenda for expanding ‘strategic reserve’ and further discussions will take place with ‘counterparts in India’. Kuwait is also exploring opportunities to invest in India’s refining sector. With the Gulf showing significant interest in India’s oil development, India plans to expand its refining capacity by 77 percent to about 8.8 million barrels per day by 2030 — becoming a key market for South Asia’s oil investments.

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renewable energy: a lucrative investment in Turkey A quarter of Turkey’s energy comes from renewable sources with a target to achieve 30% by 2030 LeVent LeZGIn

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Renewable energy has a key role to play in powering the future. BP estimates that renewables will provide 30 percent of the world’s power by 2040. The cost of producing energy from renewables is falling rapidly, making renewables an increasingly good commercial investment. A 2017 report by the International Renewable Energy Agency — an intergovernmental body with more than 150 member countries — found that the cost of renewables will be competitive with fossil fuels by 2020. The report spelled out the obvious direction of travel in terms of the cost of green energy. Since 2010, the cost of onshore wind energy has dropped by 23 percent and the cost of solar has plummeted by 73 percent. As green technologies develop, and economies of scale increase, the costs are likely to fall further. We are now seeing a worldwide shift in public opinion on the climate change issue. The rise of the green parties in the recent European Parliamentary elections is just the latest manifestation of this global trend.


People are increasingly willing to pay extra for green power. Businesses want to be seen as green, and they will seek renewable power sources. These factors, and the rise of electric cars, imply strong future demand for renewable power. Many leading fossil fuel companies are now themselves developing significant renewable energy businesses. The direction of progress in terms of government policy is also clear, as governments around the world compete to set ambitious targets for renewable energy. More than 190 countries have signed both the Paris and Kyoto agreements on climate change. Nations are submitting their emission reduction targets to the UN. For example, in 2015, Turkey submitted a climate pledge to cut emissions by up to 21 percent by 2030, compared to a business-as-usual scenario. Governments across the world are each pursuing their own strategies to reduce emissions and increase renewable energy. As a Turkish energy lawyer with experience of large renewable and fossil fuel projects in Turkey, I have seen, first hand, the effect of Turkish government policy in encouraging the development of renewables. Turkey has achieved remarkable progress in a short time. A quarter of Turkey’s energy already comes from renewable sources. Yet the government plans to aggressively increase this proportion to 30 percent by 2023. As an open economy, keen to attract investment in renewable energy, Turkey provides significant opportunities for investors in the sector.

turkey’s strategic focus on renewables Even as new oil and gas fields are discovered in the Black Sea and Anatolia, the Turkish government has maintained its strategic focus on developing renewables as a crucial component of Turkey’s energy mix. Turkey has abundant sunshine and wind, so it makes sense to look to these natural resources when building power capacity for a growing economy. Along with wind, solar and geothermal, Turkey also boasts significant existing hydroelectric generation capacity. Hydroelectric plants already generate over one-third of Turkey’s electricity. One major economic benefit of the switch to renewables comes in terms of employment. Building power generation capacity through renewables creates more jobs than creating the same capacity through fossil fuel generation. It is estimated that meeting Turkey’s 2023 renewable targets will result in up to 545,000 new jobs in the energy sector. In 2016, the Turkish government introduced ‘renewable energy zones’, dedicated to renewable energy power generation. The plan is to develop 10,000 MW of solar and wind power in the coming decade through an open tender process. In 2018, for example, the government sought tenders to build a 1,200 MW offshore wind plant, which will be one of the biggest in the world. In 2018, the Turkish government announced two ‘100day plans’ to rapidly increase renewable capacity. The first of

Why renewables are an interesting investment




Fall in production costs since 2010

onshore wind energy

solar energy

turkey’s renewable sector targets 10,000 MW of solar and wind energy in 10 years

progress as of 2018...


invested in solar projects

3 GW

of solar energy to be generated

these, announced in August 2018, attracted some US$7 billion in investment for 340 renewable projects through a series of tenders. $4.8 billion was invested in solar power plants alone, with the aim of creating an additional 3 gigawatts of solar power. The second 100-day plan, announced in December 2018, sought to attract US$4.5 billion for 454 renewable projects. The government is also implementing feed-in tariffs and developing new investment incentives for renewables. As well as boosting jobs, switching to renewables can make countries energy independent. As a net importer of energy, over half of Turkey’s balance of payments deficit is relates to energy imports. The economic benefits to becoming more self-sufficient in energy are clear: by increasing domestic production, Turkey reduces its exposure to currency fluctuations and volatile oil and gas prices. Given the political, economic and environmental benefits of renewables, it seems to be clear that the renewable energy sector is set for significant growth in the years ahead. As green technologies develop, political support grows, costs come down, and consumer concern increases, investment in renewable energy now makes both economic and environmental sense. Levent Lezgin Kılınç is the founder and managing partner of Kılınç Law & Consulting, Istanbul, Turkey. He advices foreign investors and assists them in their transactions and also provides advice in relation to dispute resolution matters, both internationally and in Turkey.

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5G network vision:

turkey is at a turning point The efforts of Open Networking foundation will improve the country’s telecom networks and better align its open systems solutions IF CORRESPONDENT

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The technology and telecom industry in Turkey has seen significant changes in the last two decades, under the jurisdiction of the Ministry of Transport and Infrastructure. The country has taken another important step with the Turkish government’s vision to lead the region in the development of 5G technologies. Turkey will become the first country in the region to test Open Networking Foundation-developed communication technologies — a turning point in its 5G vision. Open Networking Foundation is the non-profit operatorled consortium funded by Deutsche Telekom, Facebook, Google, Microsoft, Verizon, and Yahoo. The consortium in collaboration with the ministry is transforming Turkey’s network infrastructure and carrier business models to help the country resolve watershed issues such as lack of coverage. It also serves as an umbrella for a number of project development solutions by leveraging white box economics and open source software. In an interview with International Finance, Timon Sloane, vice-president of marketing and ecosystem at Open Networking Foundation explores the consortium’s role in


Turkey’s 5G deployment and the vast opportunities that rise with it. International Finance: Open Networking Foundation is poised to bring a change to Turkey’s telecom industry. What is the consortium’s role in deploying disruptive technologies and realising the benefits of 5G networks? Timon Sloane: Open Networking Foundation helps to shape these technologies with specifications for the industry called ‘reference design’, whereby each one of them is paired with an ‘exemplar platform’ open source implementation. We have created this methodology to create complete network platforms. The software is built and updated in concert with all participants, using single agreed-upon blueprint specifications. Open Networking Foundation platforms are put to the test in high impact environments of telecom carriers in Germany, Turkey, Japan, China, and the US among other countries. The platforms are then improved for optimal performance and the templates are shared in the open source community for further mainstream product development with network vendors and sophisticated integrators who in turn help to create a modern open networking supply chain for telecom operators. This reduces costs and puts technologies into production more quickly and at lower costs for operators. what are the technology advancements that have accelerated the industry’s development in recent months? Turkish operators are highly skilled and on a par with the majority of operators worldwide. Turkish operators, as part of the Turkish government’s plan to deploy an advanced telecom infrastructure serving millions of citizens, are moving ahead with better software and hardware. In addition, these operators have been taking a progressive approach towards leveraging the benefits of open source software. The SDN-based technology platforms from the Open Networking Foundation serve to largely reduce the costs of network deployments and introduce fully featured

“Public safety systems will become much more advanced with 5G technology, where sensors and video feeds can quickly react in the case of natural calamities such as earthquake, flood, or fire” networks for customers, public safety applications, education, and business applications. Investing in these technologies imply that they are supporting advanced applications, such as the Internet of Things for smart cities and virtual reality experiences that require superior performance and network capabilities. Turkey has transformed itself as a 5G testbed for mobile network operators to understand the country’s full potential in telecom. That said, what is the role of operators such as Turk Telekom in helping it to make the shift from 4.5G to 5G network? 5G applications have a broad scope and range from delivering voice to video to data to virtual reality. They can even extend support to the Internet of Things devices that encourage industrial and agricultural automation, sensors for building control systems, and precise monitoring of environments like solar and wind energy outputs, or the soil humidity. Access to data and converged content should become competitive in the global economy and Turk Telekom has demonstrated this trend. It has been at the forefront of embracing new technologies to bring this vision to Turkey. What are the opportunities that might open up with 5G deployment in Turkey? Public safety systems will become much more advanced

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“Instead of hoping that the technology works at the right cost, Open Networking Foundation community first proves that it works and makes iterative improvements to drive rapid advancements across the industry” with 5G technology, where sensors and video feeds can quickly react in the case of natural calamities such as earthquake, flood, or fire. That said, a high speed network will be required to be capable of processing and reacting to the torrents of data produced. Virtual reality or augmented reality (VR and AR) is one of the greatest emerging opportunities enabled by 5G technology. VR and AR give a digital overlay for consumer experiences in education, shopping, or while watching a sporting event. This transformational technology revolutionises content and communication consumption by enabling the consumer to experience innovative content tailored to what they ask for. It can allow them to ‘test drive’ products or services before buying them, as part of a marketing initiative. But AR and VR must be able to apply the visual updates in milliseconds, and this can only be accomplished

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through high speed network support computation at the edge of the network close to end users. Autonomous vehicles ranging from delivery trucks to taxis are going to be on the roads in the near future and they require a constant high grade connection to instantly communicate about the road conditions and nearby vehicles. Media reports state that Turkey is determined to shift to 5G network by 2020 through research and development. how active is the Turkish government in encouraging the country to manifest this vision? The Turkish government has taken a very progressive stance on supporting and pursuing the advancements of 5G networks in Turkey. Turk Telekom, for example, joined Open Networking Foundation as a partner member and was a part of the world’s most advanced


operators seeking to drive the open source movement for telecom networking and 5G. Last year, Open Networking Foundation and the Turkish government signed a protocol to test the latest telecommunication technologies at the Mobile world Congress. Can you elaborate the protocol’s significance to Turkey’s telecom sector? The protocol is a part of our efforts to continue a very successful partnership that has already been underway between Turkey, Turk Telekom, and Open Networking Foundation community. The protocol extends the commitment further into the future and ensures the delivery of key technologies introduced by our close collaborations. These technologies include testing and innovation activities all the way to driving open source platforms into Turk Telekom production networks. Turk Telekom has been an Open Networking Foundation board member helping to drive the CORD platform for innovative edge data centres. The Open Networking Foundation programme delivers advanced software programmes for wired and wireless networks, enabling the Turkish operators to economically deliver next-generation networks, because an entire open source community is leveraged for network development and testing. This occurs ‘in the field’ of the regional telecom operators helping it to mature into a ‘carrier class’ network platforms. Instead of hoping that the technology works at the right cost, Open Networking Foundation community first proves that it works and makes iterative improvements to drive rapid advancements across the industry. The Transport, Maritime Affairs and Communications Ministry of Turkey aims to increase mobile penetration in Turkey’s rural areas. does this mean the country is planning to deploy 5G technology in there as well? 5G is not needed everywhere to deliver its benefits. Rural areas can continue to run through the previously deployed 3G and 4G technologies, and 5G can be deployed in pockets where it can bring demonstrate great value. Open Networking Foundation’s approach to 5G is to make it cloud-native so that it is easier to deploy in

turk telekom has been an open Networking foundation board member helping to drive the CORD platform for innovative edge data centres. The Open Networking foundation programme delivers advanced soft ware programmes for wired and wireless networks

bigger and smaller sites. This makes it practical for rural deployments and allows it to be in the right-size for any application. what are the rising challenges in building Turkey’s 5G network? How are they addressed? Deploying a 5G network is an expensive proposition. However, when the network is deployed correctly, 5G can be rolled out in strategic locations to supplement the existing networks. Furthermore, Open Networking Foundation is building ‘cloud-native’ 5G platforms, meaning that lowcost white box hardware, commercial off the shelf servers, and storage and networking equipment can be used to drastically reduce costs and increase efficiencies. Open source software enables operators to effectively share the cost of developing the latest network solution. Altogether, it can greatly reduce capital and operational expenses, while simultaneously delivering top class networks for users.

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Malaysia’s break out moment The healthcare tourism industry of Malaysia is already achieving higher growth rates than established APAC destinations According to a report by Market Research Future, the global healthcare or medical tourism market is poised to reach $226 billion by 2023, growing at a CAGR of 21.4 percent. Lengthy waiting times and high cost of medical treatment in developed countries, and certain developing countries, is the reason for this burgeoning medical tourism market. As with many travel-related industries, medical tourism is being boosted by rapidly growing outbound Chinese healthcare traveller ow. Thanks to an expanding

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IF Correspondent


middle class, a fast ageing population, and surging demand for cosmetic surgery, the number of Chinese who travel out of China for medical treatment has hit the 20 million mark. The developing economies have a 43 percent share of the medical tourism market and the Southeast Asian nations are expected to be at the forefront of the medical tourism market till at least 2023 or even further ahead. South Korea is a significant destination for medical tourism in Southeast Asia, especially for cosmetic procedures. Chinese healthcare tourists especially target Southeast Asia for cosmetic surgery and cancer treatment. Thailand has been a popular medical treatment location for visitors from Europe, the Middle East, and other regions in Asia for a long time. Between January and April 2018, the number of Chinese healthcare tourists to Thailand is reported to have increased 30 percent. The Bumrungrad International hospital in Thailand reputedly receives more foreign patients than any other hospital in the world. Thailand now has 66 JCI accredited hospitals which ranks it fourth in the list of countries with the most JCI accredited hospitals after Saudi Arabia, China, and the UAE.

Malaysia breaks out Amid all the interest in the Southeast Asian countries, one country is emerging fast as a breakout nation among the healthcare tourism destinations in the region – Malaysia. Malaysia’s healthcare tourism industry grew at a CAGR of 17 percent between 2015 and 2018 against a 15 percent growth rate of the Asia Pacific region as a whole. In 2018, Malaysia’s healthcare tourism industry achieved close to RM1.5 billion ($361.7 million) in hospital revenue, excluding the figures for dental services and

Average savings on procedures in different countries compared to similar ones in the Us brazil


costa rica










south korea








Source: Patients Beyond Borders

wellness clinics. This potentially added RM 5 billion ($1.2 billion) to Malaysia’s GDP. The calculation is based upon the multiplier effect estimated in the Global

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Wellness Tourism report by Stanford Research Institute. A multiplier effect of 2.24 times hospital spending, which includes out of hospital spending such as transportation, accommodation, and tourism activities, is used in the calculation for GDP impact in addition to adding the estimates for wellness and dental services. Previously, in 2015, the Malaysian healthcare sector recorded a 23 percent growth in revenue following significant investments into promoting Malaysia as a healthcare tourism destination. The majority of healthcare travellers come to Malaysia from Indonesia due to the availability of superior medical care facilities compared to home. The citizens of Pakistan and Bangladesh also visit Malaysia for the same reason. Singapore and Japan are the second and third biggest sources of healthcare tourists to Malaysia and patients from these countries are attracted to the cheaper healthcare treatments at world class facilities available in the country comparable to those in their home countries. Similar reasons motivate Australian and European healthcare travellers to visit Malaysian hospitals. “Malaysia’s healthcare sector is continuously highlighting our pillars of strength — world class quality, affordability, and ease of accessibility. Our seamless and end-to-end healthcare travel ecosystem

coupled with strong government regulation make Malaysia’s healthcare system truly one of a kind,” Sherene Azli, CEO of Malaysia Healthcare Travel Council, an initiative to promote Malaysia as a healthcare travel destination under Malaysia’s Ministry of Finance, told International Finance. Malaysia’s ministry of healthcare ensures that healthcare travel to Malaysia stays affordable by monitoring ceiling rates for procedures offered by healthcare providers. The key differentiator of Malaysian healthcare for patients from the Middle East and the Western countries remains the cost. According to Patients Beyond Borders data, healthcare travellers to Malaysia from the US stand to save up to 80 percent of their healthcare procedure costs for similar treatments in Malaysia. For example, while a coronary artery bypass graft (CABG) costs on an average $92000 in the US and $33000 in Thailand, a CABG procedure of similar quality at a JCI accredited hospital in Malaysia costs only $20,800 on an average. Similarly, while a total knee replacement which costs $28,000 on an average in the US and $16250 and $13200 in South Korea and Thailand respectively, costs only $7800 on an average at a Malaysian healthcare facility of similar quality. For some cosmetic procedures, however, the cost of

‘‘Malaysia’s healthcare sector is continuously highlighting our pillars of strength – world class quality, affordability, and ease of accessibility. Our seamless and end-to-end healthcare travel ecosystem coupled with strong government regulation make Malaysia’s healthcare system truly one of a kind” - Sherene Azli, CEo of Malaysia Healthcare travel Council

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treatment is comparatively lower in Thai hospitals and clinics compared to Malaysia.

Higher mobility helps To an extent, Malaysia is now gaining from increased affluence and mobility in the APAC region and the fact that the country is located in the APAC region, which had a head start over others in healthcare tourism. For the affluent class of countries like emerging APAC economies such as Indonesia, healthcare systems and facilities at home are unable to meet growing local demand or the facilities fall short of the demands of the new middle class. Also within the APAC region, there is a growing affluent middle and upper middle class who can afford healthcare treatment abroad. The healthcare tourism market in the APAC region is forecast to grow at 22 percent CAGR between 2017 and 2023. Malaysia has seen an increase in the number of healthcare travellers from the US and Europe. Currently, Malaysia plans to increase the penetration of the country as a healthcare destination in its target markets while aggressively raising the country’s healthcare profile in secondary markets such as Bangladesh, Brunei, and the Middle East. With

regard to marketing efforts, Malaysia Healthcare is launching an international healthcare travel campaign titled Malaysia Year of Healthcare Travel 2020 for next year. The initiative intends to propel

International Finance | July 2019 | 89 26

Malaysia has been able to become the 14th largest exporter of pharmaceutical products in Asia with local drugs being exported to over 50 countries

travellers from China, Myanmar, Vietnam, and India as key markets in addition to Indonesia. Healthcare tourism a key priority for the government — in 2016, the Malaysian government had invested $5.2 billion or approximately 10 percent of its budget in the healthcare sector to develop facilities, infrastructure, pharmaceuticals, and medical tourism. The government is also redefining healthcare services in the country’s healthcare hubs Penang, Johor, and Melaka. It is developing six niche medical research facilities and several multi-speciality facilities in the region to develop it as a central hub for attracting medical and research investments and tourists. The Malaysian government had earlier identified medical travel as one of the National Key Economic Areas to drive the nation into the category of high-income nations by 2020.

Government steps in Malaysia as a reputable and reliable global healthcare travel destination while enhancing the impact of healthcare tourism on the wider Malaysian economy. The Malaysian government had said in 2017 that the country is targeting to generate revenue of RM2.8 billion or approximately $725 million from healthcare tourism in 2020. The plan is to target healthcare

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Specifically, while presenting the Malaysian budget of 2018, the prime minister had announced major plans to make Malaysia as a key healthcare tourism destination. Among the decisions announced is one to promote Malaysia as the fertility and cardiology hub of Asia with the support of expanded eVisa services and high-end medical tourism packages. He


also announced plans to introduce a flagship medical tourism hospital programme with special incentives. The investment tax allowance for private healthcare facilities promoting medical Target income current income from tourism was also extended to the for 2020 healthcare tourism end of December 2020. In the budget, the prime minister also announced that the exemption of income on value of increased export of healthcare services rate from 50 percent to 100 percent for private healthcare during the period 2018 to 2020. In addition, a tax incentive for investment in four- and five-star hotels was healthcare tourism industry growth rate (caGr 2015-18) extended for another two years. The tax incentive for tour operators was also extended to 2020. Cardiology and fertility treatments are already in high demand in Malaysia from patients of the target countries. Based on the flagship hospital programme, and medical products that do not contain porcine (porkselect hospitals will be able to step up organisational derived) elements. internationalisation. Smoother immigration clearances for medical travellers were also announced More JCI hospitals needed through the Malaysia Healthcare Traveller (MHTP) So how easy is for Malaysia’s healthcare tourism sector programme including the introduction of an eVisa to achieve the targets set by the government? To increase and online visa application services. The double its attractiveness as a healthcare tourism destination tax deduction for accreditation expenses was also and to achieve the targets of the NTP, Malaysia has extended to ambulatory care centres and private dental to increase the number of JCI accredited hospitals. It clinics. Under Malaysia’s National Transformation also needs more facilities like Thailand’s Bumrungrad Programme of 2015 that has a significant focus on hospital, which routinely sees up to 1000 foreign healthcare, Malaysia has been able to become the 14th patients a day. In addition, Malaysia will also have to largest exporter of pharmaceutical products in Asia focus on developing and marketing more treatments with local drugs being exported to over 50 countries. that are not widely available elsewhere in the region. One of Malaysia’s value propositions as a healthcare Malaysia can also step up focus on wellness and tourism destination is the scenic locales in the country. prevention programmes to develop holistic wellness This helps it promote healthcare treatments along with and prevention packages that can be marketed tourism activities in Malaysia for the family of the globally. The ability to offer Halal treatment options person seeking treatment. Another value proposition and care givers of the same gender to Muslim patients is the number of low-cost airlines that connect Malaysia is one aspect that can be developed into a differentiator with other regions in the Asia Pacific. The availability that attracts Middle Eastern and Muslim patients of low-cost airlines significantly reduces the cost of worldwide. With the combined efforts of the travel for patients and those who accompany them. government and the private sector, Malaysia’s In addition, Malaysia is centrally located in the APAC healthcare travel sector is poised for an interesting region making it easily accessible. The Malaysian period of growth. government is also touting Halal treatment options to Muslim and Middle Eastern patients such as sutures

the outlook for the healthcare travel sector in Malaysia

$361.7 million

$725 million

Malaysia 17%

apac 15%

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If China is in Africa, can Japan be far behind? Japan is out to grab a piece of the Africa development pie — and China is displeased. What does this mean for the continent? SANGEETHA DEEPAK

China has pursued a massive empire building effort in Africa through bilateral loans, trade, assistance, and foreign direct investments, strategically building its soft power and hard power in the continent. Where western corporations and governments would have thought twice before entering, China has moved in swiftly to build political support and economic benefits for itself. China has capitalised on the lack of western involvement by aggressively pushing on with new infrastructure projects such as the Belt and Road initiative, for which 37 African countries have pledged to join. This way, the Chinese have already paved the path to assert their influence on the Africa’s development — the continent where half of the world’s population will reside at the turn of the next century. If China is having a civilisation shaping influence on Africa, can its civilisational rival, Japan, be far behind? Japan is slowly making its mark on Africa’s development to counter the Chinese influence on the continent through similar deals and assistance. For decades, African countries have sought the help of the US, the UK, France, and the multilateral

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institutions like the World Bank and the International Monetary Fund to finance their infrastructure deficits. But what’s fascinating today is that China has superseded those countries in establishing its dominance on the continent in a much shorter time span. A decade ago, China ousted the United States as Africa’s largest trading partner.

Integrated approach the only way If Japan had to counter China’s influence in Africa, it had to embark on the journey with an integrated approach like China. In 2016, the Japanese Prime Minister Shinzo Abe pledged $30 billion during the fourth Tokyo International Conference on African Development (TICAD). The pledge included $10 billion for infrastructure projects carried out in cooperation with the African Development Bank. Japan has transformed the TICAD framework from basic government assistance programmes to private sector-focused activities such as trade and investment. With that, its approach to cooperation with Africa has become of more or less similar to China’s. The Japanese government recently announced that it will establish a permanent


joint council this year to link the government and the private sectors to coordinate Japanese investments in Africa. The council will comprise government officials, economic organisations, and Japanese companies operating in the African countries. The council will hold two or three meetings each year, with the foreign minister, the trade and industry minister, and a business industry representative serving as joint chairpersons. The Japanese involvement in Africa has already politicised its relations with China and Africa. To Beijing, the possibility

of Japan building high-quality infrastructure at a similar cost is a cause for concern. The Chinese Ministry of Foreign Affairs accused Japan’s outreach efforts as an attempt to ‘feed conflict’ between China and the African countries. Currently, there are more than 440 Japanese companies operating in Africa. Engineering companies including JGC are establishing plants in Nigeria, while Mitsubishi Electric and chemical company AGC have opened sales offices in South Africa and Morocco. China’s long-time influence on the continent has led to the

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commonly held belief that it is the more dominant partner of African nations than Japan. Even though Japan is lagging behind China in its engagement with Africa in numerical terms, the Japan International Cooperation Agency (JICA) which manages the country’s overseas assistance, has in fact provided aid for some of the most crucial infrastructure projects — and these involvements remain low key. For example, the JICA has provided assistance for the critical Tanzania-Zambia railway flyover bridge, and the construction of the Mwenge-Morocco highway. It has also signed a $112 million loan for assisting in infrastructural development around the Port of Mombasa in Kenya. Data from Refinitiv shows that in the last decade, with regard to completed merger and acquisition deals, Japanese firms are

significantly closing the gap with Chinese firms in Africa. So far this year the number of completed Japanese deals in Africa is four, while China has one, according to the data from Refinitiv.

stanford study Scholars from Stanford University who studied Chinese investments in Africa from 1991 to 2000 found that Chinese investments are not often complemented with economic growth. Cheaper Chinese imports, for instance, have hurt small African local manufacturers leading to loss of employment opportunities. Unlike Europe and the United States, China often acts favourably to countries isolated by others for political reasons because it prioritises geopolitical interests over western concerns such as human rights.

Whose Influence is positive? The question now is whose influence on africa is overall positive for Africa? Japan’s or China’s?

Japanese acquisitions in africa


ranking value including net debt of target ($ mn)

Chinese acquisitions in africa number of deals


ranking value including net debt of target ($ mn)

number of deals
































































Source: refinitiv 94 | July 2019 | International Finance


The eagerness of African leaders to pursue loan deals with Africa and the Chinese eagerness to indulge African nations with loans continues unabated. When Nigeria’s President Muhammadu Buhari attended the Forum on China and Africa Cooperation in Beijing last year, he pursued an additional $6 billion in infrastructure loans from the Chinese state banks. At the summit, China’s President Xi Jin Ping also pledged $60 billion for development in Africa. Most of the financing that African nations receive from China is in the form of loans. Chinese companies are also encouraged to invest in African projects. The outcome may not always be positive for the loan recipients.

African nations cancel projects At times African nations have withdrawn from or cancelled deals with China. President of Sierra Leone Julius Maada Bio, who took office in April, cancelled a deal with China to build a new $400 million international airport at Mamamah. The deal was previously signed by his predecessor, but now the government is considering renovating the current international airport citing that the new project is ‘uneconomical’. The decision to cancel the project also stems from the World Bank’s warnings that it could potentially increase Africa’s debt burden.

and October 2018, the Japan External Trade Organisation carried out a survey on Japanese-affiliated companies and their business operations in 24 African countries. According to the survey’s key findings, Chinese companies climbed the top ranks for the first time as competitors to Japanese companies in the African market in 2018. That said, the survey also showed that 76 percent of companies in Africa desire firm support from the Japanese government. During TICAD VI, the Government of Japan promised to bolster the initiatives taken by African countries to reinforce development across the continent. Also, several Japanese companies have shown renewed interest in African markets. For example, last year Daikin Industries announced plans for ts business expansion in Africa and also said it is considering a new Indian plant to produce products for the continent. Japan hopes to become Africa’s single most valuable trade partner. The country has said that it plans to link Africa with Asia and include it in the Free and Open Indo Pacific Strategy. At the opening session of TICAD VI, Prime Minister Shinzo Abe said that Japan intends to foster peace and prosperity in the international community. “It is my wish that the self-confidence and sense of responsibility spawned there as a result come to envelop the entirety of Africa together with the gentle winds that blow here,” Abe said. To this end, Japan and India are slowly

“It is my wish that the self-confidence and sense of responsibility spawned there as a result come to envelop the entirety of Africa together with the gentle winds that blow here” prime Minister shinzo abe

There is also a sense of fear that Kenya could risk losing the Port of Mombasa to the Chinese if the Kenya Railways Corporation (KRC) defaults payments to China’s Exim Bank — which might not be unlikely. KRC accepted the $2.3 billion loan with an agreement that the authority’s revenue will be used to clear the debt owed to China’s Exim bank. The fate of Sri Lanka’s Hambantota Port hangs over the Mombasa port. China insists that any future dispute in the KRC project will be handled through an arbitration process in its own courts. This shows the inordinate leverage that China exerts on African nations. Western media have raised allegations that China’s loans to African nations are leading them to a debt trap and that China is clandestinely picking up assets in Africa cheaply. Chinese companies have also emerged as top competitors in the African market to Japanese firms. Between September

investing efforts to create a joint programme—theAsia-Africa Growth Corridor—which pledges to bring real benefits to Africa. The plan has already led to conflict warnings from China. Chinese tabloid the Global Times warned: “If India and Japan design the corridor to deliberately counterbalance China’s BRI, they should think twice before rushing into it.” But this is not to say that Japan’s interest in Africa is purely altruistic. Japan’s lack of natural resources has encouraged it to become heavily reliant on the international markets. For the same reason, Japan’s Official Development Assistance (ODA) is focused on select African countries with abundant raw materials. With that, the continent has become the latest political playing field for both China and Japan to play out a historic rivalry.

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Investing in China:

Three negotiation essentials

Neil Clothier of Huthwaite examines how Western investors should best negotiate in China, and offers a three-step approach to achieving success neIL CLotHIer The Chinese economy is growing rapidly, and so it’s no surprise that that more and more investors are drawn to investing in China. However, with tensions increasing between China and the US, it’s possible that business negotiations will become trickier to navigate. With very different cultures to negotiate it’s easy to see how some negotiations may end badly. The first step in any negotiation process is to ensure you’re fully prepared. When entering into negotiations, planning is of utmost importance and conducting essential research beforehand should never be ignored. It’s also essential to assess the risks versus potential rewards of every possible outcome when entering into a new or very different market. Most importantly, it’s vital to understand that while China has adopted free-market principles, it remains a communist country and so the rules that govern a public company in China still differ from those in the UK or the US – for example, Chinese accounting standards are very different from the West’s, and regulatory differences abound. Be wary of falling into any dirty negotiating traps when heading overseas, including China. It’s fairly common that your clients will aim to start meetings while your

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concentration is impeded due to jet leg and fatigue, or perhaps aim to ‘entertain’ you the evening before to the same effect. Research by airlines and medical schools indicates that jet lag seriously impairs judgement, so keep your wits on and aim to travel early, leaving plenty of time for recuperation before meeting the other side. It’s recommended to leave a quarter of a day’s resting time for each time zone travelled through. Huthwaite’s research shows that the most successful negotiators don’t entertain dirty tricks in negotiation but instead strive to reach agreements that are satisfactory to both parties. When both sides are happy they are far more inclined to work towards a successful implementation.Another essential aspect of successful negotiation, and arguably one of the most important when it comes to negotiation in China, is recognising and understanding cultural differences. There are many nuances and processes in Chinese culture that must be respected, especially when it comes to business. Hierarchy plays an integral part of business culture in China, and it’s important for Chinese leaders to be more distinguished and to hold the respect of their juniors. In the UK, or in the US, people wouldn’t think twice about asking a question or challenging a more senior member of their team publicly, but it’s uncommon in China. It’s important to observe this Chinese tradition while negotiating in China. Often Western investors fall foul of rushing ahead and pushing too hard when doing business in China too. However, things move far more slowly than western businesses are necessarily used to – and it’s also not unusual for Chinese businesspeople to extend the decision-making process past the deadline. In Chinese culture, it’s typical to take time over proceedings and engage in multiple meetings in order to establish a strong relationship before closing a deal. However, be wary of unnecessary excuses and boundary pushing, put down to a ‘that’s how we do it over here’ excuse. Patience is the key to success while doing business in China,. A savvy investor would look to get off to a head start by understanding and adopting a considered and strategic approach to negotiating in Chinese markets. By doing so, they provide themselves with a greater chance of securing quality deals even in the time of global tensions. neil Clothier manages Huthwaite’s team of sales and negotiation strategists. Huthwaite International is a leading global provider of sales, negotiation and communication skills development. It supports companies around the world with behavioural methodologies.

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