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Thawing permafrost is placing a strain on Russia’s oil and gas infrastructure
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Political disputes have thrown central bank policy into the limelight
Put on a brave face
Facebook’s foray into financial services is struggling to gain momentum
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BUILDING A FUTURE FOR EASTERN EUROPE
Having registered years of sluggish growth in the post-Soviet era, Eastern Europe is finally showing signs of recovery. Dana Holdings President Nebojsa Karic believes the company’s ‘city within a city’ concept can help transform the region’s economic fortunes
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Following the collapse of the Soviet Union in 1991, many Eastern European states struggled to sustain economic growth, with a lack of infrastructure proving a key stumbling block. Now, through its ‘city within a city’ concept, Dana Holdings is driving development in the region
Breaking the banks
In July 2019, Facebook announced it would be entering the financial sphere with the rollout of its cryptocurrency Libra. With key partners pulling out prior to launch and regulators keen to limit progress, though, success is far from guaranteed
Helen de Beer
Charlotte Gifford Courtney Goldsmith Alex Katsomitros
WEB AND MOBILE DEVELOPMENT:
Ben Debski Scott Rouse
Max Tomlin CONTRIBUTORS: HEAD OF EDITORIAL:
Barclay Ballard PRODUCTION ASSISTANTS:
Jack Pearson Ashton Wenborn
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Zhang Jun Hans-Helmut Kotz David Orrell Joseph Stiglitz Shashi Tharoor
Investing in Myanmar International media coverage of Myanmar has typically centred on the Rohingya refugee crisis and the human rights abuses at the heart of it. But beyond the deplorable actions in Rakhine State, the country has a lot to offer discerning investors
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Thaw loser Permafrost – ground that remains frozen for more than two years – has started to thaw across Russia, damaging vital oil and gas infrastructure. With the climate only getting warmer, Moscow will need to curb its reliance on fossil fuels if it is to maintain its international power and influence
The World Economic Forum Annual Meeting has lost its mojo. If the gathering of global elites is to regain the public’s confidence, it will need to adopt a fresh approach – one that values action over deliberation and self-indulgence
HEAD OF PRINT:
Once the bastions of neutrality, central banks face increasing pressure to wade in on both domestic and international issues. Now, as politicians call for support in tackling climate change, the illusion of central bank independence is being brought into question once again
© World News Media Ltd, 2020 Printed in the UK. ISSN 1755-2915
Mustapha Belkouche, Bryan Charles, Doug Crerand, Tom Crosse, Malcolm Gade, Terry Johnson, Julia King, Monika Wojcik
Editorial on pp38-45 © Project Syndicate, 2020
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International financial news and analysis
Comment Joseph Stiglitz calls for the implementation of a global minimum corporate tax, Zhang Jun explains how China can reach its centennial goal, Shashi Tharoor questions Indian Prime Minister Narendra Modi’s leadership, and Hans-Helmut Kotz examines Germany’s fractious relationship with the ECB
Private Banking The private banking sector has a responsibility to support the global transition to a more sustainable economy
Investment Management Despite being the smallest country in Central America, El Salvador continues to show great economic promise. Following significant financial reform in 2017, the country’s pensions sector is thriving
Tax Several gaps in Europe’s VAT system must be bridged if EU member states are to enjoy the benefits of instant data sharing among taxpayers and tax administrations
Retail Banking Simplification, technology and efficiency are key to finding success in Europe’s slowing macroeconomic environment
Insurance With insurance firmly entering the digital age, the World Finance Global Insurance Awards 2019 pay tribute to the companies leading the sector’s ongoing transformation
Investment Banking The Gulf Cooperation Council region has benefitted from the establishment of the Dubai International Financial Centre
Profile Sri Mulyani Indrawati prepares for a second term as Indonesia’s finance minister
Financial History With the World Bank celebrating its 75th anniversary, we trace the history of the influential financial institution
In the World Finance Digital Banking Awards 2019, we celebrate the financial institutions driving market innovation
Global Review We examine the results of the inaugural Global Health Security Index
Islamic Finance Although a relative newcomer to the banking industry, Islamic finance has modernised quickly, embracing digital technology and delivering reliable services
The Econoclast David Orrell explains why economists must consider friction in finance
Oil & Gas
Infr astructure 138
World Finance commemorates the guiding lights of the energy industry in the 2019 Oil and Gas Awards
Commodities Israel boasts a long history of winemaking. By combining tradition with the newest technological advancements, the country is producing some of the world’s finest wines
Sustainability Climate change continues to dominate the global agenda. The World Finance Sustainability Awards 2019 celebrate the companies putting up the greatest fight
The Global North has long been considered the more developed half of the planet, but the South is producing innovative transport solutions to rival its northern counterpart
Business Services Some $900bn was wasted on digital restructuring efforts in 2018. By defining a clear vision and including employees in the process, however, businesses can deliver a successful transformation that reduces costs
Corporate Governance Initial public offerings can help companies generate vital income to push their brand forward. Going public too soon and relying on a charismatic founder, though, can present more problems than benefits
Science & Technology As the business aviation sector comes under increasing pressure to curb its carbon footprint, the use of sustainable aviation fuel is bolstering the market’s green credentials
Infrastructure investment in Morocco’s cities far outstrips its rural areas. The country must address this gap if it is to tackle more widespread inequality
Pivoting from retail to institutional brokerage is a difficult task. The traders that manage the shift will benefit from access to more diverse markets
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Paint the town red Police shield themselves from protestors in Colombia. On November 21, after the government proposed cuts to pensions, Colombians took part in the first of many national strikes. Though the pension reform was never pushed through, it prompted citizens to air more general dissatisfaction with President Iván Duque Márquez’s government.
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The European Commission predicts that economic growth in the region will not rebound MARKET until 2021 or 2022. Peter Moscovici, the EU’s economics commissioner, has warned that the bloc is “entering a new period” characterised by weak trade. In order to revive growth, experts predict that many governVOICE of the
EU export variations PERCENTAGE
5 4 3 2 1 0
-1 Q1 2018
The EU economy has been hit the hardest by the global trade slowdown, according to new OECD data. Globally, exports fell by 0.7 percent in the third quarter. However, this decline was more dramatic in Europe, where exports contracted by 1.8 percent compared with the previous three months (see Fig 1). All major EU economies recorded the same downward trend in exports and imports. France saw its exports fall by 3.6 percent while its imports dropped 1.7 percent. Germany experienced 0.4 percent and 1.8 percent declines respectively. Analysts identified uncertainty around Brexit and the slowdown in Germany’s manufacturing sector as having contributed to the region’s poor trade performance. Additionally, world trade plays a more critical role in Europe’s economy than it does in either China’s or the US’. Whereas foreign trade accounted for 83 percent of the EU’s GDP in 2018, it only contributed to 38 percent of China’s and 27 percent of the US’.
When Jair Bolsonaro took over as president of Brazil at the start of 2019, some were willing to look past his incendiary comments regarding women, homosexuals and ethnic minorities if he could Barclay Ballard sort out the country’s economic woes. His previous remarks may have been distasteful, but if the so-called ‘Trump of the Tropics’ could get Latin America’s largest economy firing on all cylinders again, they would quickly be forgotten. It was a holdyour-nose moment for many voters. At the top of Bolsonaro’s agenda when he took office was the passing of long-awaited pension reform, without which Brazil’s public finances risked collapse. In 2018, the country’s social security spending was equivalent to 44 percent of the federal budget and 8.6 percent of GDP. Bolsonaro was widely praised, therefore, when he managed to get much-needed changes through Congress in October, raising the retirement age to 65 for men and 62 for women, up from 56 and 53 respectively. The celebrations were short-lived, however. Pension reform was supposed to be the start of broader changes that would restore investor confidence in the Brazilian economy. Instead, further proposals to streamline the public sector, including wage freezes and job cuts, have been postponed. Protests in other South American states opposing the imposition of free-market policies appear to have Bolsonaro’s administration spooked. The decision to delay further reform also likely reflects recent political changes in the country. The unexpected release of Luiz Inácio Lula da Silva, the popular former president and founding member of the Workers’ Party, from prison in November may have caused Bolsonaro to think more carefully about how and when to pursue additional legislative changes. Upon his release, Lula da Silva wasted little time in attacking his political rival, describing him as “the destroyer of jobs”. Bolsonaro owed his electoral triumph, in part, to the chaos that had infected the opposition. Following Lula da Silva’s conviction for money laundering and passive corruption, his presidential successor, Dilma Rousseff, was impeached for manipulating the government budget. A reinvigorated political left could present serious difficulties for Bolsonaro’s efforts to advance his policy proposals. The pension system may have been overhauled, but the country’s economic problems do not stop there.
Although the EU was the hardest hit, the OECD found that trade is waning around the world: it weakened in nearly 80 percent of the 50 countries and regions the OECD tracks. Analysts also pinned this on lower oil prices and depreciation in major currencies against the dollar.
ments will need to push tough structural reforms that are hard to implement. However, there are still reasons to be positive about the EU’s economic prospects. The International Monetary Fund found in a recent report that the European economy still shows signs of resilience, with labour markets remaining strong.
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Footing the bill
Jacob Schram ceo
Markus Duesmann ceo
Helena Hedblom ceo
After a turbulent year, Norwegian Air has appointed Jacob Schram as its new CEO, replacing interim CEO Geir Karlsen. The airline’s rapid expansion over the past several years has left it saddled with debt: Europe’s thirdlargest low-cost airline has asked for two more years to repay its largest outstanding bonds, worth $380m, and is now on a major cost-cutting mission. It has already halted f lights from Denmark and Sweden to the US and Thailand as it tries to scale down operations. Norwegian Air is looking to Schram in the hope he will help restructure the business and lead the company to profitability.
For mer BM W executive Markus Duesmann has been named CEO of Audi. The premium car brand, owned by Volkswagen, has long been renowned for its engineering flair, but its reputation was badly tainted when it was discovered that Audi engineers had designed the software Volkswagen used to cheat exhaust emissions tests. Duesmann’s biggest challenge will be restoring the brand’s claim to innovation and beautiful design. “From Markus Duesmann and his team, we expect the stable utilisation of our factories and a more courageous approach,” Peter Mosch, Audi’s works council chief, said of the appointment.
Epiroc, the Swedish mining equipment firm, has appointed Helena Hedblom as its new CEO, effective March 1. Currently the Senior Executive Vice President of Mining and Infrastructure, Hedblom has been one of the internal favourites for the position since the company went public last year. “[Hedblom] has a strong business focus, an in-depth knowledge of the business and is an appreciated leader who is living and breathing the Epiroc values,” Epiroc Chair Ronnie Leten said in a statement. Over the years, she has certainly proven her loyalty, having held a number of leadership positions at Atlas Copco, of which Epiroc was initially a subsidiary.
VOICE OF THE MARKET
Schram has his work cut out for him: shares in Norwegian Air have fallen by more than 75 percent since summer 2018. In previous roles at Statoil and McKinsey & Company, Schram drove cost-cutting and transformation programmes. This experience will prove useful as he guides Norwegian Air through a time of dramatic upheaval in an overcrowded market.
VOICE OF THE MARKET
With a background in mechanical engineering, Duesmann has worked in the automotive industry for more than 30 years. At one point, he led the powertrain department of BMW’s Formula 1 team. The company will be counting on his engineering know-how to restore Audi’s renown for Vorsprung durch Technik – advancement through technology.
VOICE OF THE MARKET
Hedblom will put research and development first at Epiroc. “Innovation is key. That is how we stay ahead of technology leaders in all of these areas,” she told International Mining. She has played a leading role in launching a number of Epiroc’s initiatives in automation, digitalisation and electrification. She also plans to grow the company’s aftermarket business.
Considering his vocal support of authoritarian leaders, US President Donald Trump is an unusual figure to find adorning the posters of pro-democracy protestors in Hong Kong. But Charlotte Gifford this is exactly what happened in late November, when it was announced that Trump had signed the Hong Kong Human Rights and Democracy Act. Thousands of protestors gathered in Hong Kong’s Central district to wave US flags and brandish posters of Trump, celebrating what they saw as a show of international support for Hong Kong’s autonomy. Sadly, Trump’s decision wasn’t so much a change of heart as the result of having been backed into a corner – the act had already passed unanimously in the US Senate. Nonetheless, Hong Kong’s prodemocracy movement supported it. According to the bill, the US Government must now impose sanctions on Chinese and Hong Kong officials who commit human rights abuses in the territory. A second bill bans US exports of tear gas, rubber bullets and stun guns to the Hong Kong Police Force. But while the bill is a boost to Hong Kong’s pro-democracy movement, it poses a potential threat to the city-state’s special economic status. Under the new bill, the US secretary of state must also make an annual assessment of whether or not Hong Kong’s legal system and civil liberties are intact. If not, the US will revoke special economic privileges to the territory – an outcome that would deliver a significant blow to the Hong Kong economy. Hong Kong is already buckling under the strain of months of protests, with its economy reportedly shrinking by around 1.4 percent in 2019. Since it was granted autonomy in 1997, the city-state’s special status has been a critical component of its business environment. In 2018, for example, trade between Hong Kong and the US was estimated to be worth $67.3bn. If its special status is threatened, businesses and investors are likely to vacate the city, harming not just Hong Kong but also the business interests of China and the US. Although the bill sends a supportive message to Hong Kong’s protestors, on closer inspection, it could end up inflicting more economic pain on Hong Kong and its trade partners. TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com
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A greener ECB
Just what the doctor ordered
The European Parliament made history when it declared a global climate and environmental emergency in November. Although the vote, which came ahead of the Global Climate Courtney Goldsmith and Health Summit in Madrid, was largely symbolic, it also ramped up pressure on European Commission President Ursula von der Leyen to commit to more stringent emissions targets. Von der Leyen has said that tackling the climate emergency is at the top of her agenda, vowing to accelerate emission cuts so that Europe becomes the first climate-neutral continent by 2050. “If there is one area where the world needs our leadership, it is on protecting our climate,” she said. “This is an existential issue for Europe – and for the world.” Despite this, environmental campaigners have called for more ambitious plans and are quick to point out that targets do not necessarily equate to action. To begin a tangible green shift in Europe, the European Central Bank (ECB) must join the fight. Luckily, newly appointed president Christine Lagarde has signalled her interest in pushing the ECB’s role in green finance. While current rules mean the central bank looks strictly at monetary issues, Lagarde is pressing for the inclusion of climate change considerations in her strategic review of the ECB. Fitting sustainability considerations into this framework could be a watershed moment for green finance due to the ECB’s influence over investment decisions, but some are sceptical of Lagarde’s plans. Critics say it should not be within the ECB’s remit to make environmental decisions, which instead should be left to the governments of individual member states. Supporters, though, are eager for the ECB to integrate global warming impacts into its economic models. Speaking before the European Parliament’s Committee on Economic and Monetary Affairs, Lagarde said the ECB’s financial forecasting models “need to incorporate the risk of climate change”. With global warming posing an enormous threat, Europe’s moves to combat it must be equally monumental, and giving the ECB more powers to push for green finance would be a significant step forward. If the continent is to be a true leader in cutting emissions, it should move beyond symbolic decisions and towards a radical rethinking of the economy.
In one of the largest pharmaceutical deals in history, Bristol-Myers Squibb (BMS) has completed a $74bn deal to buy the biotech company Celgene, which specialises in the development of drugs for cancer and inflammatory disorders. By purchasing the firm, BMS hopes to become a world leader in oncology. In recent years, BMS has found itself urgently needing to boost its pipeline of future drugs. It has had several research setbacks relating to its top cancer medicine, OPDIVO, which faces strong competition from other products. Through the deal, BMS will acquire Celgene’s lucrative products, including its cancer treatment, Revlimid. Together, the companies will have nine blockbuster drugs – products that generate over $1bn in annual revenue. However, the deal has come up against obstacles. Investor groups have raised concerns about Celgene’s dependence on Revlimid and its portfolio of experimental drugs. Wellington Management argued that it was too risky for BMS shareholders, while Starboard Value called the acquisition “poorly conceived”. The Federal Trade Commission also raised concerns that the deal could give the compa-
nies too much power in the anti-inflammatory market. To get the regulator’s approval, BMS was forced to divest Celgene’s highly profitable psoriasis drug, Otezla. This was a serious blow to BMS, as Celgene generated about $1.6bn in revenue from Otezla in the last financial year alone. Now, the combined company aims to launch six more products within 24 months, with hopes of generating $15bn in revenue. Some analysts remain doubtful the deal will solve the companies’ underlying issues, though, with a number of major products set to lose exclusivity between 2022 and 2026. The combined company will need to see significant sales of new drugs to offset this loss.
Onto the next chapter
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In November, Savannah Petroleum completed the purchase of Nigerian oil and gas company Seven Energy International, boosting the company’s operations in Niger and Nigeria. Since 2014, Savannah’s five exploration wells have produced five discoveries in Agadem, a region on the edge of the Sahara. However, it has lacked the funding to bring these into production. The acquisition of Seven Energy, which produces around 20,000 barrels of oil per day in Nigeria, should help it push into the region. “The deal transforms Savannah into a fullcycle [exploration and production] company in West Africa and marks the start of a very exciting time for us,” said Savannah CEO Andrew Knott. Savannah’s share price remained flat on news of the deal’s completion, though, suggesting that investors are unconvinced the company will operate smoothly in West Africa.
Nanometrics and Rudolph Technologies merged in October to create Onto Innovation. The new entity is expected to be the fourth-largest semiconductor capital equipment supplier by revenue in the US, and among the top 15 semiconductor companies in terms of revenue worldwide. It is estimated that the deal expanded the companies’ market opportunity to $3bn. Both the board of directors and the company comprise executives from Nanometrics and Rudolph Technologies. As well as expanding the companies’ portfolio of cutting-edge technology, the deal should allow Onto Innovation to make significant cost savings. CEO Mike Plisinski said in a statement: “By bringing these two companies together, we believe we have created a powerful new choice for customers seeking advanced process control solutions across the semiconductor value chain.”
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Working the fields Inmates from Prado Conservation Camp work to put out the Saddleridge wildfire in California. The camp is one of 43 state-run facilities that provide firefighting training to minimum-custody inmates. The California Department of Corrections and Rehabilitation estimates that the programme saves taxpayers $100m each year.
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From generation to generation
China’s pork and beans The Chinese agricultural sector is still reeling from an outbreak of African swine fever that wiped out almost half of its pig herd in 2019. But as output plummets in the livestock sector, investors have identified a unique opportunity among the country’s soybean oil and palm oil markets, which are now enjoying a huge surge. Soybean oil is a by-product of crushing soybeans for livestock feed. With far fewer pigs to nourish, demand for soybeans has been slashed, meaning soybean oil output has been greatly reduced. Demand for soybean oil in food remains high, however. In fact, food makers have
increased oil content to compensate for serving less fatty pork in meals and products. To make up for the decline in soybean oil output, China also imported 4.43 million tonnes of palm oil in the first 10 months of 2019, representing a 23 percent increase from total imports in 2018. In late November, soybean oil and palm oil reached their highest prices since mid-2018 (see Fig 1). Chinese officials have forecast that hog herds will recover this year, but many analysts agree that this is an overambitious time frame. As a result, long-term volatility in the oil markets can be expected to continue for now.
Price of Chinese soybean oil and palm oil ● DALIAN SOYBEAN OIL ● DALIAN PALM OIL
USD PER TONNE
6,300 5,600 4,900 4,200 3,500 2,800 2,100 1,400 700 0 2006 SOURCE: REUTERS
Over the past few years, the Italian private banking market has enjoyed consistent growth. By the end of 2018, the sector was valued at €800bn ($887.18bn). But Stefano Colasanti private banks must overcome a number of challenges if they’re to capitalise on this success, argues Stefano Colasanti, Head of Business Development and Commercial Planning for BNL Private Banking and Wealth Management at BNP Paribas Group. In an interview with World Finance, he identified generational change, digitalisation and regulation as the three main areas where private banks must focus their energy. Generational change refers to the flow of wealth from private banking clients to their heirs – mainly Millennials and Generation Z. “It’s very important for the major wealth managers to create, to build in time, a good relationship manager with their client heirs,” Colasanti said, “because private banks that first prepare this generational shift will get a very important competitive advantage, and tap into the client base of the competitors that are not able to prepare [for] this generational change.” Another change expected to have a significant impact on private banks is the 2018 introduction of the EU’s MiFID II framework. This legislation means banks must now be more transparent about the costs associated with investment products and services. As such, they will need to review their product offerings to ensure they remain compelling to clients. To tackle these changes, BNL Private Banking has taken a number of actions. The first was to invest more in its wealth advisory services. The second was to launch a digital platform, My Private Banking, to strengthen its relationship with a new, digitally savvy generation. BNL also introduced a 24/7 contact centre dedicated to the needs of its private banking clients. Finally, BNL has made sustainability a top priority, and plans to help its clients invest in their environment, community and country. “I strongly believe these new strategic actions will give BNL Private Banking a competitive edge over its competitors,” Colasanti said. TO FIND OUT MORE ABOUT PRIVATE BANKING, VISIT: www.worldfinance.com/videos
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Banking with purpose Canada is home to a thriving business environment. As well as establishing itself as a technology leader on the world stage, the country has seen a recent surge in female Dev Srinivasan entrepreneurship. BMO Bank of Montreal is focused on unlocking these business opportunities, which are exciting not just from a profit perspective, but also in terms of their contribution to communities. Dev Srinivasan, Chief Operating Officer for BMO Bank of Montreal Canadian Business Banking, spoke with World Finance about the most promising segments of business banking in Canada today. Toronto, Ottawa and Montreal were three of the fastest-growing technology hubs globally in 2018, Srinivasan said: “This is a hugely important segment, and it is an area where we’re focused in on serving clients across the broad spectrum of their needs. We’re able to deal with venture capital companies that are really the lifeblood of the tech space, as well as private equity and the companies themselves as they go public and grow faster.” Another area experiencing huge growth in Canada is female-led business. In May 2019, Canada announced the launch of its Women Entrepreneurship Strategy, which will invest nearly $2bn in businesses founded by women. Partly due to initiatives like this, Canadian women are starting businesses at a faster rate than their counterparts in other G20 countries. BMO Bank is dedicated to supporting this segment. “It’s a hugely important population, and we want to ensure that we’re supporting all groups,” he told World Finance. “And if you look at our growth within the bank, we’re actually growing women-owned businesses at about 30 to 40 percent faster than we are male-owned businesses.” BMO is also focused on bringing banking to indigenous people. These communities represent a significant segment of the Canadian population, with almost 1.7 million people identifying as Aboriginal in 2016. “BMO has served indigenous communities since 1992 with a dedicated team,” Srinivasan said. “This team really partners up with the communities in terms of understanding their unique needs and ensuring that we’re delivering the services, the guidance [and] the expertise that is needed to help those communities thrive in a challenging environment.” TO FIND OUT MORE ABOUT BUSINESS BANKING IN CANADA, VISIT: www.worldfinance.com/videos
Mexican President Andrés Manuel López Obrador
The long road ahead It’s been more than a year since Mexican President Andrés Manuel López Obrador (AMLO) took office, and he has little to celebrate. Despite his pledges to tackle crime, Mexico still has one of the worst homicide rates in the world. He has also failed to deliver on promises to achieve a two percent growth rate for 2019, with new data revealing that Mexico’s economy skidded into recession in the first half of the year. Faced with a grim economic outlook, AMLO is now under pressure to kick-start growth. To that end, on November 26, 2019, the Mexican Government unveiled an ambitious $44.3bn infrastructure plan for 2020 to 2024. The 147 projects included in the plan will extend from transport to tourism and telecommunications. Mostly privately funded, these projects will involve the building of new roads, railways, ports and airports. The second phase of infrastructure projects will be announced in January and will focus on the
This year has seen economists and ratings agencies slash their growth expectations MARKET for Mexico. But despite his apparent failings, AMLO remains broadly popular in Mexico, with an approval rating of 68 percent. This popularity can be attributed to his refreshing leftist stance, his disVOICE of the
energy sector. Moody’s analyst Ariane OrtizBollin was relatively positive about the plan. “If the implementation of this is fast and effective and it positively impacts the negative view of investment… it can have a positive multiplying effect on growth,” she told Reuters. However, since coming to power, AMLO has had a number of clashes with the business community. His government has poured almost $10bn into struggling state oil firm Pemex, which is one of the most indebted companies in the world. He also scrapped plans to build a $13bn airport that was already one third complete, to the dismay of investors. Analysts have raised concerns about whether the current infrastructure projects will face similar setbacks. Many of the projects announced are not new but were suspended or only partially completed. One thing is certain: an undertaking of this scale is needed to pull the Mexican economy out of its current slump.
like of the elite and his attention-grabbing, Trump-like outbursts. However, the people of Mexico could begin to lose patience with their president if his “hugs not bullets” stance continues to fall short in preventing crime and his infrastructure projects fail to create the jobs he has promised.
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A sinking feeling Protest group Extinction Rebellion floats a model house in the River Thames. Research published by Nature Communications has found that 300 million people will live in areas that flood at least once a year by 2050 unless carbon emissions are cut. A study by the National Oceanography Centre warns that rising sea levels could cost the global economy $14trn a year by 2100.
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In October 2019, Esther Duflo became the youngest recipient (and second-ever female winner) of the Nobel Prize in Economic Sciences for outlining an “experimental approach to alleviating global poverty”. With just 10 years left to achieve the UN’s first Sustainable Development Goal, we take a closer look at the numbers behind the crisis that Duflo is hoping to solve.
Fig 1. Number of people living in extreme poverty by region
592m $1.90 Number of people living in extreme poverty globally
2.0 ■ Sub-Saharan Africa ■ South Asia ■ East Asia and Pacific
■ Latin America and the Caribbean ■ Middle East and North Africa ■ Europe and Central Asia
Proportion of the global population living in extreme poverty
Number of countries in which half the world’s extremely poor live
The year by which the UN aims to abolish poverty
Current shortfall in the UN’s aim (number of people)
0.4 0.2 0.0
Extreme poverty line (purchasing power parity dollars per day)
Target global escape rate (people per second) 1990
SOURCE: WORLD BANK, PIECING TOGETHER THE POVERTY PUZZLE
Current global escape rate (people per second)
Note: Data for 2016-30 are estimates
SOURCES: WORLD POVERTY CLOCK, UN, WORLD BANK
Fig 2. Extreme poverty rate by age group
Fig 3. Greatest decline in extreme poverty rates, 2000-15
Angola São Tomé and Príncipe India
0-14 15-24 25-34 35-44 45-54 55-64 65+ SOURCE: WORLD BANK, PIECING TOGETHER THE POVERTY PUZZLE
Note: Data based on a 2015 survey of 91 countries
SOURCE: BROOKINGS INSTITUTION
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The Ledger Winter 2020
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Big spenders Nigeria’s high-net-worth population is expected to grow 16.3 percent by 2023, according to a report by Wealth-X. As the wealth of Nigeria’s citizens increases, so too does their need Idowu Thompson for private banking and wealth management services. With 125 years of experience and a large international network, FirstBank of Nigeria is perfectly placed to cater to this growing base of high-net-worth clients. Idowu Thompson, Group Head of Private Banking for FirstBank of Nigeria, spoke with World Finance about how the needs of this client base have changed over the years, and what FirstBank is doing to address them. One trend Thompson has noticed is that FirstBank’s wealthy clients have higher expectations of their private banks than in the past. “Our clients are a lot more demanding these days, in a very good way,” Thompson said. “A lot of the clients want high yield on their portfolios; at the same time, a lot of them also want the safety of their portfolios.” As part of this, clients increasingly expect a strong, long-term relationship with their bank. Thompson points out that this often means a long-term relationship not just with the client themselves, but also with their family. As such, FirstBank works closely with families to help them actualise their financial goals as a unit. Forging this strong relationship while studying the buying habits of the demographic as a whole also hones FirstBank’s understanding of what its clients want. “There’s a need for us to be able to treat them as individuals,” Thompson said. Thompson recognises that the number of financial institutions in Nigeria aimed at high-net-worth clients is growing rapidly. “There’s going to be a lot more competition coming in from the non-traditional institutions,” he said. “We also have competitors coming from offshore banks; even from the developed banks that have representative offices in Nigeria.” But FirstBank is confident it can stay ahead of the curve. To this end, the company is creating innovative products and ensuring that it always complies with the latest regulatory changes. “A journey is not a race that’s won in one day,” Thompson said. “And that’s the way we’ve tried to position ourselves.” TO FIND OUT MORE ABOUT NIGERIA’S HIGH-NET-WORTH CLIENTS, VISIT: www.worldfinance.com/videos
China opens its doors to big pharma Beijing is approving imported drugs at an unprecedented speed. According to Deloitte, 51 drugs made in other countries were approved last year, up from just five in 2016. With the world’s second-largest pharmaceutical market opening up to global companies, western firms are dramatically slashing drug prices in order to win a place at the table. As its population ages, China is seeing a surge in rates of diseases like cancer and diabetes. At the same time, drug costs are high and many patients in the country lack access to the latest treatments. For the last few years, China has been pushing to speed up approval for drugs manufactured in other countries. Its national insurance scheme subsidises a significant portion of the cost of drugs on the list in order to lower patients’ out-of-pocket costs. AstraZeneca, Gilead and Roche are among the companies that have agreed to cut the price of 70 drugs by an average of
The fact that the government is set on slashing prices and reducing health costs for the elderly MARKET will no doubt affect pharmaceutical companies’ bottom lines. Nonetheless, many firms in this space have identified China as an attractive market. Top executives at companies like GlaxoSmithKline and Roche have made VOICE of the
over 60 percent in order to be added to the scheme. As well as meeting the clinical needs of its population, the influx of more innovative drugs should boost the competitiveness of China’s pharmaceutical market. As it increases its healthcare spending and starts fast-tracking drug approval, China is also encouraging global pharmaceutical companies to set up base there. AstraZeneca plans to set up new research and development centres for drugs and artificial intelligence in Shanghai. “China is rapidly emerging as a global scientific powerhouse, which is why we have taken this exciting decision to follow the science,” AstraZeneca CEO Pascal Soriot said in a statement. As well as opening up to global pharmaceutical companies, the country plans to produce more sophisticated drugs domestically. When it comes to drug innovation, China has typically lagged behind the West. Now, it has a chance of finally closing this gap.
China a core part of their business strategies, while industry experts predict the country’s biotech start-ups will grow rapidly. At the same time, healthcare authorities like the World Health Organisation are applauding the progress China has made in overhauling its healthcare system, which has left many struggling to afford life-saving drugs in recent years.
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A picture of health The first of its kind, the 2019 Global Health Security Index assesses 195 countries on their ability to prevent, detect and respond to public health emergencies. Alarmingly, it found that no country is fully prepared to deal with either an epidemic or a pandemic 57 or more 46 – 57 39 – 46 34 – 39
30 – 34 25 – 30 Less than 25 No estimate available
Note: Countries measured in scores out of 100
US (Rank 1)
With an overall score of 83.5, the US is the country best prepared to deal with an epidemic or pandemic. It scored an impressive 98.2 for detection of outbreaks – more than double the global average. This is owed to the US’ high-quality laboratory systems, strong epidemiology workforce and successful data integration throughout its various health sectors. The US also ranked number one in the world for the prevention of epidemics and its compliance with international norms. For healthcare access, however, it was unsurprisingly in the bottom tier, due to the absence of guaranteed access from the government and high levels of spending in the private healthcare sector. 30
Thailand (Rank 6)
Impressively, Thailand is the only middle-income country in the top tier for its overall score. Although it is placed sixth in the index, Thailand was ranked third in the world for the prevention of outbreaks. To demonstrate why, the Global Health Security Index cited a case in 2015 when Thailand successfully stopped an outbreak of Middle East respiratory syndrome (MERS) from spreading. It also has a robust healthcare system and monitors public health concerns effectively. In addition, Thailand is one of only five countries that has demonstrated a public priority for treating healthcare workers who become sick while responding to epidemics.
Norway (Rank 16)
Norway is a leading nation in terms of global efforts to combat public health emergencies, with the development of global health being a key priority. It should, therefore, come as no surprise that the Global Health Security Index ranks it at number 16 in terms of health security. With the highest per-capita health expenditure of the Nordic countries, Norway has a strong healthcare system, but in other areas, it hasn’t performed quite as well as one might expect. For example, it came in at number 49 in terms of the early detection and reporting of health concerns. Here, it was let down by the lack of data integration across its various health sectors.
Argentina (Rank 25)
In the early 2000s, health systems in Argentina lagged behind those of its neighbouring countries. A surge in diseases like HIV and tuberculosis prevented the country from developing its health infrastructure to better combat outbreaks. Today, however, Argentina is the highestranked country for health security in South America. This is thanks to a number of initiatives the country pushed through between 2006 and 2012, which helped to bring its disease-monitoring systems and health infrastructure up to speed with international norms. Argentina demonstrated this by effectively containing an outbreak of dengue fever in 2009.
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SOURCE: NTI AND JOHNS HOPKINS CENTRE FOR HEALTH SECURITY, GLOBAL HEALTH SECURITY INDEX 2019
UAE (Rank 56)
Thanks to its compliance with international health standards and high levels of food safety, the UAE is relatively well placed to prevent and respond to public health emergencies. During a MERS outbreak in 2014, the World Health Organisation (WHO) praised the UAE’s authorities for “following up diligently” on cases. It noted how effective the country was at gathering data and information to help it better understand the virus. However, the WHO also found that lapses in hospital infection control measures may have contributed to the spread of the disease. Overall, the Global Health Security Index deems the quality of the UAE’s health system to be below average.
Ukraine (Rank 94)
Ukraine is faced with a number of major health threats: it’s home to the second-largest HIV epidemic in Eastern Europe, and also faces a serious measles epidemic that infected more than 58,000 people in 2019. These outbreaks are testament to the country’s poor healthcare system, which suffers from a shortage of medicine and healthcare workers. Meanwhile, for political and security risks, the Global Health Security Index gave Ukraine a score of just 14.3, compared with the global average of 60.4, due to the ongoing conflict between armed groups and government forces in Eastern Ukraine. This only makes the country more vulnerable to outbreaks.
Liberia (Rank 111)
In 2013, a deadly Ebola outbreak revealed just how vulnerable Liberia’s healthcare system was. Like Guinea and Sierra Leone, which were also affected, Liberia had to rely heavily on global assistance to stop the epidemic. As a result of this international assistance, Liberia’s healthcare systems are now improving: with the help of donors like the World Bank, Liberia is preparing itself to adjust how it combats disease outbreaks. As a consequence, Liberia now ranks in an impressive 10th place for its adherence to international norms, despite its low overall score. The country has also received more than 520 pieces of medical equipment from the WHO and the UN.
Equatorial Guinea (Rank 195)
With a population of just 1.2 million people, Equatorial Guinea – a small country on the west coast of Africa – is the least-prepared nation in the world in terms of managing a public health emergency, according to the index. In the prevention category, Equatorial Guinea has a score of just 1.9, compared with the global average of 34.8. It also has no capacity to monitor and report on outbreaks, and no planned emergency response should one occur. The fact that its economy is so reliant on oil – accounting for 90 percent of export earnings – also leaves it prone to recession, making its healthcare systems even more vulnerable.
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Making the world go round Over its 75-year history, the World Bank has supported more than 12,000 development projects around the globe. Since the 1940s, the bank’s original role has gradually transformed, going from foreign diplomat and mediator to investor in the developing world
The 1944 Bretton Woods Conference represented a sea change in the global financial order. In addition to the formation of the IMF, the conference also saw the creation of the International Bank for Reconstruction and Development, which today constitutes one of the five organisations that make up the World Bank Group. During these early years, the World Bank was primarily focused on delivering post-war reconstruction loans to help rebuild shattered European economies.
In December 1946, the World Bank Group formally came into existence following the Bretton Woods agreements made two years previously. Less than six months later, on May 9, 1947, the bank approved its first loan, worth $250m, to support France in its recovery from the devastation of the Second World War. To this day, it is still the largest loan issued by the bank in real terms. Later that year, Eugene Meyer, an American financier, was appointed the World Bank’s first president.
In the 1950s, the World Bank shifted its remit to become an international mediator as well as a lender. In 1951, the bank was asked to intervene during a dispute between the UK and Iran over the proposed nationalisation of the Iranian oil industry. Ultimately, the World Bank was unable to find a satisfactory compromise to placate both parties, but some of the proposals that were formulated during the negotiations were used in the final settlement of 1954.
After post-war reconstruction in Europe, the World Bank turned its attention to the world’s developing nations. In January 1960, the International Development Association (IDA) was formed to support countries that suffered from low-level per capita income or poor creditworthiness. Honduras received the first IDA loan when the Central American country agreed to $9m in credit for highway maintenance, to be paid back, interest-free, over a term of 50 years.
The World Bank realised its resources would need to be supplemented by investments from the private sector to support its efforts in the developing world. However, encouraging investment in these markets was not easy. To reassure potential funders, the bank established the International Centre for Settlement of Investment Disputes (ICSID) to arbitrate in dispute cases. Thus far, 162 UN member states, plus Kosovo, have signed the ICSID’s convention.
The bank issued its first loan for pollution control in the 1970s, granting $15m to help improve water supplies and sewerage services in and around the city of São Paulo in Brazil. Ironically, this came shortly before the bank began being criticised for funding environmentally damaging projects. A 1972 report, The Limits to Growth, influenced World Bank President Robert McNamara to reassess the merits of his organisation’s growth-centric approach.
In 2013, the World Bank Group repositioned itself by adopting a strategy to eradicate extreme poverty by 2030 and sustainably promote shared prosperity. Much had changed since the 1940s: strong performances from many developing economies were shifting the planet’s economic centre, and digital technologies were driving globalisation forward at a rapid pace. As a result, the World Bank began working more closely with its international partners.
Appointed to the World Bank by the Trump administration in 2019, President David Malpass has criticised the bank in the past for its bureaucracy and lack of accountability. Under his leadership, the bank will likely adopt a smaller, more targeted approach that focuses on the developing countries most in need of support. The fact that China is the World Bank’s biggest borrower, for example, is unlikely to go down well with the new president.
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Sri Mulyani Indrawati INDONESIAN FINANCE MINISTER
Indonesia’s Iron Lady
Few people have played a greater role in building modern Indonesia than Sri Mulyani Indrawati, one of its longest-serving finance ministers. Now reappointed for her second term, the world is waiting to see if she will maintain her reputation as a tough reformist
Despite being the fourth-most populous country in the world, Indonesia plays a relatively small role on the geopolitical stage. Rarely do its cabinet ministers garner any form of international recognition. However, there is one minister whose reputation precedes her. Sri Mulyani Indrawati, Finance Minister of Indonesia, is highly respected at home and abroad. As well as being named the world’s best finance minister in 2006 by Euromoney, she regularly features on Forbes’ annual rankings of the world’s most powerful women. And her popularity shows no signs of waning: when she was reappointed for President Joko ‘Jokowi’ Widodo’s second term in 2019, the Indonesian rupiah strengthened by 0.6 percent. “Investors appear to trust that she can run a tight ship,” Nicholas Antonio Mapa, Senior Economist at ING, told World Finance. After all, it takes nerves of steel to champion economic reform with as much commitment as Sri Mulyani – particularly when reform means undoing decades of corruption.
Honest achievements Sri Mulyani is known for her no-nonsense approach. When she first became finance minister under President Susilo Bambang Yudhoyono in 2005, she sacked 150 of her 34
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departmental staff for corruption and penalised another 2,000. “If you are corrupt, you are going to have to deal with me,” she said in an interview in 2009. “I am not going to let you work here and I will put you in prison; that’s going to be my policy.” This hostility towards those who cheat the system was instilled in Sri Mulyani from an early age. For most of her young life, Indonesia was ruled by one of the most dishonest autocrats of all time, President Suharto. Through his system of patronage, the dictator’s family members and close associates dominated the economy. Sri Mulyani’s first experience of this cronyism came while she was studying at the University of Indonesia, where the president’s daughter, Siti Hediati Hariyadi, was also enrolled. Already, Sri Mulyani could see that the entourage of the president’s daughter would be fast-tracked into high-flying business roles and cabinet positions that were out of reach for her fellow students. “That feeling of exclusion was very strong,” she told Bloomberg in 2017. “If you’re not a friend of those people, then your career path is going to be very different, and that is exactly what influences very strongly the way I think about economics and the economy in Indonesia.”
SRI MULYANI IN NUMBERS
First appointed as Indonesian finance minister
Returned to finance minister role
$700m 90% Cost to bail out Century Bank
Salary cut to leave the World Bank
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If you are corrupt, you are going to have to deal with me. I am not going to let you work here and I will put you in prison
Sri Mulyani Indrawati
CURRICULUM VITAE BORN: 1962 | EDUCATION: UNIVERSITY OF INDONESIA
Sri Mulyani Indrawati became a lecturer in economics at the University of Indonesia, her alma mater, and was later appointed as visiting professor at the Andrew Young School of Policy Studies at Georgia State University.
Inspired to take a more active role in economic development, Sri Mulyani joined the board of the International Monetary Fund as executive director, representing 12 countries in South-East Asia.
President Susilo Bambang Yudhoyono selected Sri Mulyani as Indonesia’s finance minister. She was credited with strengthening Indonesia’s economy and safeguarding it against the 2008 financial crisis.
After making the controversial decision to bail out Century Bank, a failing financial institution, Sri Mulyani resigned as finance minister and became a managing director at the World Bank.
Sri Mulyani made her return to Indonesia’s cabinet as finance minister under President Joko ‘Jokowi’ Widodo, who tasked her with securing financing for his ambitious infrastructure plans and attracting foreign investment.
When news came that Sri Mulyani had been reappointed as finance minister for Jokowi’s second term in office, it caused the rupiah to strengthen by 0.6 percent, its highest value in more than a month.
Born to academics, Sri Mulyani’s upbringing was modest. She had nine siblings, and her mother worked a second job to make ends meet. Her parents impressed upon her the value of education, and at university she excelled, earning a scholarship that allowed her to go on to pursue a doctorate in economics at the University of Illinois. After graduating, she returned to her alma mater. It was then, while Sri Mulyani was working as a lecturer, that the country underwent radical change. The 1997 Asian financial crisis saw the devaluations of many East Asian currencies, including Indonesia’s rupiah. Across the country, there were widespread layoffs and
bankruptcies. As anger towards the ruling class mounted, President Suharto – who had ruled for more than 30 years – was deposed. During this tumultuous period, and in the years of uncertainty that followed, Sri Mulyani became more incensed by what she saw as “the wrong policy, the wrong approach” being executed by Indonesia’s politicians. Compelled to make a difference, she began looking for career opportunities beyond academia. She worked on strengthening local government institutions through the US Agency for International Development, and then became an executive director at the International Monetary Fund, where she
represented 12 countries in South-East Asia before being appointed head of the Indonesian National Development Planning Agency. These positions focused mainly on development, preparing her for her most challenging role yet: managing South-East Asia’s largest economy as it recovered from crisis.
Enemies in high places Analysts estimate that President Suharto stole as much as $35bn from Indonesia before he was deposed. Since his resignation, the country has changed dramatically. “The Indonesia of 2019 is almost unrecognisable from [that of] 1999,” said Tom Pepinsky, »
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Non-Resident Senior Fellow at the Brookings Institution. “Not only has the country overseen a successful democratic transition, but it has also recovered from a massive economic crisis. The country has enjoyed two decades now of consistent economic growth, and politics has become far more open and plural than it was under Suharto’s authoritarian New Order regime.” Sri Mulyani’s economic reforms were key in shaping Indonesia during this period. After becoming finance minister in 2005, she tackled corruption head-on and pushed hard to raise tax revenue and slash private and public debt. By 2009, the nation’s debts had been reduced to 30 percent of overall GDP, down from over 100 percent a decade prior. Suharto’s legacy of patronage and bribery was so entrenched within the system that Sri Mulyani had to fight hard to keep it out of her ranks. In this respect, she was ruthless. When the government’s human resources department was accused of manipulating the rotation for promotions, Sri Mulyani sought to fire 36
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the person responsible. But there was no way to work out exactly who it was, so Sri Mulyani told the director general to replace all 60 employees in that cohort. “Overkill is necessary and important to get the message across,” she said about the decision. Not everyone took kindly to her tough reforms. One of many powerful enemies she made was Aburizal Bakrie, a member of Indonesia’s elite and chair of the Suharto-era Golkar Party. One of his family’s companies – Bumi Resources – was hit hard by Sri Mulyani’s tax crackdown. She also resisted pressure from Bakrie to prop up his coal interests with government funds. Like others in Indonesia’s old guard, Bakrie became determined to undermine her reform agenda. The wheels were set in motion for Sri Mulyani’s resignation when she made the controversial decision to bail out Century Bank for $700m. It was not long after the 2008 financial crisis, and Sri Mulyani feared that the failing institution could be a contagion for the rest of the financial sector. But critics accused her of
acting without legal authority. Bakrie’s Golkar Party seized the opportunity and backed a parliamentary inquiry into the bailout. Although Sri Mulyani denied any criminal wrongdoing, her reputation in Indonesia suffered a significant blow as a result of the investigation. It didn’t help that President Yudhoyono was quiet on the subject for months. Eventually, he came to her aid, commending her “credibility and personal integrity”, but it was too little too late: the investigation was enough to convince Sri Mulyani that her battle against corruption had come to an end. A day after testifying, she announced her resignation.
Return to the charge Around the world, many saw Sri Mulyani’s resignation as an indication that Indonesia was turning back the clock on much-needed economic and political reform. The Indonesia Stock Exchange tumbled 3.8 percent after her departure was announced. But Sri Mulyani was not on the back foot for long. In June 2010, she became one of the three
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Indonesian President Joko Widodo
managing directors at the World Bank, with her experience as a reformist proving highly valuable for this career-defining role. The regions she was responsible for – the Middle East and North Africa – had endured the same corruption that Sri Mulyani tried to stamp out in Indonesia, and she championed reform in energy, health and education. During her tenure, she helped pull in significant donations for some of the world’s poorest regions and rose to second-in-command within the organisation, earning respect from peers around the globe. It came as a huge shock when, six years later, Jokowi asked her to join his cabinet. She was on a three-day visit to the University of
MANY SAW SRI MULYANI’S RESIGNATION AS AN INDICATION THAT INDONESIA WAS TURNING BACK THE CLOCK ON MUCH-NEEDED ECONOMIC AND POLITICAL REFORM
Indonesia when the president offered her the finance minister position. It was no easy decision: for one thing, it meant taking a bruising 90 percent salary cut. Ultimately, Sri Mulyani’s sense of duty got the better of her. “If a president, who was elected by the people, asked you to join him to realise Indonesia’s ambition, I don’t think anyone can say no to that,” she told the South China Morning Post. Sri Mulyani was tasked with helping Jokowi find funds for his major road, rail and port infrastructure projects. She immediately put raising tax revenues at the top of the agenda. With this tax amnesty programme, Sri Mulyani hoped to boost tax revenues by as much as IDR 165trn ($11.7bn) in the first year. At the time, Indonesia had one of the lowest tax-collection rates in South-East Asia, with just 900,000 Indonesians submitting returns in 2014. Sri Mulyani was keen to show that she’d lost none of her fire for economic reform. In her first interview as finance minister under Jokowi, she warned tax evaders that they had to choose between “heaven and hell”, and either accept a two percent tax penalty and have their “sins deleted”, or suffer the consequences. “I’m not going to play around,” she added. Indonesia’s tough reformist was back in town.
Room for improvement Now that she’s been reappointed for Jokowi’s second term, the world is waiting to see whether Sri Mulyani can lift the economy out of stagnation. Jokowi sailed to victory on promises that he would transform the economy and achieve seven percent annual growth, but since coming
to power in 2014, growth has remained sluggish at five percent. “Indonesia has churned out robust growth figures over the past few quarters, even in the face of several Fed rate hikes as well as concerns about the global economy,” Mapa told World Finance. “But five percent for the region’s largest economy doesn’t point to the economy hitting its potential.” So far, the administration has struggled to attract the foreign investment it hoped for. The US-China trade war should have been a great opportunity for Indonesia as companies looked to relocate their manufacturing bases to avoid being hit by US tariffs. But of the 33 companies that announced plans to move operations out of China between June 2018 and August 2019, 23 chose Vietnam as their new base. None chose Indonesia. One of the main reasons investors have cold feet is the vast amount of red tape that surrounds Indonesian business, causing significant delays. At the same time, poor road and rail connections can be a major deterrent for foreign companies. “Jokowi [is considering] further development of the country’s infrastructure, and as the country starts to lay out the details of the plan to move the capital from Jakarta to the eastern part of Indonesian Borneo, development financing will be a major priority,” Pepinsky told World Finance. Sri Mulyani must now try to boost growth within a very tight budget. Despite her impressive credentials, executing the president’s ambitious vision for the economy will be a gruelling task. But no one is better suited for the job than Indonesia’s Iron Lady. n
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Joseph Stiglitz CHIEF ECONOMIST, ROOSEVELT INSTITUTE
No more half measures on corporate taxes Multinational firms continue to profit from disparate tax regulations at the expense of governments and citizens. A global minimum tax is the only way to effectively tackle corporate tax avoidance Globalisation has gotten a bad rap in recent years, and often for good reason. But some critics – not least US President Donald Trump – place the blame in the wrong place, conjuring up a false image in which Europe, China and developing countries have snookered the US’ trade negotiators into bad deals, leading to Americans’ current woes. It’s an absurd claim. After all, it was America – or, rather, corporate America – that wrote the rules of globalisation in the first place. That said, one particularly toxic aspect of globalisation has not received the attention it deserves: corporate tax avoidance. Multinationals can all too easily relocate their headquarters and production to whatever jurisdiction levies the lowest taxes. And in some cases, they need not even move their business activities, as they can merely alter how they ‘book’ their income on paper.
Dark arts Starbucks, for example, can continue to expand in the UK while paying hardly any UK taxes because it claims there are minimal profits there. But if that were true, its ongoing expansion would make no sense. 38
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Why increase your presence when there are no profits to be had? Obviously, there are profits, but they are being funnelled from the UK to lower-tax jurisdictions in the form of royalties, franchise fees and other charges. This kind of tax avoidance has become an art form at which the cleverest firms (like Apple) excel. The aggregate costs of such practices are enormous: according to the IMF, governments lose at least $500bn per year as a result of corporate tax shifting. Gabriel Zucman of the University of California, Berkeley, and his colleagues, meanwhile, estimate that some 40 percent of overseas profits made by US multinationals are transferred to tax havens. In 2018, 60 of the 500 largest companies – including Amazon, Netflix and General Motors – paid no US tax, despite reporting joint profits (on a global basis) of some $80bn. These trends are having a devastating impact on national tax revenues and undermining the public’s sense of fairness.
One rule for US Since the aftermath of the 2008 financial crisis, when many countries found themselves in dire financial straits, there has
been growing demand to rethink the global regime for taxing multinationals. One major effort is the OECD’s base erosion and profit shifting (BEPS) initiative, which has already yielded significant benefits, curbing some of the worst practices, such as those associated with one subsidiary lending money to another. But as the data shows, current efforts are far from adequate. The fundamental problem is that BEPS offers only patchwork fixes to a fundamentally flawed and incorrigible status quo. Under the prevailing ‘transfer price’ system, two subsidiaries of the same multinational can exchange goods and services across borders, and then value that trade ‘at arm’s length’ when reporting income and profits for tax purposes. The price they come up with is what they claim it would be if the goods and services were being exchanged in a competitive market. For obvious reasons, this system has never worked well. How does one value a car without an engine or a dress shirt without buttons? There are no arm’s-length prices, no competitive markets, to which a firm can refer. And matters are even more problematic in the expanding services sector: how does one value
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MULTINATIONALS CAN ALL TOO EASILY RELOCATE THEIR HEADQUARTERS AND PRODUCTION TO WHATEVER JURISDICTION LEVIES THE LOWEST TAXES
Instead, US corporate profits are allocated to different states on a formulaic basis, according to factors such as employment, sales and assets within each state. And as the Independent Commission for the Reform of International Corporate Taxation (of which I am a member) shows in its latest declaration, this approach is the only one that will work at a global level.
Second bite at the apple a production process without the managerial services provided by headquarters? The ability of multinationals to benefit from the transfer price system has grown as trade within companies has increased, trade in services (rather than goods) has expanded, intellectual property has grown in importance, and firms have gotten better at exploiting the system. The result: the large-scale shifting of profits across borders, leading to lower tax revenues. It is telling that US firms are not allowed to use transfer pricing to allocate profits within the US. That would entail pricing goods repeatedly as they cross and recross state borders.
For its part, the OECD will soon issue a major proposal that could move the current framework a little in this direction. But if reports of what it will look like are correct, it still would not go far enough. If adopted, most of a corporation’s income would still be treated using the transfer price system, with only a ‘residual’ allocated on a formulaic basis. The rationale for this division is unclear; the best that can be said is that the OECD is canonising gradualism. After all, the corporate profits reported in almost all jurisdictions already include deductions for the cost of capital and interest. These are residuals – pure profits – that arise from the joint operations of a multinational’s global activities. Under the 2017 US Tax Cuts and Jobs Act, for example, the total cost of capital goods
is deductible in addition to some of the interest, which allows for total reported profits to be substantially less than true economic profits. Given the scale of the problem, it is clear that we need a global minimum tax to end the current race to the bottom, which benefits no one other than corporations. There is no evidence that lower taxation globally leads to more investment – of course, if a country lowers its tax relative to others, it might steal some investment, but this beggar-thy-neighbour approach doesn’t work globally. A global minimum tax rate should be set at a rate comparable to the current average effective corporate tax, which is around 25 percent. Otherwise, global corporate tax rates will converge on the minimum, and what was intended to be a reform to increase taxation on multinationals will turn out to have just the opposite effect. The world is facing multiple crises – including climate change, inequality, slowing growth, and decaying infrastructure – none of which can be addressed without well-resourced governments. Unfortunately, the current proposals for reforming global taxation simply don’t go far enough. Multinationals must be compelled to do their part. n
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Zhang Jun DIRECTOR, CHINA CENTRE FOR ECONOMIC STUDIES
How China can reach its centennial goal China has profited greatly from international trade over the past 70 years. If the country is to maintain its impressive growth trajectory, though, it will need to adopt a new approach to development In October 2017, Chinese President Xi Jinping declared that by the time the People’s Republic celebrates its centenary in 2049, it should be a “great modern socialist country” with an advanced economy. To achieve this ambitious goal, China will need to secure another three decades of strong economic performance and inclusive development. The question is how. The first step towards answering this question is to understand what has driven China’s past successes. The list is impressive: three decades of double-digit GDP growth; a sharp increase in the urbanisation rate (up from 18 percent in 1978 to 57 percent in 2016); and plummeting poverty, according to China’s own standard, from 250 million people in 1978 to 50 million in 2016. At this rate, China will have completely eliminated poverty sometime in 2020.
A slow start But the People’s Republic of China did not thrive from the very start. On the contrary, Mao’s highly dogmatic and centralised approach, embodied in the disastrous Great Leap Forward and fanatical Cultural Revolution, not only prevented the country from 40
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advancing technologically, it also pushed the economy to the brink of collapse. According to China’s state planning commission, the decade-long Cultural Revolution alone had cost China a sum of CNY 500bn ($70.7bn) in national income by the end of 1977. That is equivalent to 80 percent of all capital investments during the first 30 years of the People’s Republic and exceeds the total value of China’s fixed assets during that period. Moreover, the fi rst 30 years of the People’s Republic brought very little in the way of poverty reduction: in 1978, nearly 84 percent of China’s population lived below the international poverty line of $1.25 per day; per capita income amounted to less than one third of the average in sub-Saharan Africa; and 85 percent of Chinese lived in rural villages, isolated and lacking basic necessities like food and clothing. Everything changed in 1978, when Mao’s successor, Deng Xiaoping, launched his strategy of ‘reform and opening up’. Thanks to that change of course – which emphasised constant experimentation, monitoring and adaptation – China shifted onto the fast track towards industrialisation, fuelled by strong export growth and guided by lessons
from countries that had recently become high-performing economies. During this process, China’s government encouraged inflows of foreign capital to spur growth in sectors with potential comparative advantages. As those sectors became globally competitive, they helped to drive gradual structural change, capital accumulation, and productivity and employment growth.
Getting up to speed This approach meant that China’s economy, despite its sizeable domestic market, became hugely dependent on external trade. According to the World Bank, trade amounted to nearly 38 percent of GDP in 2017 – still a remarkably high rate, especially for such a large country. In reality, the processing trade accounts for a large share of this total – more than half for most of the past 40 years – and has relied largely on foreign direct investment (FDI). At first, China did not even import materials for processing, owing to a lack of equipment and know-how; instead, it largely processed and assembled customer-provided materials. And when China began to acquire the needed equipment, it came largely from foreign investors, leaving local companies
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with only meagre proceeds. It was only in the 1990s that China began to process a larger share of imported materials. This slow start underscores China’s strategy of leveraging advanced economies’ strengths to help it overcome its own weaknesses. But given institutional distortions, including financial-sector discrimination against private enterprises, perhaps a better way for Chinese companies to join global value chains was through ‘excessive’ use of foreign capital. As China accumulated experience and capital – a process that accelerated in the 1990s – it doubled down on this approach, opening up frontier cities (such as Shanghai) and regions (like the Yangtze River Delta) to attract more FDI. China’s government also encouraged local enterprises to form joint ventures with their foreign counterparts. As a result, China became a global manufacturing centre. But far from settling into its position near the bottom of global value chains, China continued its upward climb, pursuing rapid technological progress and constant industrial upgrading. Consequently, China has been able to reduce its dependence on foreign capital dramatically over the past 15 years.
The final hurdle Within the past decade, though, China’s growth has slowed significantly. Given the long-term nature of the factors underlying this downturn – including weaker global demand for Chinese exports, an extremely high ratio of manufacturing value added to GDP and a declining working-age population – this trend is likely to continue. If China is to achieve advanced economy status by 2049, it will need to make significant changes to its growth model. China’s leadership recognises this. Having acknowledged that the country’s days of double-digit GDP growth are probably over, the authorities are working to contain credit growth and, more broadly, to curb debt and financial risk to manage the trend of slowing growth. Moreover, it has been trying to foster new growth in hi-tech sectors. To that end, it has accelerated the opening up of capital and financial markets. But to realise Xi’s vision, China must go further, fundamentally transforming its growth model to ensure the generation of greater income growth within its domestic market. Thus, a sharp and sustainable increase in domestic demand is key. This will require, for starters, continued rapid urbanisation, with the popu-
lation of more developed cities increasing by 200-250 million over the next 30 years. Furthermore, achieving Xi’s goal will depend on continued growth in demand for physical infrastructure and massive corporate investment in machinery and equipment. This would require faster progress on opening up access to depressed and protected market sectors, especially the services industry – not only to foreign enterprises, but also (and more importantly) to private Chinese firms. In short, China must make its considerable size a source of growth. Having said that, it also needs to ensure fair domestic competition, thereby reversing the decline of private confidence in investment over the last decade and improving the economy’s overall productivity growth. The focus on exports has undoubtedly served China well during the past four decades. But over the next 30 years, the key to success will be to release the massive potential of China’s domestic market, especially by clearing institutional barriers that impede the expansion of private enterprises’ creativity. Only then can China move beyond imitating its more developed counterparts to leading the world in innovation. n
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Shashi Tharoor MEMBER OF PARLIAMENT, INDIAN NATIONAL CONGRESS
Saving a derailing India After two decades of strong growth, the Indian economy has started to falter. A bold shift in government policy is key to getting the country back on track Until recently, Indians had become used to taking economic growth for granted. After a decade of annual growth averaging over nine percent, India’s economy weathered the post-2008 worldwide recession and grew at a still-impressive rate of seven percent until 2014-15. Nothing, it seemed, could stop the gravy train from rolling on. And then came Prime Minister Narendra Modi’s government and his biggest economic blunder – demonetisation – which took 86 percent of India’s currency abruptly out of circulation (in an effort, Modi claimed, to flush out undeclared wealth). The economy is yet to recover. Millions of jobs were lost and hundreds of thousands of small and micro enterprises – employing between two and seven workers, and dependent on daily cash flow to sustain themselves – went under. All that was achieved was that Modi, who prizes appearances above actual results, managed to look bold and decisive. If demonetisation was a bad idea badly implemented, then next came a good idea badly implemented: a nationwide goods and services tax (GST). Instead of a simple, flat and all-inclusive GST – as applied in every country where the concept has worked well – the government unveiled a 42
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multi-tier GST. Despite having five different rates and a luxury tax on top, the government’s hasty and botched rollout retained a number of key exclusions (including alcohol and petrol) and continues to confuse all who are subject to it. These two initiatives derailed economic growth, which is now expected to slow to five percent this fiscal year.
Running out of steam Bad news is everywhere: unemployment is at a 45-year high of 8.4 percent and rising; the distressed agriculture sector was driving record numbers of farmers to suicide, which is why the government now suppresses the figures; and manufacturing, exports and the index of industrial production are all down. Output in India’s eight core industrial sectors – coal, crude oil, natural gas, refined petroleum products, fertiliser, steel, cement and electricity – declined 0.5 percent in August. India’s banks, meanwhile, are reeling under a huge burden of non-performing assets (NPAs), with debts exceeding $150bn and one financial institution after another coming under the scrutiny of regulators and law enforcement authorities. Loans have dried up, owing to banks’ leeriness of piling up more NPAs; investment
has slowed to a trickle as a result. With sinking demand for new housing causing a slump in the residential property market, many builders are struggling to repay their loans to banks, worsening the crisis. With consumers lacking resources, banks unwilling to lend and investors afraid to borrow, it is unclear where the much-needed fillip to economic growth will come from. Car sales have collapsed, plummeting 32 percent in August – the largest annual drop in two decades. The decline continued for an 11th straight month in September, when sales fell 23.7 percent, and persisted in October, when three back-to-back Hindu festivals normally loosen consumers’ purse strings. A major wave of layoffs by carmakers has followed, with Ford announcing factory closures and an estimated one million jobs in jeopardy.
Wrong side of the tracks As with other economic setbacks, policy decisions made by India’s central and state governments are principally responsible for this outcome. Higher car prices reflect not only luxury taxes on higherend models and the effects of higher safety and emissions standards, but also hikes in sales taxes on cars in nine states. And the large volume of
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NPAs means the banks and finance companies that dealers rely on to provide car loans to many purchasers are pulling back. The automobile sector is proof of the extent to which India’s economic downturn is the result of policy ineptitude. The signs of the downturn are everywhere, affecting ordinary Indians’ daily lives. Indians are fond of cookies (which we call ‘biscuits’) with our omnipresent cups of tea, but even biscuit sales are down eight percent, prompting the popular biscuit manufacturer Parle Products to announce thousands of layoffs. And the famous ‘underwear index’ proposed by Alan Greenspan, the former US Federal Reserve Chairman, confirms the extent of India’s slump. Greenspan posited that declining sales of men’s underwear was an accurate indication of consumer distress. According to some reports, men’s underwear sales are down 50 percent in Tiruppur, the capital of the garment industry in the southern state of Tamil Nadu. The recent increase in oil prices has compounded India’s problems in the short term. Advances in robotisation and artificial intelligence represent a longer-term drag on growth, because they have reduced many western countries’ dependence on outsourced Indian skills in areas such as code-writing, medical
WITH CONSUMERS LACKING RESOURCES AND INVESTORS AFRAID TO BORROW, IT IS UNCLEAR WHERE THE MUCHNEEDED FILLIP TO INDIAN GROWTH WILL COME FROM
transcription and offshore business process call centres. And with the Indian rupee plumbing record lows against the US dollar, essential imports have become more expensive. It hasn’t helped that in the midst of all of this, US President Donald Trump has made India a target of his increasingly acrimonious approach to trading partners. The bonhomie Trump and Modi recently displayed in Houston did not translate into a resolution of the issues the US has been griping about.
Railroad to ruin Through it all, the government has appeared clueless. Its proposed budget has prompted despair
in the business community, with an unexpected tax increase on foreign investors leading many of them to sell their Indian holdings and leave. Then, as its negative impact became increasingly evident, the government announced a series of U-turns on tax increases and business incentives. After Modi was overwhelmingly re-elected in May with an even larger majority for his party, many economists expected him to take bold steps to remove the many bottlenecks that have discouraged investors – both Indian and foreign. There have been none, and no short-term stimulus either. Long-standing issues, such as agricultural stagnation, rigid labour laws and prohibitive land costs, are simply absent from the government’s agenda. With the economic downturn leaving revenues well short of projections, the pressure on India’s tax officials to catch evaders has mounted, prompting intrusive investigations that have been decried as ‘tax terrorism’. Many Indian millionaires are voting with their feet: 5,000 migrated in 2018, and the number for 2019 is likely to be much higher. The conclusion is inescapable: the great Indian growth story is on hold, and no one should expect the Modi government to get the gravy train back on track. n
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Hans-Helmut Kotz PROGRAMME DIRECTOR, SAFE POLICY CENTRE, GOETHE UNIVERSITY
Germany versus the ECB Having driven European growth for decades, Germany is now on the brink of recession, prompting fears of an economic retreat. Consequently, the European Central Bank is being forced to exhaust the tools at its disposal to keep the bloc running smoothly Over the past couple of months, the German debate over fiscal and monetary policy has taken an interesting turn. Old, deeply ingrained economic dogmas – including that the public sector must strive to generate a fiscal surplus regardless of macroeconomic conditions – are being reappraised. At least, by some. The economic situation is changing rapidly for the worse. The German economy – long the engine of eurozone growth – is undeniably sputtering. Powerful underlying currents are contributing to the slowdown; as a result, there is a high probability of a typical German recession (in terms of depth and duration), if not worse.
Bloc in the road The main headwind, of course, is the uncertainty emanating from the highly contentious global trade environment. This is particularly threatening for open economies like Germany and its neighbours, which are deeply integrated into its manufacturers’ value chains. Rising global trade tensions will hit Europe both ways: indirectly, through the China channel; and directly, for example through the US tariffs announced following the recent World Trade Organisation (WTO) ruling regarding state aid to European aerospace group 44
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Airbus. Tit-for-tat retaliation by the EU against US subsidies for Boeing, probably endorsed by the WTO, will be the logical response. Gone are the good – or, for some, bad – old days of multilateral trade agreements. Today, tariff and non-tariff barriers are in vogue again, partly because large bilateral trade imbalances, beyond a certain level, inevitably seem to trigger a reflex among some policymakers to shield domestic markets for the benefit of home producers and their employees (often regionally concentrated). Trade, not unlike technological disruption, has redistributive consequences that policymakers ignore at their own peril, and therefore implies a need for adjustment and structural change. Hence, Germany’s persistently large current account surpluses – long more than six percent of GDP – are causing increasing tensions with other ‘over-importing’ countries – notably the US, which must run commensurately large, offsetting current account deficits. Given the high risk of recession in Germany, the seemingly obvious response would be to use both fiscal and monetary policy – the two macroeconomic “handmaidens”, as the US economist Arthur Okun described them – and account for the impact of both.
Fiscal and monetary policy inevitably interact with one another to influence economic activity in what the economist James Tobin called the “common funnel”. The economic policy debate in the eurozone often ignores this interaction. Acknowledging it, however, would leave critics much less room to bash the European Central Bank (ECB).
Backseat driver In a federal state, the uppermost level of government – often responsible for the bulk of public expenditures – is typically charged with implementing fiscal policies to counteract a slowdown. These stabilising measures can be automatic, as budget revenues and expenditures fluctuate with the economic cycle, or they can be active, intentionally boosting domestic demand with the aim of getting the economy back on track. Meanwhile, the second handmaiden adjusts policy rates and/or access to funds in pursuit of the same stabilisation objective. This is where eurozone-specific factors complicate things. The EU (and, even more so, the eurozone) is more than a confederation, but much less than a federation. Thus, the mechanics of the common funnel are different. In theory, eurozone member states, being mon-
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etary sub-sovereigns, should perform the fiscal stabilisation function. But in practice, they do not, either because they are restricted by the quasi-constitutional rules of the EU’s ‘fiscal compact’ or because their vulnerable publicsector finances leave them constrained by debt markets. Other eurozone governments, meanwhile, may see no need for counter-cyclical fiscal measures, even though they have the fiscal space to introduce them. This puts most of the stabilisation burden on the ECB, which does not have a mandate to smooth output. The business cycle influences the central bank’s policy only indirectly, via its effects on consumer prices. But the ECB has almost exhausted its unconventional monetary policy tools, such as large-scale securities purchases and negative interest rates. While bringing evidence to bear on these tools’ net benefits, the ECB has acknowledged their potential negative side effects, such as their potentially adverse impact on the resilience of the eurozone’s banking and insurance sectors. Former ECB President Mario Draghi, therefore, rightly called on national governments that have room for manoeuvre to shoulder some of the stabilisation burden by providing fiscal stimulus.
Not doing so paints the ECB into a corner and erodes its independence, as does not addressing the overcapacity in Europe’s banking industry. This is the remit of fiscal policy and would come with budgetary consequences. Sadly, essentially forcing the ECB to use its balance sheet (providing liquidity for everlonger periods to deal with solvency issues) is incomparably more attractive for many national politicians. It also makes bashing the central bank much easier.
Recalibrating Europe’s engine The good news for the ECB is that policymakers, including those in the frugal Netherlands, are at least discussing counter-cyclical fiscal policies again. Obviously, reasonable people can have different views – indeed, most of the proposals to handle downturns have always been two-handed, and now the balance finally seems to be shifting in the eurozone. But the policy debate must become less macro and more concrete. Given their respective national versions of welfare capitalism, eurozone member states have relatively strong automatic stabilisers – much more so than in the US. Moreover, some countries are quite decentralised fiscally.
This is particularly true of Germany, where much of the net disinvestment in public infrastructure – which shows up in aggregate public-sector budgets as savings or as a schwarze Null balanced budget – is the result of a fragile and highly unevenly distributed revenue base within the third fiscal tier municipalities. Although they follow economically sensible ‘golden rules’ by separating current and capital budget accounts, many municipalities are cash-strapped. To address the German ‘fiscal space’ problem, therefore, one must drill much deeper. Finally, a reasonable (in terms of size) automatic stabilising capacity is needed at the eurozone level. While the eurozone’s Budgetary Instrument for Convergence and Competitiveness is a start, it is far from sufficient. And of course, it should not involve a budget line item for ‘stabilisation’, but rather a real, democratically legitimised transfer of public-sector national responsibilities and sovereignty. Unfortunately, the current politics in eurozone member states, including France and Germany, is much more inward-looking. This will leave the eurozone, and particularly its weaker members, continuously vulnerable. n
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| Autumn 2019
If you build it,
THEY WILL COME Having emerged from a post-Soviet slump, many countries in Eastern Europe are now looking to take their economic growth to the next level. Infrastructural and real estate developments can play a significant role in this process, according to Nebojsa Karic, President of Dana Holdings
Many of the major cities in Eastern Europe are blessed with picture-perfect spaces that have delighted residents and visitors for centuries. But while these cities have historic charm in abundance, they are sometimes found wanting in other areas. The modern global economy means that urban spaces are no longer just competing domestically to secure the best talent and the most investment – they are up against international rivals, too. For cities in Eastern Europe that possess outdated infrastructure and lack modern amenities, this can make it difficult to win the race. In 1991, Belarus was the second-most developed post-Soviet country in terms of GDP per capita, after Russia. The country boasted well-developed infrastructure and substantial industrial capacities that enabled it to supply consumer goods to other former Soviet states. However, the economic growth that was experienced in the early 1990s proved difficult to sustain. Some of the country’s struggles can be attributed to an overreliance on Russia; delays in expanding the private sector did little to help matters. In 2015, Belarus’ economy contracted by 3.83 percent (see Fig 1, overleaf ). Today, though, things are taking a turn for the better: Belarus is revamping its economy to focus on a more diverse range of industries, encompassing everything from IT to agriculture. Ambitious construction projects are creating modern business hubs that sit comfortably alongside the country’s more traditional attractions. Similar developments are taking place in other Eastern European markets as well. Although governments have played their role in the turnaround, several of the most impressive projects being launched in the region owe their existence to Dana Holdings. As one of Europe’s leading investment and construction firms, Dana Holdings has plenty of experience when it comes to creating world-class business and residential complexes. Having emerged as one of the earliest examples of pri-
vate enterprise in the former Socialist Federal Republic of Yugoslavia, the company has firsthand knowledge of what it takes to thrive as a new business in this part of the world.
A city for everyone One of the approaches that Dana Holdings has pioneered is the ‘city within a city’ concept, which involves creating large multipurpose complexes that combine residential, business, cultural, educational and entertainment facilities. So far, the concept has been warmly received, attracting state-of-the-art businesses with premium infrastructure and first-rate amenities. The developments are part of Dana Holdings’ broader plan to use real estate and construction to support economic development in Eastern Europe. These markets possess huge growth potential, but often require a helping hand to make their voices heard in today’s highly competitive global business climate. The developments being pioneered by Dana Holdings ensure that investors can no longer ignore this part of the world. Dana Holdings’ city within a city approach allows tradition to sit beside modernity. One of the places where Dana Holdings is planning to implement its new type of urban project is the Belarusian capital. Dubbed Minsk World, the development will have an international financial centre at its heart and will be fully integrated with the city of Minsk and its infrastructure. “The financial centre of Minsk World has been modelled on the examples of Dubai,
“Cities are no longer just competing domestically to secure the best talent and the most investment – they are up against international rivals, too”
Singapore, Hong Kong and other world-class financial hubs,” Dana Holdings President Nebojsa Karic told World Finance. “The ambitious project started with a vision to allow Belarus to take a leading role in the region’s economic development. Though part of the country’s existing economic zone, the international financial centre will enjoy a special system of benefits and incentives to attract capital and provide financial services. We believe that thanks to these incentives, Belarus can become the most competitive and interesting country for investments on the continent.” In addition to world-class financial services, Minsk World will also contain residential areas, shopping malls, entertainment centres, schools, hospitals and hotels. Nestled among parks and gardens, the site will be fully integrated into the urban environment of the dynamic city. The project’s location in the centre of Minsk reflects the city’s position in the very heart of Eastern Europe. Belarus’ sustainable development and diverse investment options – from agriculture to IT – were also important factors in deciding the project’s location. Minsk World is set to strengthen the role of Belarus as a bridge between Western Europe and the growing economies of Russia, Eastern Europe and Asia. At three million square metres, Minsk World is one of the region’s largest and most ambitious construction schemes to date – not to mention the biggest single development project in the whole of Europe. It is no coincidence that it has been compared to projects in Dubai and Abu Dhabi, the leaders of modern urbanism. Minsk World combines residential and business amenities to provide a new level of friendliness, comfort and quality of life to residents and guests. Sustainable growth and increasing prosperity lie at the heart of Dana Holdings’ vision for Minsk World – a complex that comprises 24 residential quarters named in honour of »
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Size of Dana Holdings’ development projects (sq m):
1.5m Tesla Park
250,000 Chelyuskintsev Park
100,000 BK Capital Palace
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Above A rendering of Minsk World
12 10 8 6 4 2 0 -2 2018
The residential areas of Minsk World will boast a highly developed and complex infrastructure composed of social, cultural and educational facilities, as well as robust transportation links, including a new metro line. With its modern boulevards running along the main residential areas – which comprise walkways and cycling tracks, as well as fully equipped playgrounds – Minsk World is set to become a great place for business and recreation for both residents and visitors. “Multifunctional complexes, with their city within a city format, have swiftly become extremely popular across the world,” Karic said. “The main reason is that time has become the most valuable commodity in modern life. There is only a limited supply, yet we still want to experience and accomplish as much as possible within any given 24-hour period.” Due to the sheer size of modern cities, the commute between home, work and other destinations has become a major obstacle to enjoying a good quality of life. The city within a city concept allows real estate developers to organise and plan each project to give the enduser everything they need on their doorstep. In Karic’s words, it allows Dana Holdings to “fight the commute with the community”. Minsk World is a next-century city looking at a bright and confident future, but it is not
Home sweet home
Left A rendering of BK Capital Palace
Fig 1: Belarusian GDP growth
different countries, people and achievements. A new city park will be at the centre of the project to support a green way of life, while a system of pedestrian zones and vast green spaces will connect the park with the new urban, ecofriendly environment where contemporary and historic designs are fused into one.
SOURCE: WORLD BANK
alone. In fact, Dana Holdings’ work in the Belarusian capital is not confined to Minsk World: the real estate developer also has plans to create a multifunctional complex called Mayak Minska. The complex was conceived in 2008 to operate as a separate neighbourhood unit, prioritising family values. “Dana Holdings is an example of strong family relations being used successfully within the enterprise management system, and we put a similar idea into action with Mayak Minska,” Karic said. “We have focused on creating an environment that caters for couples looking to build a bright future together, as well as people who prefer a quiet, measured life surrounded by beautiful European architecture. The indisputable advantage of our multifunctional complex is its unique location opposite the National Library of Belarus – one of the country’s most enduring symbols – and along the main road connecting Minsk and Moscow.” Shopping opportunities are also provided nearby. The largest regional shopping and
entertainment centre, Dana Mall, is located on the territory of the multifunctional complex, where there are schools, supermarkets, fitness clubs, spa centres and food outlets to enjoy as well. Covering an area of 200,000sq m, Mayak Minska is the first of Dana Holdings’ residential projects to offer apartments with fully decorated interiors. These apartments, renovated in accordance with the highest principles of design and using the best materials and equipment, are ready for occupancy immediately. This allows individuals to move in as soon as possible, which should mean that a sense of community builds up rapidly in the area.
A safe investment Situated near Minsk city centre and not far from the M1 highway, which leads to Minsk National Airport, is Dana Holdings’ premium business hub, Dana Centre. The complex encompasses guest parking and several fitness centres, provides direct access to the Dana Mall and offers 24-hour security. It is also an
BUILDING BLOCKS feature
ideal place to host small and medium-sized businesses, as well as already being the headquarters for large international companies. One of the Belarusian capital’s newest attractions is Picasso Boulevard, which links the entire architectural concept of the Mayak Minska projects together and forms a central meeting point for all residents. The nearby multimedia fountain, Dana’s Dance, crowns the boulevard and is already a favoured location among photographers – especially during the summer months, when a host of beautiful events come to this part of the city. “Picasso Boulevard, with its considered layout and magnificent architecture, is by far one of the most beautiful pedestrian streets in Minsk,” Karic said. “Everything is provided for the comfort and pleasure of residents. Every day, new stores, cafes, travel agencies and other service establishments open.” In addition, Dana Holdings has launched a new wedding festival at Mayak Minska to support the institutions of marriage and family – two social values that are very important to the company. “We are building apartments in Minsk that offer everything required for a happy family life,” Karic told World Finance. “And thanks to advantageous price conditions, our apartments are available to everyone. We are sure that our wedding festival will become a much-loved tradition and that over the coming years, there will be even more couples in love.” Every Saturday, visitors to Dana Mall – including residents and guests of the Mayak Minska residential complex – can be seen enjoying social events. On weekends, when the Summer in Mayak Minska initiative is running, Picasso Boulevard turns into a vacation spot for families, offering activities such as
drawing, checkers, backgammon, inflatable rafting and a mechanical bull. “Over the past 10 years, we have witnessed constant, stable growth, improved the wellbeing of Belarusian citizens and created an environment where new investments can flourish,” Karic said. “We believe that this was facilitated by the implementation of new government policies, which were aimed at creating a safe state. This not only created the right conditions for doing business and seeking investment, but also shaped an environment where the safety of citizens and visitors was prioritised. Today, we can confidently proclaim Belarus to be the safest country in Europe.” Undoubtedly, the construction of new projects like those pioneered by Dana Holdings has been a major step forward in the development of Belarus. The creation of bespoke technology hubs in urban areas, for example, has greatly supported the Belarusian digital economy. As a result, the country can attract the attention of investors from around the world. The national government is aware of the importance of these new builds and recently signed an investment agreement with Dana Holdings for several large construction projects. Partnerships like these help to ensure that new projects are developed with a long-
“Due to the sheer size of modern cities, the commute between home, work and other destinations has become a major obstacle to enjoying a good quality of life”
term view in mind and continue to deliver benefits to local people for years to come.
The right environment Many factors must be considered when a business is deciding where to locate its headquarters, with the physical building being chief among them. This can have a huge bearing on a company’s costs, revenues and ability to attract talented members of staff. It’s something that Dana Holdings always keeps in mind when starting a project. This attention to detail is perhaps best shown in the BK Capital Palace business centre. Situated in the heart of Minsk, the venue boasts eight storeys of business space, a luxurious designer lobby lounge with panoramic views and a ceiling height of more than eight metres. Businesses that choose to place themselves in these glamorous surrounds will gain access to multifunctional offices with areas of between 50sq m and 2,635sq m. They will also enjoy centralised air conditioning, high-speed silent elevators and high-quality energy-saving windows. To ensure the highest security standards are maintained at all times, CCTV will be in operation 24 hours a day. “The BK Capital Palace boasts an ideal location in the heart of Minsk, as well as amazing views across Independence Avenue and the stunning October Square,” Karic said. “It takes visitors only 30 minutes to get to BK Capital Palace from Minsk National Airport by car. There are also two metro stations and major road networks in the immediate vicinity.” Recreationally, the BK Capital Palace has plenty to offer. There is a food court, multifunctional trading floor, cocktail bar, restaurant and lounge area. For added convenience, »
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A rendering of Chelyuskintsev Park
Steppe-ing up Dana Holdings is not focusing all of its energy on Belarus, though. Set in the heart of the Eurasian Steppe, the expansive nation of Kazakhstan has one of the fastest-growing capital cities in the world; Dana Holdings is keen to play its part in its development. The city of Nur-Sultan (previously Astana) became the capital of Kazakhstan in 1997 and has not looked back since. Futuristic buildings and towering skyscrapers now dominate the skyline, while the population has more than doubled since 2005 (see Fig 2). With such an impressive rate of growth and a forward-thinking vision firmly in place, Nur-Sultan has proven itself to be the ideal location for Dana Holdings’ latest development project: the innovative Tesla Park. Set in one of the most dynamic areas of the city, Tesla Park will cover 1.5 million square metres and feature all of the crucial elements of a modern, liveable city, including comfortable residential areas, shops, schools and plenty of green space. “As the project continues to advance steadily, our vision for Tesla Park is beginning to take shape, creating a vibrant hub within the rapidly expanding city of Nur-Sultan,” Karic noted. “The city’s significance within the re50
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gion is only set to grow in the years to come, as it continues on its modernisation drive and capitalises further on its strategic location at the centre of the Silk Road. With Dana Holdings helping to drive innovative development in the area, the future certainly looks bright for Kazakhstan’s thriving capital.” The main goal of Tesla Park is to conquer a segment of the market that is currently underserved – namely, property functionality and apartment design. Nowadays, dynamic lifestyles demand functional apartments at prices that are affordable for businesspeople. This is where Dana Holdings comes in: contemporary planning is the company’s main focus, as it directly impacts local economies and can help attract a young, talented workforce, supporting urban growth and development. “Nur-Sultan was chosen as the location of Tesla Park largely because of the vast scope of
the capital’s potential,” Karic added. “Over the past 20 years, Astana, as it was known until March 2019, has grown from a town of some 300,000 inhabitants to a city in which more than one million people live. Its population is expected to reach 1.5 million people in the next 10 years. Situated halfway between China and Europe, Nur-Sultan is like a mini Dubai and has great prospects both geopolitically and macroeconomically.” The city is also extremely interesting from an investor’s standpoint: Nur-Sultan harbours ambitions of becoming one of the world’s foremost financial centres, and the national government has launched several initiatives to attract new business to the city. Its position at the centre of the Eurasian landmass is another factor in the city’s favour. Dana Holdings’ Tesla Park project, meanwhile, provides vital support to the city’s growth plans.
Fig 2: Population of Nur-Sultan MILLIONS
0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
the complex offers two-level underground parking for 190 cars, while the palace’s favourable central location means that public transport options are plentiful. Covering a total area of 100,000sq m, the BK Capital Palace stands out even in a city with no shortage of picturesque locations. To have an office here sends a powerful message to partners, investors, clients and employees that the business is moving in the right direction.
A rendering of Tesla City
SOURCES: UN, MACROTRENDS
Note: 2020-35 figures are estimates
specifically, Minsk World was recognised as the largest multifunctional complex in Europe for 2018 – a rare honour only granted to the most innovative projects in the real estate market. “The Minsk World complex will strengthen the growing role of Belarus as a bridge between Europe and the dynamically developing economies of Russia and Asian countries,” Europaproperty.com founder Craig Smith said as he presented the award to Karic. “It acts as a catalyst for sustainable development in Belarus, Russia and the Eurasian Economic Union zones.”
Global recognition Dana Holdings has also attracted interest from outside of Eastern Europe. In September 2019, the company participated in the Cityscape Global exhibition in Dubai, becoming the first Belarusian company to exhibit at the event for many years. As one of the most significant forums in the fields of architecture, construction and investment, it is hoped that the firm’s participation at the exhibition will show investors that Belarus is a country worth doing business in. “I believe that the Cityscape Global exhibition provides the most suitable platform for finding those people who are interested in investing in Belarus,” Karic told World Finance. “Here, we were able to promote Belarus as a country that is open for business, that is a safe place for capital, and that is in possession of clear work regulations and a safe environment.”
Dana Holdings’ completed projects in Moscow: Manezhnaya Square Meyerhold Theatre and Cultural Centre Moscow International Business Centre (Moscow City) Gagarin tunnel Yakutsk State University’s Institute of Finance and Economics
“The real estate market is constantly evolving – buildings rise and fall with the changing needs of the people who inhabit them” Karic is right to put so much significance on the exhibition: the event showcased the Belarusian economy to potential investors from all over the world and provided an opportunity to publicise the country’s favourable geographical position and attractive investment conditions. Boasting a visa-free regime with 74 countries, Belarus presents a fantastic opportunity for businesses hoping to enter the European market. In particular, its relatively cool climes may provide some welcome relief from the Gulf’s summer temperatures, which regularly touch 40 degrees Celsius. “On the first day of the Cityscape Global event, a number of negotiations were held with interested parties,” Karic said. “This is unsurprising given that we have received numerous accolades in recent years. For example, Dana Holdings is one of the few European investment and construction companies to be awarded a place on the World Finance 100 list on multiple occasions. This list traditionally includes the largest companies in the world that have shown the highest results in their field, while contributing to the global economy.” Dana Holdings’ Minsk World development was singled out for particular praise at the Cityscape Global event, with Europaproperty.com presenting Dana Holdings Vice President Boyan Karic with an award for the successful implementation of the project. More
As the residents of Belarus and other postSoviet states are discovering, a thriving construction sector can prove a boon to economic growth. In particular, completing new projects within strategically important parts of the economy can provide indirect benefits to the wider populace. “Dana Holdings has completed many strategically important projects throughout Russia,” Karic said. “Some of the main developments include the head office of the Bank of Russia, the Meyerhold Theatre and Cultural Centre, the Gagarin tunnel and Yakutsk State University’s Institute of Finance and Economics. These developments have enriched the social, cultural and economic lives of countless Russian citizens.” Although Dana Holdings has delivered a host of successful projects to date, the Belarusian firm is not intent on stopping any time soon, and currently possesses a pipeline of new developments spanning more than five million square metres. Among them is the Chelyuskintsev Park residential complex, located at the intersection of Independence Avenue and Makayonka Street in Minsk. Spanning 250,000sq m, the project is due for completion later this year and is already generating much excitement as a result of its elegant and stylish design. The facilities, which include a fully equipped concierge service, a modern interphone system, a fitness centre and underground parking, ensure that every possible detail has been accounted for. Its location near the Chelyuskintsev Park of Culture and Rest, the Minsk Botanical Garden and several other famous attractions is a bonus. The real estate market is constantly evolving – buildings rise and fall with the changing needs of the people who inhabit them. Dana Holdings understands this better than most: across numerous projects, the company has crafted new residential and business premises that are both aesthetically pleasing and practical. As investors weigh the pros and cons of entering the still-developing markets of Eastern Europe, the glittering constructions being delivered by Dana Holdings – and the economic growth that they foster – should help them make up their minds. n
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On their toes From advanced chatbots to biometric identification, technology is rapidly reshaping the banking industry. Even the most innovative players will have to work hard to keep up with the market as it evolves In a remarkably short space of time, digitalisation has revolutionised the world of banking. Nowadays, there’s nothing unusual about customers paying for items with the tap of an app, or checking their bank balance on their smartphone while on the move. Advanced technologies have transformed the way we bank, with remote, on-demand services becoming the new normal. Mobile banking has fast become the go-to method for customers looking to review their spending, transfer money and make payments. By 2021, consulting firm Caci predicts mobile banking will overtake high street branch visits in the UK, with consumers increasingly opting for the convenience of banking through their portable devices. As our lives become more digitalised, customers have had their expectations defined by other industries – particularly online retail – and are now demanding the same round-the-clock service from their banks. For younger generations – and digital natives in particular – convenient, highly personalised mobile services are expected to be the standard. To keep up with these evolving preferences, traditional banks must ensure they are successfully incorporating the latest technology into their operations, while also anticipating what the next digital trend might be. For those that manage to stay abreast of these rapid developments, digitalisation presents a number of exciting and potentially lucrative opportunities. On the other 52
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hand, those who fall behind risk losing ground to their more innovative competitors. With new technology rewriting the rulebook for financial institutions across the globe, it’s clear that the banking industry is at a crucial moment in its history. Decisions made today will have a profound impact in the years to come, meaning banks cannot afford to make any digital missteps. The World Finance Digital Banking Awards 2019 celebrate the firms that are leading the way with their digital strategy, prioritising innovation and setting a path for future growth.
Time to act fast We are now living in a smartphone-filled society. These devices are a fixture of modern life and have created an ‘always on’ culture where most of us have grown accustomed to 24/7 access to the internet. At the touch of a button, smartphone users have almost limitless access to a wealth of information, various forms of entertainment, social networking sites, online shopping channels and, perhaps most significantly, an unprecedented means of communication with businesses and brands. As such, customers have grown to expect remote, round-the-clock customer care from their financial service providers. But rapid responses aren’t enough on their own – the entire customer service experience needs to be tailored to each customer as personalisation rises up the list of customer demands. The runaway success of fintech start-ups reflects this growing appetite for personalised services.
“With new technology rewriting the rulebook for financial institutions across the globe, it’s clear that the banking industry is at a crucial moment in its history”
Traditional banks, meanwhile, have learned from the success of these tech-savvy start-ups and are now using advanced technology to improve their customer service. The most significant example of this is the widespread adoption of artificial intelligence (AI), which banks are using to deliver frictionless, 24/7 customer care. Research by IHS Markit shows that the business value of AI in banking was $41.1bn in 2018. In the same year, PricewaterhouseCoopers found that 72 percent of business decision-makers believed AI would be the leading business advantage of the future. AIpowered chatbots allow banks to offer convenient, flexible customer support, available from any location and at any time, day or night. As these systems become increasingly sophisticated, they have the potential to replace traditional communications channels such as email, phone and text, especially among younger, more digitally literate consumers. Chatbots aren’t the only way banks are strengthening their relationships with customers. The advent of biometric identification – such as iris scanning and fingerprint recognition – has allowed banks to offer clients an additional layer of security to their online interactions, responding to a growing demand for more personalised security measures. In an age when data protection and online security is a top priority for many, this enhanced feature helps put customers’ minds at rest.
Unlocking insights Biometric identification and AI-powered chatbots are perhaps the two most noticeable ways that banks are employing new technology in their customer-facing operations. But behind the scenes, big data might be the most important tool available to financial service providers. Each day, banking customers generate vast amounts of data through credit card transactions, cashpoint withdrawals and oth-
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WORLD FINANCE DIGITAL BANKING AWARDS 2019 COUNTRY Andorra Angola Austria Botswana Brazil Cambodia China Costa Rica Côte d’Ivoire El Salvador Finland France Germany Ghana Greece Guatemala Honduras Hungary Italy Kenya Lebanon Mexico Mozambique Netherlands Nicaragua Nigeria Panama Philippines Portugal Singapore Spain Tanzania Turkey UAE Uganda UK Zambia Zimbabwe
BEST MOBILE APPS MoraBanc App – MoraBanc BFA App – Banco de Fomento Angola George-App – Erste Bank SC Mobile Botswana – Standard Chartered Bank Airfox – Airfox Sathapana Mobile – Sathapana Bank HSBC Mobile Banking – HSBC Banca Móvil – BAC Credomatic SC Mobile (CDI) – Standard Chartered Bank Banca Móvil – BAC Credomatic Ferratum Mobile Bank – Ferratum Bank BRED – BRED Bank N26 – N26 SC Mobile Ghana – Standard Chartered Bank Winbank Mobile – Piraeus Bank Banca Móvil – BAC Credomatic Banca Móvil – BAC Credomatic MKB Mobilalkalmazás – MKB Bank Intesa Sanpaolo Mobile – Intesa Sanpaolo SC Mobile Kenya – Standard Chartered Bank Cedrus Mobile Banking – Cedrus Bank BBVA Mexico – BBVA Mexico Via Daki – BCI Bunq – Bunq Banca Móvil – BAC Credomatic Access Bank – Access Bank Banca Móvil – BAC Credomatic UnionBank Online – Union Bank of the Philippines ActivoBank – ActivoBank Frank – OCBC Bank Openbank – Openbank SC Mobile Tanzania – Standard Chartered Bank Garanti BBVA Mobile – Garanti BBVA Bank Snapp – Mashreq Bank SC Mobile Uganda – Standard Chartered Bank Monzo Bank – Monzo SC Mobile Zambia – Standard Chartered Bank SC Mobile Zimbabwe – Standard Chartered Bank
COUNTRY Andorra Angola Austria Botswana Brazil Cambodia China Costa Rica Côte d’Ivoire El Salvador Finland France Germany Ghana Greece Guatemala Honduras Hungary Italy Kenya Lebanon Mexico Mozambique Netherlands Nicaragua Nigeria Panama Philippines Portugal Singapore Spain Tanzania Turkey UAE Uganda UK Zambia Zimbabwe
BEST CONSUMER DIGITAL BANKS MoraBanc Banco de Fomento Angola Erste Bank Standard Chartered Bank Airfox Sathapana Bank HSBC BAC Credomatic Standard Chartered Bank BAC Credomatic Ferratum Bank BRED Bank N26 Standard Chartered Bank Piraeus Bank BAC Credomatic BAC Credomatic MKB Bank Intesa Sanpaolo Standard Chartered Bank MEAB Bank BBVA Mexico BCI Bunq BAC Credomatic Access Bank BAC Credomatic Union Bank of the Philippines ActivoBank OCBC Bank Openbank Standard Chartered Bank Garanti BBVA Bank Mashreq Bank Standard Chartered Bank Monzo Standard Chartered Bank Standard Chartered Bank
er purchases and payments. Every customer has their own transaction footprint containing plenty of useful information about their spending and saving habits. For banks, this data – if collected and analysed effectively – presents a number of exciting opportunities. By tracking spending patterns, banks can better understand their clients, creating detailed profiles for each customer. This enables banks to offer greater product personalisation, helping them to devise new products and services that are tailored to customers’ specific needs. What’s more, the successful analysis of big data allows for improved fraud detection, as banks are able to use machine learning to pinpoint transactional behaviour that differs from customers’ regular banking habits. In 2018, 14.4 million people were victims of fraud, with out-of-pocket fraud costs reaching $1.7bn. As the threat of online fraud looms large for many digital banking customers, dataenhanced fraud detection is certainly an area worth investing in over the coming years.
In safe hands The digital transformation of the banking industry has opened traditional financial service providers up to a wealth of opportunities, helping them boost efficiency while cutting costs. This significantly improves their customer service operations. However, the digital era also comes with its fair share of challenges, and banks must take care to protect themselves and their customers from the risks that accompany increased digitalisation. According to a 2019 report by cyber intelligence firm IntSights, over 25 percent of all malware attacks in 2018 were targeted at banks and financial services organisations, making the finance industry the worst-hit professional sector. The study also recorded a 212 percent year-on-year increase in stolen credit card data and a 102 percent increase in malicious apps. To combat these aggressive attacks, banks of all sizes must prioritise investment in threat detection and online security. Failing to do so places institutions at risk of suffering a targeted attack, potentially resulting in regulatory fines, sky-high legal costs and irreparable reputational damage. As we begin a new decade, it is remarkable to reflect on how technology has transformed the banking sector. Services that seemed impossible a few short years ago are now accepted as commonplace, and banks are only beginning to scratch the surface when it comes to advanced technologies. The sector is moving towards a dynamic future, and a handful of innovative institutions are leading the way. The World Finance Digital Banking Awards 2019 highlight those firms at the very forefront of this exciting digital drive. n
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Joining forces Some banks view fintech firms as a threat, but ActivoBank is not one of them. Instead, the Portuguese bank relishes the opportunity to collaborate with and learn from these new, innovative businesses, writes Andreia Teixeira, Marketing Director at ActivoBank Like so many other industries, the world of banking is facing significant upheaval. New technology has disrupted financial institutions, many of which had allowed a state of inertia to develop as a result of market dominance sustained over a number of decades. Today, new players are challenging that dominance. Regulatory changes and new digital solutions are giving individuals more options than ever before. Now, instead of conducting their finances with established banks, some customers are choosing to partner with fintech firms. It will be interesting to see how more established banks react to these agile new competitors. They could remain set in their ways, believing their customers will choose history over innovation. At ActivoBank, we know this is a foolhardy approach: we feel that the fintech revolution will bring benefits to new entrants in the financial services market, as well as to established organisations and customers. Rather than fearing the challenges fintech will bring, ActivoBank welcomes them as an opportunity to gather insights about the market as it evolves.
On the same team Since its foundation, ActivoBank has positioned itself as a digital bank, with the primary goal of giving clients a simpler but more complete offer than other players. This is becoming a bigger challenge every day as the speed and complexity of digitalisation forces us to innovate at an increasingly fast pace, particularly in the banking world. In this context, itâ€™s easy to see why established financial institutions see fintech firms 54
as a threat. They offer solutions that are perceived by clients to be similar to those offered by traditional banks, but at a lower cost. In the majority of cases, fintech companies also demonstrate impressive dexterity, especially during the onboarding process, which may only require a smartphone and a couple of short steps. Itâ€™s important to note that fintech firms face different regulations to large organisations within the formal banking sector, meaning they can embrace new developments at a faster rate. Yet, even considering the many ways fintech firms are able to outrun traditional banks, we wonâ€™t stop viewing them as a growth opportunity. By observing their operations and processes, we can learn how to improve our services and take advantage of innovative new approaches to banking. ActivoBank has partnered up with some successful fintech providers, which will allow us to offer our clients the best solutions at a fair price, without losing sight of the values that have always been integral to our corporate mission. For banking incumbents to adapt to change, it is essential they are able to anticipate change and respond to it in an agile manner. To achieve this, ActivoBank has taken a multidisciplinary approach to the monitoring and evaluation of new solutions. We speak of a multidisciplinary approach because it is important to keep track of the fintech sector in a holistic way, understanding each organisation, its solutions, their impact on the banking sector, their user-friendliness and the advantages and costs for the client.
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“Even considering the many ways fintech firms are able to outrun traditional banks, we won’t stop viewing them as a growth opportunity” Designed for convenience At ActivoBank, we align our objectives with the most secure technological developments available, in keeping with banking best practices. We are currently developing partnerships with fintech companies to further our vision of providing the best user experience to our customers. In 2019, we focused our efforts on international bank transfer technology; for 2020, we are predominantly interested in personal finance management tools. We are also keen to ensure that we have a mobile-first banking solution that appeals to all our customers. Certainly, the Millennial generation values mobile-first banking because they have always known smartphones to play a significant role within their daily lives. However, it would be an oversimplification to suggest that only Millennials are interested in mobile banking: today, smartphones provide all generations with the tools for communication, work, daily organisation and entertainment. Another social change that has made mobile banking an essential part of any financial institution’s offering is the desire for instant results. Very few people will go to a bank in person to deal with an issue, preferring to complete tasks remotely. ActivoBank is currently focused on digitalising all our banking processes in order to provide the most convenient service to our customers. However, this is a challenging task. A bank has numerous procedures that must be considered during digitalisation, including opening accounts, providing loans and insurance, and processing payments and transfers. Before any of these processes can be revamped, a bank must carefully consider its customers’ needs. While banks must tread carefully, they should not be overly cautious – digitalising services is the best way to keep up with changing customer needs. The most important thing is to continue analysing performance and thinking critically about whether new ways of operating are effective or not. In 2019, we launched our new transactional app, which we redesigned from scratch. Taking into consideration the needs of our clients, the app allows individuals to quickly and easily consult their account balance, withdraw money, start saving and receive an immediate response to a personal loan request. Regard-
ing investments, we have launched another app that allows clients to oversee market developments, conduct transactions and manage their securities portfolio, all with the speed required to find success in the fast-moving world of modern finance.
Close contact It’s important to remember that being a digital bank doesn’t mean being distant from clients. A client with a digital bank is likely to be more independent when making a decision, but bank employees should remain contactable to ensure they can support customers as soon as they are needed. ActivoBank is able to achieve this thanks to our precise customer relationship management solutions and our commitment to developing products and services that anticipate clients’ needs. Clients must always feel like there is a human component to a digital bank so they know they can get in contact with staff or even visit a physical branch if necessary. At the same time as being proudly digital, ActivoBank maintains a set of branches – called Pontos Activo – located in easily accessible urban areas and boasting generous opening hours. These branches give our clients the feeling of support that comes with brick-and-mortar outlets. Additionally, our personalised support line means we can always answer our clients’ queries. Of course, social networks have played an integral role in the development of customer service over the past decade: since 2010, we have been active across multiple online channels, answering questions, offering support and sharing information about new developments. When deciding which functions to digitalise and which should be offered in a more traditional format, banks should remember what customers look for in digital services: autonomy, agility, speed and usability. Sometimes, however, people simply prefer the security that is offered by face-to-face interactions with knowledgeable members of staff. Looking to the future, ActivoBank will continue to increase its client base, creating value and fostering long-lasting relationships. Digitalisation and innovation will remain the bank’s primary focus and we will continue to embody the values that are a part of our DNA: innovation, accessibility, simplicity, transparency and trust. In the years to come, traditional banking will likely cease to exist. Digital banks will thrive and will operate alongside fintech firms, benefitting from collaborative relationships. Banking will be faster, smarter, safer and more efficient. Institutions that realise this quickly have nothing to fear. If they embrace the change that is set to hit the industry, they can continue to play a major part in its future. n
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Small but mighty The banking market in Andorra may not be the world’s biggest, but that doesn’t mean broader developments in the sector have passed it by. The industry has been quick to embrace digital transformation to ensure customers receive a high level of service
Lluís Alsina Àlvarez MANAGING DIRECTOR, MORABANC
Andorra’s banking sector is one of the country’s economic pillars. However, in the past few years, the market, clients and rules of the game have changed radically, forcing banks to adapt and transform in order to offer the modern services that customers want. Away from the banking sector, the Andorran economy has had to deal with wider change. Although sometimes still referred to as a tax haven, this is no longer a fair description of the country’s regulatory environment: Andorra introduced an income tax in 2015 and now boasts a transparent and highly regarded banking model. While the landlocked principality still offers an attractive tax system and represents an excellent destination for clients looking to diversify their wealth management, it also abides by all the regulatory standards expected of a member of the global economy. At MoraBanc, reacting to the changes that have taken place in Andorra in recent times has been a challenge, but one we have embraced wholeheartedly. As the first bank in the state to implement a digital transformation – a process that was completed quickly and smoothly – we know all about the difficulties that change brings. Thanks to the efforts of our staff, we are now operating as a fully fledged digital bank. Making the most of more than 60 years of private banking experience, we now offer a much more global service. We are fully com56
mitted to our clients, whether they reside in Andorra or further afield. Still, now is not the time to rest on our laurels: after navigating several years of profound change, we are excited by the challenges that await.
The little things With a population measuring just over 75,000, Andorra’s internal market is certainly small. This makes gaining market share difficult and requires us to be more competitive. To engage new clients, we must offer high-value, differentiated and personalised services. Additionally, with such close client proximity, it is vital to maintain a high level of trust at all times. Though we talk about Andorra as a small market, in the past few years it has been on a significant growth path that has created opportunities for the financial sector. The driving forces behind this economic growth have been tourism and commerce, and these sectors continue to generate a great deal of business, with the country receiving more than three million visitors between December 2017 and November 2018. Andorra’s certification and adoption of international agreements, combined with its beneficial taxation schemes, make the country an attractive destination in which to incorporate businesses that don’t require major industrial logistics. Due to its high level of security and excellent geographic location, Andorra has become a place of residence for professional sportspeople and high-net-worth retirees. All of these factors create a strong internal banking sector that has the potential to find great success in the international market.
Thanks to the transformation of the banking sector and the focus on certification and transparency, new business options are opening up beyond our borders. We have had subsidiaries in Switzerland and Miami for years now, and have upcoming projects in Spain, which we are able to take on thanks to our solid financial footing.
Let’s get digital Society has welcomed the digital banking revolution because it gives the consumer more freedom: it brings access to services better suited to their needs and lets them choose how and when to acquire and use such products. The banking system, both in Andorra and globally, must respond to these new consumer habits. At MoraBanc, we have achieved our transformation by making a digital mindset an essential part of the company’s culture. Our strategy hinges on two courses of action: first, we have concentrated all of our strategies under one umbrella, streamlining the decisionmaking process for our multichannel services; second, we have integrated innovative methodologies in the design and creation of products and services at every stage of our projects. Our investment in digital banking stood at €7.5m ($8.31m) between 2015 and 2018, during which time we succeeded in positioning ourselves as market leaders. In 2019, our investment totalled €5m ($5.54m), which included technological innovation that responded to regulatory updates, improving internal processes and revamping the client experience. These levels of investment are high given the size of the Andorran market, and reflect Mora-
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agement and advisory services. The agreement provides differential value for MoraBanc clients, enabling them to obtain exclusive information and a more personalised range of products and services. Information regarding their portfolio’s performance can be viewed via MoraBanc Digital, making it easier for users to assess their investments.
Leading the way
Banc’s commitment to being the country’s benchmark digital bank. However, it’s important to remember that digital innovation is always progressing. We are constantly updating our offering and working on new projects. Over the next few months, we have five key aims. The first is consolidation: we will make the most of our position as a benchmark of online services in Andorra and consolidate our image as a modern digital bank. The second is innovation, which involves improving the tools we have already launched, incorporating new functionality and upgrading our digital solutions every week. We have not forgotten digital transformation, which is our third goal. We will continue to move our services out of branches and onto our digital platform, investing in new technology to ease the process. In the interest of furthering Andorra’s technological transformation, this year, we headed the first study on the digital maturity of companies in Andorra. Our fourth goal involves delivering an omnichannel customer experience; to achieve this, we must strive to improve the services offered to our customers, expanding their payment options through the digitalisation of transactions and simplifying the payments process. We also wish to provide clients with more information on using point of sale solutions so they are empowered to increase sales and improve their customer service. Our fifth aim concerns private banking. In January 2019, MoraBanc entered into an exclusive agreement with Goldman Sachs Asset Management to offer unique investment services in Andorra, such as portfolio man-
MoraBanc’s digitalisation project:
Increase in digital users
Increase in access to online banking
Increase in clients conducting banking through the app
IN THE PAST FEW YEARS, ANDORRA HAS BEEN ON A SIGNIFICANT GROWTH PATH THAT HAS CREATED OPPORTUNITIES FOR THE FINANCIAL SECTOR
To be viewed as a digital trailblazer, businesses must focus on commitment, adaptability and teamwork. We have displayed commitment through our efforts to implement digitalisation, viewing it not as an option but a necessity that allows us to offer a better service to our clients. Similarly, adaptability has been fundamental in allowing us to make changes before our competitors, including launching a new website and app, which has shown us to be a benchmark digital bank. Solid teamwork has also been essential in ensuring that everyone at the bank is working towards the same goal of making MoraBanc Digital a reality. From our first meeting about the institution’s digital future to the consolidation of the project, many hours have been dedicated to creating a digital identity that satisfies our clients and the bank’s other stakeholders – shareholders, employees, suppliers and Andorran society. We apply one ethos to everything we do: we are modern, innovative, accessible, efficient and trustworthy. These values, when transferred to the digital world, enrich our products and services. We want our clients to see us as a bank that responds to their needs and maintains remote channels that give them the freedom to operate at any time and from any place – all our metrics tell us we are achieving this. We’ve seen remarkable results since launching our digitalisation project in December 2016. Our internal digital banking report, published in April 2019, found a 77 percent increase in digital users, a 181 percent increase in access to online banking across all devices and a 709 percent increase in clients conducting banking through our app. MoraBanc is optimistic about the future. We are not Andorra’s biggest bank, but the way we have dealt with change in recent years has seen us receive a great deal of recognition. After successfully finalising our transformation strategy, we started a new plan focused on achieving constant, unlimited growth. We have all the ingredients to make progress: a solid balance sheet, a talented and efficient team, agreements with first-class partners such as Goldman Sachs, and a welldefined, attractive business model in which digital banking plays a hugely important role. n
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Innovate to accumulate
Boasting the world’s tallest building and a series of man-made islands, the UAE has never been afraid to do things differently. The same is true of its financial sector, where banks are always keen to adopt new technology
Subroto Som EXECUTIVE VICE PRESIDENT, MASHREQ BANK
The global banking industry is going through a period of rapid transformation, heralded by disruption and driven by emerging digital technologies. The changing landscape requires extensive collaboration from governments, regulators, institutions and individuals to create a strong financial and regulatory ecosystem that spurs the growth of innovative financial services. With many economies increasingly striving to be cashless, innovations in digital banking and disruption from fintech firms are pushing progress. According to EY’s Global Fintech Adoption Index 2019, India’s consumer fintech adoption rate sits at 87 percent, far above the global average of 64 percent. According to Indian think tank NITI Aayog, the value of the fintech market in India could reach $31bn in 2020, while Accenture reports that global investment in fintech ventures in China was worth $55.3bn in 2018, showing just how lucrative a developed fintech market can be. Consumers are increasingly choosing digital banking services due to the added convenience they provide. With digital-only banks and mobile wallets proliferating, financial inclusion is only set to increase. Recognising this trend, the UAE Government has established strong technological support for the country’s banks. Regulatory initiatives such as the Emirates Blockchain Strategy 2021 and the Emirates Digital Wallet are already underway, making it clear that digital banking is a major priority in this part of the world. This digital mindset is reflected by Mashreq Bank, the UAE’s oldest privately owned bank. World Finance spoke with Mashreq’s Executive Vice President and Head of Retail Banking Group, Subroto Som, about the bank’s digital solutions and the role they are set to play in the country’s economic development. 58
How is Mashreq leveraging technology to improve its banking solutions? There is a large opportunity within the banking industry to provide scalable, robust and low-cost technology solutions to customers and to increase the adoption of financial services through digital offerings. At Mashreq, our approach is solution-driven: we want to improve the customer experience for our customers and ensure they are getting the best possible service when they need it, wherever they are. To achieve this, we have invested a significant amount of effort and resources in improving the customer journey. We are investing heavily in data analytics and artificial intelligence (AI), and are also using robotics to automate a lot of operating procedures, manual entries and activities that are repetitive in nature. We are also both early and advanced users of AI and robotics. Separately, we work with a large number of fintech firms in the retail space – particularly in the areas of payments, wealth management, credit underwriting and Know Your Customer processes. We have launched several digital services and platforms that make it easier for customers to bank with us. One of the most prominent is Mashreq Neo: launched in 2017, it is the UAE’s first fully fledged digital bank. Over the past year, Neo has witnessed astounding uptake, accounting for approximately 70 percent of Mashreq’s retail customer acquisition. Neo offers a digital-only banking experience that facilitates instant sign-up and a wide range of products and services, such as a stored-value account. In 2019, we launched Mashreq NeoBiz, the nation’s first digital bank for SMEs and start-ups. We are working on several other major projects to expand these services beyond personal banking, catering to businesses and other client segments. Further, we helped launch initiatives such as UAE Pass, a federal initiative to unify the digital authentication mechanism by unifying and providing one single username and password across several services throughout the Emirates.
What are the benefits of a high mobile penetration rate when it comes to banking? Mobile penetration in the UAE ranks among the highest in the world, at 210 percent (see Fig 1). Easy access to smart gadgets, the government’s commitment to providing digital services and the strong data connectivity offered by the country’s telecoms giants all contribute to the region’s high penetration rate. The current focus on delivering 5G to the country’s mobile users will serve to boost digital commerce and foster even greater access to financial services for all citizens. High mobile penetration enables customers to manage their finances anytime, anywhere. As a customer-centric bank, Mashreq is committed to offering easy access to financial services in the UAE and furthering financial inclusion. We understand this is only possible when services are delivered through a user-friendly and secure portal, such as our Mashreq Neo and NeoBiz platforms, which is why we continue to place them at the centre of our digitalisation strategy. How advanced is digital banking in the UAE and how has it developed over time? The UAE has always been an early adopter of cutting-edge technology and smart services. As outlined in UAE Vision 2021, the country is keen to achieve digital transformation in order to deliver economic diversity and prosperity. This strategic vision has reached the fiscal services sector, encouraging the country’s financial institutions to become more innovative.
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MASHREQ’S FOCUS IS TO CONTINUE IMPROVING THE BANKING EXPERIENCE FOR CUSTOMERS THROUGH ONGOING INVESTMENTS IN DIGITALISATION
As a leader in digital banking, Mashreq has been responsible for several firsts in the UAE. The public response to our initiatives has been extremely positive so far, with consumers embracing the convenience and flexibility Neo and NeoBiz offer. With a favourable regulatory environment, increasing demand from the market and the benefit of cost efficiency, we can expect digital banking to go from strength to strength over the coming years. As one of the oldest financial institutions in the country, Mashreq is committed to leading this change. What are Mashreq’s most innovative digital banking products? Mashreq continues to encourage the adoption of digital banking in the UAE and beyond.
In 2019, we launched a programme to transform our branch network, introducing advisory services that encourage greater face-to-face interaction between employees and customers. For everyday transactions, customers benefit from state-of-the-art self-service facilities. We have plans to extend the range of these solutions to make banking quicker, easier and more accessible across our network. Also in 2019, we added instant global investment capabilities for our customers through our mobile banking app, Mashreq Mobile. The newly added service provides access to international markets including foreign equities, gold trading and foreign currency accounts, and allows customers to open and trade various investment products. The launch
UAE mobile subscriptions PER 100 PEOPLE
250 200 150 100 50
enables instant account openings and trades over a diverse range of geographies, and allows customers to make and manage investments easily, 24 hours a day, at the touch of a button. We were also the first bank to establish the payment solutions Masterpass QR and Alipay in the region, and one of the first banks in the country to introduce Apple Pay and Samsung Pay. In 2018, we launched our own digital wallet, Mashreq Pay, allowing our customers to simply tap and pay at retail outlets, and in 2019, we began investing heavily in emerging technologies, such as blockchain. Our blockchain initiative exemplifies technology that is secure, easy to integrate and automates the onboarding process for our corporate clients. A first for the region, the platform ensures the protection of customer data while providing the convenience and flexibility of smart banking. With a launch planned for the first quarter of 2020, we aim to roll out the initiative to our business clients before exploring an expansion into additional segments. Notably, we also launched WhatsApp Banking, an initiative that makes it easier than ever for consumers to bank securely and quickly on the world’s most popular instant messaging application. How has Mashreq contributed to the UAE’s economy and how will it continue to do so? Mashreq has always supported Dubai and the wider UAE economy. We were at the heart of building some of Dubai’s most iconic projects and some of the UAE’s most significant infrastructure constructions, including the Palm Jumeirah, Dubai International Airport and the Burj Khalifa. We believe these iconic structures have changed the way people see Dubai. Beyond these projects, Mashreq has been the first mover on many occasions, demonstrating our commitment to the UAE’s citizens, businesses and the wider economy. We have introduced many innovative firsts to the UAE market, which are now considered standard among businesses and consumers. Today, there is increased demand for more digital solutions in the region’s banking sector, and our digital transformation strategy remains a key pillar in our overall strategy moving forward. Our focus is therefore to continue improving the banking experience for our customers through ongoing investments in digitalisation. We strongly believe that by investing in the latest technology and the talent of tomorrow, we can introduce products that are innovative and relevant, while ensuring we are at the forefront of the changes taking place in the UAE and the wider region’s banking sector. We thank and appreciate our customers, whose adoption of these initiatives has created the ultimate boost for digital banking in the UAE. n
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The customer is always right Although many banks are adopting digital solutions at a rapid pace, the importance of maintaining a customer-centric approach has not diminished. This is certainly the case at BAC Credomatic, where regular feedback informs all its new technologies
José Manuel Páez CHIEF DIGITAL OFFICER, BAC CREDOMATIC
As in many other parts of the world, the banking sector in Central America has undergone a profound change in recent years. Digital technologies have revamped many banks’ solutions as they attempt to keep pace with shifting customer demands. At BAC Credomatic, these changes have centred on transforming company culture to make sure customers are at the centre of its operations at all times. Becoming a customercentric bank has been the most important initiative the bank has undergone recently, and has resulted in a significant change in organisational structure and a fundamental shift from products to customers. Now, the company’s C-suite is organised by client segments and a new chief customer experience officer role has been created. Unsurprisingly, given its customer-centric approach, the bank continues to value its physical branches even as it embraces digitalisation. Banking is about relationships, and many clients still value this in brick-and-mortar branches. At BAC Credomatic, however, the role of the branch is changing: every day, the transactional side of the bank shrinks, opening opportunities for branches to become advisory and relational centres for clients. In the past five years, despite serving an increased number of customers, monetary transactions carried out at BAC Credomatic branches have plateaued, while digital monetary transactions have increased by 282 percent. Consequently, branches have been redesigned to provide a more relational banking experience, drawing on digital aspects, such as full internet access and self-service kiosks, while simultaneously prioritising relational solutions like providing meeting spaces for expert 60
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advice. The bank plans to expand its network of concept branches in the coming year. Maintaining a high standard of digital and human services will not be easy, particularly with technology rapidly evolving, but it is something that BAC Credomatic is wholly committed to. World Finance spoke with the bank’s chief digital officer, José Manuel Páez, about how the organisation intends to achieve this balancing act over the coming years. How has the bank used technology to foster a culture of innovation and creativity among its employees? BAC Credomatic continually invests in human talent, which remains the core of our business. Internally, we organise webinars where digital initiatives are shared company-wide and employees get the chance to hear and ask questions about recent digital releases. Our CEO regularly participates in these sessions, discussing the bank’s customer-centric strategy and the challenges we are facing. In 2019, the bank organised a digital showroom where developers were able to showcase their innovative initiatives. All corporate employees were invited to learn about recently released and upcoming innovations, testing them firsthand. The event felt like a tech showcase: loud and busy; everyone getting their hands on the new technology. We received very positive feedback about the event and will continue to support these types of initiatives in the future. In what other ways has BAC Credomatic digitalised its products and services? BAC Credomatic has undertaken a number of efforts to digitalise its products and services. Internally, we are launching novel product origination processes through our newly implemented business process management solution. The focus isn’t only on creating more efficient processes, but also on redesigning the processes themselves, thinking about digital origination and self-service wherever regula-
tion allows. In 2018, we were thrilled to release new streamlined or ig ination Increase in digital monetary processes for three transactions credit-card-related products, and even more excited to see t he ex treme of digital customers use BAC ly h ig h a dopt ion Credomatic’s app rates that these processes have had in all markets. E x t er na l ly, we of customers only use BAC recently launched Credomatic’s app our redesigned mobi le a ppl ic a t ion . Currently, three out of four digital customers use our mobile banking solution; therefore, it was critical for us to launch a completely renovated mobile experience. Further, because two out of five of our customers only use our mobile solution, we were keen to deliver a pristine application. We invested hundreds of hours researching customers’ needs and testing prototypes in order to deliver a banking solution they would fall in love with. Our mobile banking platform now presents a bird’s-eye view of all the products being used by each customer. It also allows them to easily share the result of a transfer or payment through their preferred method, whether it is an SMS, email or WhatsApp message. Improvements like these have positively impacted our customer satisfaction scores.
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don’t have the resources to build and maintain a website to sell their products through Facebook or via email using a simple and accessible platform. The uptake of this solution has exploded in the past year. We have also created a digital portal that offers discounts and promotions to our customers and merchants. The portal extends our merchants’ reach and provides discounted benefits to our customers. This closed loop has created a virtuous cycle that has been well received by both merchants and customers.
As part of our efforts to offer an omnichannel experience, we are pleased to have opened the first three concept branches in the region, located in Guatemala, Honduras and Costa Rica. Among other benefits, these branches offer full Wi-Fi access to customers and extensive in-branch digital solutions, integrating our technology platforms with our new business vision of a customer-centric service model. How has BAC Credomatic embraced mobile payments? BAC Credomatic became the first bank in the region to equip its mobile application with contactless payments functionality. Through near-field communication (NFC) technology, users can safely and easily use any NFC-enabled Android phone to pay merchants. As the largest merchant bank in the region, we have been creating an environment in which mobile payments can thrive, pushing contactless terminals and providing training for merchants. Clients have embraced the idea of only carrying their mobile phone and still being able to pay safely and smoothly. Since its release in August, uptake has gradually in-
MAINTAINING A HIGH STANDARD OF DIGITAL AND HUMAN SERVICES WILL NOT BE EASY, PARTICULARLY WITH TECHNOLOGY RAPIDLY EVOLVING, BUT IT IS SOMETHING THAT BAC CREDOMATIC IS WHOLLY COMMITTED TO
creased, and only continues to do so. We are pleased to see our customers raving about how innovative the feature is. What security features are included within the mobile app to safeguard consumer assets? Across all our services and channels, we adhere to the strictest information security standards and protocols, which allow us to safeguard our customers’ data and privacy. For one, the app itself is obfuscated, preventing anyone from accessing the source code. We have also included risk-based authentication functionalities within our platforms. This enables us to understand, detect and prevent unwanted customer behaviour. As part of our efforts to provide a safe but convenient experience, we have enabled biometric login where the device allows. Does BAC Credomatic offer any digital solutions that are specifically tailored to its SME customers? We have tailored many of our digital solutions to the SME segment. In a developing region such as ours, we focus on providing solutions that support the formal economy by enabling digital payments. For example, we launched MiPOS, a Bluetooth-enabled card reader that allows SMEs to receive card payments on the go. Credit card acceptance in our region is remarkably strong, partially due to the innovative and convenient products we offer. Another product we offer SMEs is Compra-Click, which allows small merchants that
As technology becomes more prominent, how will BAC Credomatic ensure that it keeps a human touch at the heart of its services? At BAC Credomatic, we are dedicated to keeping the customer at the centre of our every undertaking. We constantly research our markets and make every effort to understand our customers’ behaviour in order to find solutions that resonate with them. Our user experience team goes into the field on a weekly basis to receive customer feedback on new products and prototypes. The insights we obtain from these excursions are used to make the necessary changes to ensure our products are as clear and helpful as possible. In addition, we are implementing a new tool that will help us measure customer satisfaction at every touchpoint. We are excited to give our customers a voice to express their opinions. This will help us turn customer views into actionable insights that ultimately translate into better experiences. Technology is an enabler in many processes, but the customer will always dictate the path we will follow. What are BAC Credomatic’s plans for the future? We remain committed to our customercentric culture and, with that in mind, we are moving forward locally and regionally to strengthen our value proposition. In 2020, we will continue along the same lines, delivering well-researched solutions that respond to our customers’ needs. For our retail segment, we are planning to release a solution that helps our customers better understand their financial position and therefore make better financial and life decisions. It is our goal to create deep relationships with our clients, becoming their trusted advisor. We will continue to innovate for our corporate segment, providing digital solutions and a better experience for payroll, treasury and supplier payments. BAC Credomatic closed 2019 on a very positive note and we expect 2020 to be equally full of opportunities for the organisation. n
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Guiding responsible investment The finance industry plays a key role in global social development and supporting the transition to a sustainable economy. As a leading Nordic financial advisor, Carnegie Investment Bank takes this responsibility seriously, leveraging its prominent market position to stimulate responsible investments
Jonas Predikaka GLOBAL HEAD OF PRIVATE BANKING, CARNEGIE INVESTMENT BANK
Carnegie Investment Bank has played a central function in Nordic business for more than 200 years, first as a trading house and then as a financial advisor. We have built a bond of trust among the institutions, companies and private individuals we work with. Our knowledge of Nordic companies and their markets, combined with access to capital and ideas about growth creation, means we are well positioned to funnel capital into investments with growth potential. In every aspect of our operations, we take care to work with projects that contribute to a stronger society. New technology and sustainable products will be important if companies are to overcome the challenges that society faces today. Financial advisors must be able to provide assistance in terms of the personal and corporate issues associated with transitioning to a sustainable economy. This is where Carnegie’s years of experience come to the fore.
Shepherding change Being an industry leader like Carnegie means upholding a responsibility to always provide sound advice that meets the standards expected of a financial advisor. We are in a position to have a positive impact on the world, but this all hinges on the advice we give our clients and the long-term success of our own business. Through our research capabilities, which cover almost 95 percent of Nordic-listed companies, we can improve transparency and provide strong guidance to private and institutional investors. The risks and opportunities associated with envi62
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ronmental, social and governance (ESG) Carnegie Investment responsibilities are a Bank in numbers: natural component of this research. They form an essential as- Years of experience pect of decision-making for many investors in the Nordic market. of assets are screened Farsighted inves- for ESG qualities tors can use shrewd funds to contribute to the long-term health of the entire planet. The reallocation of capital, both between and within sectors, intensifies the pressure on companies to drive their sustainability efforts. Companies with access to capital represent a huge force for change in building a better world. With smart products and a skilled workforce, they can shepherd the world’s consumers towards a more sustainable lifestyle. Carnegie embraces sustainability throughout its asset management services, and we understand the importance of helping our clients navigate the complex financial issues associated with this transition. We screen 100 percent of the assets under our discretionary management in terms of their contribution to ESG principles. Sustainable investment can be approached in various ways, but ultimately it is a matter of mitigating risks and generating better riskadjusted returns. Investment managers might select companies that are recognised for their commitment to sustainability, or they could choose to influence companies that their clients have a stake in. Sometimes, managers decide to exclude entire industries in order to meet their sustainable goals, although this can have a negative impact on risk-adjusted returns. Carnegie has chosen to exert influence on the companies and management teams that are included in our asset management sphere.
We believe this approach is a more effective long-term solution than exclusion.
Planning to succeed Priming the next generation to take over substantial assets is an important part of creating a sustainable economy in the future. Carnegie provides support to families as they handle their legacies. Part of our long-term mission has always been to facilitate succession by helping the next generation take over their family business or other assets. Carnegie’s Next Generation Academy is a six-month tutoring initiative that aims to provide structured learning to our clients’ heirs. Attendees are instructed in a wide spectrum of skills that can have an impact on their inherited assets, including entrepreneurship, tax law, property ownership, investments and digital security. At the end of the course, we invite participants to join a network of past attendees. Through this network, we offer ongoing opportunities to meet and benefit from Carnegie’s experts. As part of the wider business community, Carnegie recognises our capacity and responsibility to facilitate the growth of new players in the market. For several years, Carnegie has offered a meeting place to promote the emergence of these early-stage companies. For example, each year they have the opportunity to gain broader exposure to investors and the wider world. We are committed to the idea that enterprise is a cornerstone of a dynamic business sector and a sustainable economy. As Carnegie continues to advance its position in the Nordics, we are also striving to enhance our role in capital markets. The importance of responsible advisory services is growing all the time, and Carnegie remains committed to leveraging its market position to stimulate responsible investment. ■
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Out of the shadows An ongoing crisis in India’s shadow banking sector has sparked a credit crunch and contributed to a major economic slowdown in the country, pointing to a need for greater surveillance of these institutions, writes Charlotte Gifford India’s love of gold goes back centuries. The precious metal plays an important role in traditional ceremonies, such as weddings and festivals, and it is such an important asset that households typically pass down gold jewellery and trinkets from generation to generation. So when Indians begin pawning their gold, it is a sign that the country has fallen on hard times. Many workers in India are selling off their family gold amid a credit crunch that has brought the country’s real estate and automotive sectors to a standstill and left hundreds of thousands without work. In a country that has been hailed as the world’s fastest-growing economy for decades, GDP growth is now at its lowest in six years (see Fig 1). Analysts have blamed the liquidity crisis on a range of factors, including clumsy policy moves, an unforgiving business environment and a tepid global economic climate. But few could deny that the credit crunch predominantly stems from India’s $42bn 64
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shadow banking sector, where an ongoing crisis has left many individuals and businesses unable to secure loans.
A moment in the sun Since the 2008 financial crisis, the number of non-banking financial companies (NBFCs) – or ‘shadow banks’ – has grown rapidly around the world. The success of these entities, which include hedge funds, insurance companies and pension funds, was partly due to increasing regulatory pressure on traditional banks. Today, total lending to NBFCs stands at $7trn globally. Unlike normal banks, shadow banks can’t borrow from central banks and don’t insure customer deposits – they use short-term sources such as commercial paper to borrow from banks, mutual funds and insurance firms in order to fund long-term projects. In India, where there are more than 11,000 shadow banks, this sector has come to play a vital role in the economy. The rise of these insti-
tutions can be traced back to the 2000s when there was a boom in large-scale infrastructure projects. Some developers struggled with repayments and left state-owned banks saddled with non-performing loans. As a result, these banks began shunning riskier borrowers. “For about five or six years, banks basically stopped lending to real estate,” said Harsh Vardhan, a senior advisor at Bain & Company. Shadow banks moved to fill the void. These entities went on a lending binge in the 2010s, accounting for nearly a third of new loans in India between 2015 and 2018. Their lending allowed for the huge rise of small to mediumsized businesses during this period. “SMEs were able to draw money from NBFCs as they have traditionally had a good reach in the interiors of the country and have expertise in things like vehicle finance, machinery [and] service equipment,” said Madan Sabnavis, Chief Economist at CARE Ratings. In this way, shadow banks contributed significantly to India’s rapid economic growth.
Turn for the worse This party came to an abrupt end when IL&FS, a major Indian infrastructure lender, ran into trouble. The institution, which until then was AAA-rated, defaulted on an INR 10bn
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$7trn 11,000 $63bn
Value of global lending to NBFCs
Number of shadow banks in India
Value of stalled residential projects in India
ing very easily,” Vardhan told World Finance. “The cost of their borrowing had gone up.” More than a year later, the crisis is far from over. In the financial year that ended in March 2019, credit by shadow banks fell 30 percent from the year before. Businesses that relied heavily on shadow banks have been left struggling to secure funding. Not only has this prompted a liquidity crunch among India’s real estate and automotive sectors, but it’s also created problems for the rest of the banking sector – after all, shadow banks are among India’s biggest borrowers. “Roughly 50 percent of their financial funding comes from banks, which means that there is a solvency issue with this,” Vardhan said. “If they start defaulting, then obviously some banks will default.” On this basis, S&P Global Ratings has warned that India’s financial sector now faces “a rising risk of contagion”.
AS SHADOW BANKS ARE LEFT UNABLE TO LEND, SOME OF INDIA’S MAJOR SECTORS HAVE FOUND THEMSELVES STRAPPED FOR CASH ($140.14m) bond repayment to the Small Industries Development Bank of India in June 2018. Over the following months, the trouble came thick and fast: IL&FS defaulted on five bank loans, prompting the government to step in and take control of the firm. The default rocked India’s financial markets. The Economist called it India’s “Lehman moment”. Amid the panic, investors shunned NBFCs, concerned about their hidden risks. “Even other entities [that] had no direct issues suddenly found that they could not raise fund-
Feeling the pinch As these financially important institutions are left unable to lend, some of India’s major sectors have found themselves strapped for cash.
Indian GDP growth PERCENTAGE
10 8 6 4 2
SOURCE: WORLD BANK
0 Note: 2019 figure is an estimate
One of these is the real estate sector. When mutual funds and insurance firms stopped lending to shadow banks, many of the infrastructure projects that took off in the 2000s skidded to a halt. According to Anarock Property Consultants, there are currently $63bn worth of stalled residential projects across the country. Without sufficient financing, many developers are going bankrupt. The credit crunch has also delivered a serious blow to the country’s automotive sector. Its current slowdown is one of the worst India has seen, with passenger vehicle sales experiencing their steepest fall in 18 years. The government has been reluctant to accept responsibility, with Finance Minister Nirmala Sitharaman blaming the slowdown on “the mindset of Millennials, who prefer to use ride-hailing services such as Ola and Uber”. However, the main reason car dealerships are going under is because they are struggling to secure finance. Since shadow banks lent to less creditworthy borrowers, banks are wary to take their place, which only adds to the woes of dealerships. Across the country, firms in the industry have laid off about 350,000 workers; as more people lose their jobs and see their income slashed, consumer spending drops, sending the economy into a vicious downward spiral. As well as being an important source of credit for many industries, shadow banks are fully integrated into India’s financial services sector. Many shadow banks lent from stateowned banks, mutual funds and insurance firms, meaning a collapse could have a domino effect on the wider banking sector. A report by the Reserve Bank of India suggests that the failure of any one of the top five shadow finance companies could trigger defaults in up to two banks. If this happened, the government’s ability to support depositors would be limited, owing to the increasingly narrow leeway for »
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“As more people lose their jobs and see their income slashed, consumer spending drops, sending the economy into a vicious downward spiral”
Indian Prime Minister Narendra Modi
dealing with any such collapse. This increases the risk of a full-blown financial crisis. It’s this threat that led ratings firm Moody’s to lower India’s outlook in early November from stable to negative, citing concerns about the country’s access to funding. Vardhan is optimistic that such a financial crisis is far from inevitable, as long as the government takes appropriate action. “As of yet, nobody has had a solvency issue,” he told World Finance. “As long as that is the case, then we don’t have a contagion risk.” Meanwhile, Sabnavis points out that not all NBFCs are at risk of defaulting – it’s only those with a history of “incorrect practices” that have exacerbated the crisis. “There are several large NBFCs [that] have prudent and viable models, and have not been affected by this crisis,” he said. As unlisted entities, shadow banks have so far come under less scrutiny than India’s stateowned banks. However, the current crisis has made it clear that these institutions need more regulatory oversight. “The lesson learned is that we need to have more supervision,” Sabnavis said. “Just as we have had an asset quality review for banks, so should it be for NBFCs, whose loan book is around 18-20 percent the size of banks and hence has an important position in the financial system.” 66
Into the light India is taking steps to improve the supervision of these institutions and minimise the risk of contagion within the sector. The government recently amended its insolvency and bankruptcy rules to give the Reserve Bank of India the ability to refer shadow banks to insolvency courts. The first shadow bank to go into insolvency proceedings will be the real estate lender Dewan Housing Finance: after a series of defaults in 2019, it stopped taking deposits and delayed some of its debt payments. Like IL&FS, the lender was taken over by the Reserve Bank of India after it racked up debts of $14bn owed to banks and mutual funds. That it will now be moved into bankruptcy proceedings marks an important step forward for the sector as a whole. “We have seen a major clean-up operation [that] will lead to the weaker firms being gradually moved out from the system,” Sabnavis said. “This will lead to greater prudence on the part of NBFCs in terms of re-evaluating their business models. Some of them may even pitch for banking licences, as this would be the right way to grow.” The Indian Government is also determined to tackle the credit crunch brought about by the crisis: in November, Sitharaman
announced that $1.4bn would be put towards restarting unfinished infrastructure projects. India will also sell stakes in five state-owned companies, including one of its largest public oil companies, in order to attract much-needed foreign investment to boost growth. However, the shadow banking crisis and the shockwaves it sent through the wider economy have cast doubts over the government’s ability to salvage the situation. On the campaign trail, Prime Minister Narendra Modi claimed he would make India a $5trn economy by 2024, but since taking office in 2014, Modi has been accused of making hasty decisions that have damaged the country’s economy. The most high-profile example of this was when he abruptly pushed through demonetisation in 2016, wiping out 86 percent of the currency in India’s market and leaving many cash-reliant businesses struggling to stay afloat. It’s another reason why the real estate and automotive sectors are as vulnerable as they are today. With that said, these economic issues – including the shadow banking crisis – cannot be blamed entirely on Modi. The crisis has exposed a number of systemic weaknesses in the financial sector, such as the lack of a legal framework around a financial institution’s insolvency. In this respect, Modi’s error was neglecting to prioritise reform of the financial system he inherited. Now, he desperately needs to push for change if he’s to get economic growth back on track. He’s promised to boost infrastructure spending and financial support for agriculture, but keeping the financial sector afloat may be his most urgent responsibility. Once the fastest-growing economy in the world, India is now in the midst of a steep economic slowdown. As much as the government might want to blame its misfortunes on the uncertain global economic climate, the fact that it is not a major exporter of manufactured goods means the country is less exposed to the US-China trade war and global manufacturing slowdown than other export-reliant nations. The roots of India’s economic woes go much deeper. Modi must tackle the financial sector’s weaknesses and improve regulation of its shadow banks if he’s to kick-start growth, create jobs and fulfil his promise of modernising India’s economy. n
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Bridging the gulf The Gulf Cooperation Council region has undergone significant infrastructural and economic development over the past few years. Financial institutions like Alpen Capital have provided substantial support in this area across a number of sectors
Rohit Walia EXECUTIVE CHAIRMAN, ALPEN CAPITAL
The Dubai International Financial Centre (DIFC) was established in 2004 as a special economic zone to provide companies with world-class infrastructure. Its opening brought about a paradigm shift for the region, with the adoption of a common law framework, an independent regulator in the form of the Dubai Financial Services Authority and the introduction of an independent judicial system. Today, the DIFC is ranked among the top 10 global financial centres for its effective business environment, human capital, infrastructure, financial sector development and excellent reputation. Starting with only a handful of companies, the DIFC is now home to more than 2,000 firms from around the globe, at least 600 of which are finance related. It has provided an encouraging platform for many companies to gain a foothold in the market and expand their operations across the region. The DIFC has played a pivotal role in not only connecting the local region with international markets, but also in establishing Dubai’s – as well as the broader Gulf Cooperation Council (GCC) region’s – place on the world stage. It has enabled overseas entities to establish their management offices, holding companies and family offices closer to assets they own or manage. In 2017, the DIFC 68
launched the FinTech Hive, a first-of-its-kind accelerator in the area, which brought cutting-edge financial services technology to the region. In addition, the success and impact of the DIFC led to the establishment of the Qatar Financial Centre in 2005 and the Abu Dhabi Global Market in 2013, both of which have frameworks similar to the DIFC. Alpen Capital was one of the first companies established in the newly revitalised DIFC. Over the years, the firm has seen the centre evolve into a vibrant financial hub for the region. World Finance spoke with Rohit Walia, Executive Chairman at Alpen Capital, about the comprehensive range of financial advisory services offered at his company and why the GCC region continues to attract investors from all over the world. In your opinion, what are the most notable opportunities available in the GCC region today? The GCC is currently undergoing significant reforms – regional governments are investing in local infrastructure development, tourist attractions and retail establishments. Recently, the UAE introduced changes to ownership laws, which we expect will improve the security of existing businesses and encourage renewed interest from investors. The Saudi Arabian Government has also announced bold infrastructure plans as part of its Vision 2030 programme. Its decision to allow 100 percent foreign ownership for retail and wholesale businesses, alongside the issuance of
new tourist e-visas, is expected to improve the country’s economic prospects. The other GCC nations are also implementing similar reforms to create a more lucrative investment climate. The region has seen a good number of deals made over the past couple of years, with more than half struck with countries outside the GCC. We have successfully closed deals across the food, electronics and manufacturing sectors, the most notable being the sale of a majority stake in the Al Kabeer Group – a frozenfood player in the UAE – to the Savola Group in Saudi Arabia. The region has also witnessed a number of cross-border mergers and acquisitions, with our regional companies acquiring stakes in numerous foreign businesses. Foreign companies have also made strategic investments in regional entities to strengthen their foothold in the region. We have witnessed a significant focus on e-commerce and online retailing, such as through Amazon’s acquisition of Souq.com, the largest e-commerce platform in the UAE, and Uber’s purchase of Careem, the foremost transportation network company in the UAE. At Alpen Capital, we are currently working in a broad range of sectors in the region such as food distribution, IT, education, healthcare and manufacturing. What about opportunities in Africa, Asia and the Levant? We began exploring the Asian markets about four years ago and have since successfully concluded several transactions in
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Companies with a presence in the DIFC
The year in which the DIFC was opened
THE GCC REGION HAS SEEN A GOOD NUMBER OF DEALS MADE OVER THE PAST COUPLE OF YEARS, WITH MORE THAN HALF STRUCK WITH COUNTRIES OUTSIDE THE GCC the broader South Asian region. We have raised over $700m for Sri Lankan financial institutions since we entered the market, while also raising capital for clients in Cambodia and Pakistan. In Bangladesh, we are currently raising funds for banks and reputable business groups that have attracted interest from top development finance institutions (DFIs) globally. Following our success in Asia, we have ventured into the Levant and Africa over the past two years, with both regions providing ample investment opportunities. For example, in Lebanon we raised over $250m for financial institutions and were pleasantly surprised with the opportunities found in Iraq – a market we entered last year. In Africa, we have closed multiple deals over the past year and are currently working on raising capital for local banks and financial institutions. We are also engaged with corporations (both local and international) for capital raising and mergers and acquisitions. Our work with the Tata Group in support of a complex off-balance-sheet financing transaction for one of its operations in Africa helped demonstrate our core strengths, particularly with regards to raising capital. Owing to the current underdeveloped state of the market, there is substantial interest from international investors, and plenty of opportunity to satisfy their appetite. We believe that venturing into these markets has yielded great results, and we expect to further cement our presence here over the coming years.
Can you tell us about your work with DFIs? DFIs are typically backed by developed countries, and are often established and owned by governments to provide funds for projects that encompass socially responsible investing. DFIs can include multilateral development institutions or bilateral development institutions. These play a crucial role in providing credit in the form of higherrisk loans, equity status and risk guarantee instruments for private sector investments in developing countries. Over the past couple of years, we have advised several financial institutions in emerging markets on debt and equity solutions delivered through DFIs. We have concluded multiple transactions with institutions including the Asian Development Bank, the European Investment Bank and Proparco, which has allowed us to enter markets in India, Sri Lanka, Lebanon and elsewhere. One of the transactions in Sri Lanka was funded by three DFIs: the Germany Investment Corporation, the Development Bank of Austria (OeEB) and the OPEC Fund for International Development (OFID). Our client at the time used the funding to support the growth of small and medium-sized enterprises (SMEs). In your opinion, why is impact investment becoming increasingly popular globally? Impact investing refers to investments made into companies, organisations and financial institutions with the intention of generating a beneficial social or environmental impact, in addition to financial returns. This source of financing is primarily gaining popularity because it facilitates capital to address the world’s most pressing challenges, such as sustainable agriculture, renewable energy sources, conservation, microfinance and affordable services. Given its progressive goals, this source of funding has attracted a wide variety of investors, both individual and institutional. Historically, we have seen that DFIs can provide capital for emerging economies – however, lately there has been an increasing interest from pension funds, prominent family offices and private foundations. Can you tell us about some of your most popular social impact transactions? What kind of response have they had? Most of our transactions have involved the funding of banks or financial intermediaries in emerging markets that subsequently lend to SMEs and microfinance institutions. This supports financial inclusion by making financial products and services accessible and affordable to all individuals and businesses. The benefits here are twofold – underserved individuals, en-
trepreneurs and SME owners all benefit from being incorporated into the formal economy. Reciprocally, banks and governments benefit from incorporating the underserved into the formal economy, as it provides more customers to loan to and a more regulated economy. For example, Alpen Capital advised Cambodia’s PRASAC Microfinance Institution in raising a term facility from the Asian Development Bank. The funding has been utilised by PRASAC to expand its lending to SMEs and to develop enterprises in rural areas. In another transaction, we assisted Lebanon and Gulf Bank to raise a syndicated senior term facility from the Netherlands Development Finance Company, the OFID and the OeEB. This led to the creation of jobs in one of the most underserved SME markets in the world. We are currently working on a transaction to fund a non-banking financial company to lend to female entrepreneurs so they can grow their own businesses. We are additionally looking at raising funds for a solar power plant in South Asia via impact investing funds. In light of the products and services you provide, what do you think the region’s investment landscape will look like in the future? The GCC region has been very dynamic and shown sustained growth over the past 15 to 20 years. It has also experienced its share of highs and lows, given the recent economic slowdown, fall in oil prices and geopolitical conditions. However, to mark its presence on the international business stage, the region has undergone massive infrastructural and financial development. By establishing financial centres among the top-ranked in the world, the region has established a solid ecosystem worthy of global recognition. In order to maintain the flow of capital, governments are implementing regulatory and economic reforms, which I believe will bring an upswing in demand and activity. Despite existing challenges, we are currently working on multiple merger and acquisition deals within the region, with expected deal closures in the near future. In order to survive the recent economic slowdown and maintain operational efficiencies, there have been consolidations in the market, and I expect this to continue. I also expect to see a revival of private capital funding as economic activity rises. Going for ward, we are anticipating a lot of traction in the broader reg ion from markets in need of infrastructural and socioeconomic development. Alpen Capital will be on hand to support these coming developments. n
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A first-rate bond market
Kazakhstan’s capital markets are flourishing, with tengedenominated bonds attracting interest from all over the world. The work of financial institutions like Tengri Partners has helped to whet investors’ appetites, writes Ilias Tsakalidis, Head of Capital Markets at Tengri Partners Investment Banking Kazakhstan’s financial market is developing rapidly. Its capital city, Nur-Sultan, has ambitions to become one of the world’s foremost financial centres, with investors from East and West beginning to take advantage of the country’s position at the crossroads of Europe and Asia. Tengri Partners Investment Banking, a premier independent investment banking and asset management firm headquartered in Almaty, Kazakhstan, provides full-scale investment banking services in the fields of debt and equity capital markets, mergers and acquisitions, brokerage and asset management, merchant banking, and private equity investments. Established in 2004 as Visor Capital (the investment banking arm of Visor Holding), our firm has advised and executed more than 40 transactions, collectively valued in excess of $17.3bn, over the years. At the end of 2015, Visor Holding sold the firm – the only investment bank in Kazakhstan holding a brokerage licence on the London Stock Exchange – to Tengri Partners Investment Corporation. Since then, the local investment banking market has entered a new era.
A capital idea Tengri Partners has garnered a reputation as the go-to bank for attracting debt capital, as shown by our repeat clientele and status as the preferred investment bank for international investors on issues related to bond transactions in Kazakhstan. At the end of Q3 2019, Tengri Partners’ presence in debt capital markets significantly increased, reaching 20 percent of total market share, compared with one percent in 2018. Tengri Partners is also the market leader for debt capital in terms of completed transactions. Our main aim is to boost the development of local capital markets, which are currently suffering severe deficits in terms of new issuers and secondary liquidity. Bringing risk-free instruments denominated in Kazakhstani 70
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tenge to local institutional investors has improved the potential for diversification from sovereign bonds and short-term notes. It has also allowed international financial institutions (IFIs) to expand their operations and avoid the currency mismatches that have been present for a number of years. Tengri Partners brought AAA-rated IFIs to the public debt capital market for the first time in the history of Kazakhstan, at a time when the country’s sovereign rating was BBB. The deals we pioneered strengthened our position in the investment banking sector; now, we are looking to take Kazakhstan’s capital markets to the next level. Transitioning International Finance Corporation (IFC) bonds out of global mediumterm notes programmes and placing them on the Kazakhstan Stock Exchange (KASE) represented the first hybrid transaction in the history of Kazakhstani capital markets. Tengri Partners successfully saw through the adjustment of local legislation and regulation in order to make this a reality. This proved to be the most challenging aspect of the transaction, requiring us to develop new mechanics of issuance and conduct a public offering on the KASE. Other challenges we faced were: allowing these deals to be settled through a local depositary system; developing a market valuation methodology for these bonds amid scarce secondary liquidity; including IFI bonds with AA and above ratings in the list of eligible collateral for the discount window with the National Bank of Kazakhstan; and applying identical haircuts as sovereign bonds. This final requirement proved to be a game changer for many investors and primary commercial banks, for which secondary liquidity is an extremely important issue. In July 2018, the first IFC bond was placed for KZT 8.5bn ($22m), representing backto-back funding for the issuer, with funds
HAVING TAPPED INTO IFI BOND MARKETS, TENGRI PARTNERS HAS DEMONSTRATED THAT IT IS A FORWARDLOOKING ENTERPRISE READY TO ACCEPT NEW CHALLENGES
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being immediately disbursed to the local borrower. The deal was structured to mirror the terms of the loan disburseTransactions executed ment and resulted in an amortising fixed coupon bond – the first of its kind in Total value of transactions Kazakhstan in almost 10 years. In arranging the deal, Tengri Partners outperformed the sovereign yield curve, which was a great achievement for us and the IFC as the issuer. It reduced the loan cost for the borrower, granting them access to the private sector for affordable funding amid limited local opportunities. The transaction was an important benchmark in the history of Kazakhstan’s capital markets development. It was the first IFC bond to be denominated in tenge, the first AAA-rated bond placed on the KASE, the first AAArated IFI bond primarily for private sector investors in Kazakhstan, and the first time an AAA-rated IFI engaged a Kazakhstani investment bank for a public bond offering.
Tengri Partners in numbers:
A done deal In another unprecedented move, Tengri Partners has managed to engage every type of investor currently present in Kazakhstan, with 19 bids from 10 participants and a bid-to-cover ratio of 2.25. The issuance of the IFC’s tengedenominated bond is in line with the IFC’s strategy to source long-term funding and create access to local currency finance for private sector expansion, helping to boost economic growth and create jobs. The IFC almost immediately followed up with two deals in September 2018 and January 2019, worth a combined KZT 25bn ($64.7m), underwritten by Tengri Partners. Again, demand significantly exceeded the offered volume by an average of 1.64 times. The maturities of the three bond issuances were 7.5, four and two years respectively. This perfectly matched with investors’ appetites for risk-free, medium-term instruments. It allowed them to diversify their investment portfolios and comprehensively enhance the average quality of liquid assets. An Asian Development Bank (ADB) bond issuance in tenge has also provided a backto-back funding strategy for the issuer. The milestone dual-tranche, inflation-linked bond possesses a highly tailored structure mirroring the terms of underlying loans that will grant cheaper debt funding on market terms. The hybrid bond approach was crafted by issuing and documenting the transaction under the ADB’s global medium-term notes
programme and English law while settling the deal through the local depositary system – a first for the ADB in any developing member country. The issuance was placed exclusively with institutional investors and marked a series of firsts both for the ADB and the local market. It was the ADB’s first tenge bond issuance, the first ADB inflation-linked bond in a local currency and the first inflation-linked bond in Kazakhstan since 2016.
Building a reputation The European Bank for Reconstruction and Development (EBRD) is the most active development bank in Kazakhstan in terms of project numbers and volume. With the help of Tengri Partners, it is the latest IFI to successfully tap the local market with a tenge-denominated bond issuance. The EBRD already raised KZT 260bn ($673m) through five issues in 2019 alone – another milestone for the local market. We have witnessed the first domestically placed public bond offering for the EBRD in Kazakhstan and the largest single inflationlinked bond issuance by an AAA-rated IFI in Kazakhstan. The execution phase of the deal took just one week from the approval of bond terms to final settlement. The bond issuances also provide proof of the feasibility of tapping spare tenge liquidity for a risk-free borrower. For Kazakhstani investors, such bonds are important for diversifying their portfolios, while commercial banks and insurance companies that urgently need medium-term, high-quality liquid assets in tenge will also benefit. It is worth noting that the issuance of IFI bonds took place on market terms and was a significant success, since the demand of most placements exceeded the offered volume, emphasising the high rating appreciation by local market participants. Moreover, the entry of issuers such as the IFC, ADB and EBRD to the KASE opens the way not only for other IFIs, but also entails further interest in local debt capital markets from both international investors and issuers, which is a positive sign for the reputation of the country and the development of capital markets in Kazakhstan. Having tapped into IFI bond markets, Tengri Partners has demonstrated that it is a forward-looking enterprise ready to accept new challenges. The next cutting-edge solution for local quasi-government companies will be an opportunity to place their bonds among international investors. Tengri Partners has already developed a unique issuance structure that will make tenge-denominated local bonds an attractive security for overseas bond investors. At the same time, local capital markets will experience an investment boost, not a mere capital reshuffling within the country. n
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A European banking roadmap Despite heightened competition, a slowing macroeconomic environment and record-low interest rates, BAWAG Group is finding success in Europe’s retail banking sphere with a relentless focus on simplification, technology and efficiency Keeping things simple words by
Anas Abuzaakouk CEO, BAWAG GROUP
We are living in one of the most dynamic and transformative periods of banking. The next decade will bring about rapid change as the traditional banking model is challenged by new and evolving technology and shifting customer behaviour. The future guarantees only one thing: change. Banks that fail to address these changing currents will find themselves unable to compete. On the surface, the situation today for European lenders does not look promising. Negative interest rates, lower margins, multiple restructurings and anaemic growth all tend to paint a rather challenging picture of the entire banking industry. These factors are particularly pronounced in mainland Europe, a region with a vast number of lenders of all shapes and sizes – by all measures, a region that is overbanked and seemingly unable to consolidate for a variety of reasons. Since 2007, both the EURO STOXX Banks Index (which represents publicly listed eurozone banks) and the STOXX Europe 600 Banks Index (which represents listed panEuropean banks, including those outside the eurozone) have decreased by more than 70 percent. According to the European Central Bank (ECB), the average return on equity of eurozone banks in 2018 was around six percent, with a cost-to-income ratio of 66 percent. Focusing on negative rates or the structural differences between Europe and other regions related to bond yields, capital markets or the lack of a banking union is not without merit. In our view, however, this is not the greatest culprit causing the banks’ struggles. Financial institutions need to embrace simplification, leverage technology and have a keen focus on efficiency to transform their business models for the better. 72
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Despite the aforementioned all-too-familiar challenges, at BAWAG Group, we see many opportunities across the European banking landscape. In order to take advantage of these, banks’ management teams should foster a clear commitment to simplification and efficiency. Defining core competencies, being laser-focused on a handful of core products and services, and simplifying end-to-end processes across the organisation are key to driving efficiency throughout a company (be it at a bank or any other firm). Consumers are increasingly looking for the most simple, straightforward and easy to use banking products that offer 24/7 connectivity. Providing a straightforward and simplified product offering requires simple and streamlined end-to-end processes, whether the product involves mortgages, consumer loans, leases, credit cards or current accounts. At the end of the day, customers don’t care about a company’s internal processes – they want the most simple, easy to use and easy to understand products and services at a fair price. This will ultimately drive banks to become more efficient, which is a key competitive differentiator. Companies still talk about technology through the traditional lens of IT, referring to it as a siloed function that is distant from the rest of their operations. Banks should take a different view, very much placing technology at the heart of every aspect of their business. This includes engagement with customers through mobile applications, e-banking, online payments, advisory services, underwriting, loan processing and customer service centres – everything needs to be underpinned by technology. Retail banking is becoming more commoditised in the way that it enables financial institutions to truly benefit from technology to create seamless processes. Our own experience at BAWAG Group required us to understand our end-to-end processes before transforming the organisation. In doing so, we were
able to reduce the amount of complexity within our product offerings and services, which, in turn, simplified our middle and back-office functions. However, embracing this focus on simplification required buy-in across the organisation, becoming data-driven in our decision-making and empowering employees to be agents of change. Ultimately, the culture of simplification and consistent improvement took hold and became ingrained in how our organisation operates.
Sound fundamentals If we zoom in to focus on a specific core European market, the situation for banks in the DACH (Germany, Austria and Switzerland) region looks particularly interesting: the average return on equity for German banks is 2.4 percent (see Fig 1); Austria is one of the most densely banked countries in Europe; and Switzerland’s banking sector is recognised the world over for its stability. The region is at times mischaracterised as being unprofitable for banking. A good deal of the below-average profitability in the region can be attributed to very high cost structures and, to a certain degree, a fragmented banking market. We see both as opportunities, in terms of applying an industrialised ap-
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Average return on equity achieved by banks (2018) PERCENTAGE
15 12 9 6 3 0
SOURCES: EUROPEAN BANKING FEDERATION, THEGLOBALECONOMY.COM
CUSTOMERS DON’T CARE ABOUT A COMPANY’S INTERNAL PROCESSES – THEY WANT THE MOST SIMPLE, EASY TO USE AND EASY TO UNDERSTAND PRODUCTS AND SERVICES AT A FAIR PRICE proach to banking and presenting am- BAWAG Group ple opportunities for in numbers: consolidation. More importantly, our view is largely informed by Pre-tax profit (2018) the very strong macroeconomic backdrop of the region. The DACH region Return on tangible is home to more than common equity (2018) 100 million people – roughly one third the size of the US market. According Cost-to-income ratio (2018) to the OECD, the regional GDP growth rate is approximately one to two percent – Austria is the front-runner here, recording GDP growth of 2.7 percent in 2018 and 1.8 percent in 2019. Unemployment in the DACH region, meanwhile, lies between a healthy three and four percent. All three countries have strong fiscal positions, with a relatively small debt-to-GDP ratio and low levels of both consumer indebtedness and homeownership when compared with Anglo-Saxon countries. These are all great macro factors from a retail banking standpoint and should translate to a lower
$630.2m 14.2% 44%
cost of equity given the stability and low volatility of the region. With a strong macro backdrop, stable legal systems and regulatory environments, and low levels of consumer indebtedness augmented by strong risk management, conservative underwriting and an industrial approach to banking, we believe this to be a formula for success in retail banking across the region.
Focusing on things you can control Every business has to deal with constant change and disruption, whether it’s a bank, a manufacturing company, a technology firm or a cutting-edge start-up. However, if organisations choose their products, channels and markets with an absolute focus on customer needs, and drive simplification and efficiency across the organisation, this can create a formula for success in any industry, including retail banking. In 2007, our bank was loss-making and undercapitalised with a fundamentally broken business model. The bank was sold in an administration process to an investor consortium led by private equity firm Cerberus Capital Management. More than 12 years later, our bank is now a publicly listed company on the Vienna Stock Exchange. It executed the
Note: Switzerland data is the latest available (2016)
largest initial public offering in Austrian history in 2017, and today ranks in the top tier of European banks in terms of profitability and efficiency, delivering a pre-tax profit of €573m ($630.2m), a return on tangible common equity (ROTCE) of 14.2 percent and a cost-to-income ratio of approximately 44 percent for 2018. In terms of capital generation and returns, we target an annual dividend payout of 50 percent of the net profit attributable to shareholders and will deploy additional excess capital to invest in organic growth and pursue earnings-accretive mergers and acquisitions at returns consistent with our group ROTCE targets. This all comes as a result of focusing on the things we can control and truly impact. For the first three quarters of 2019, we reported a strong profit before tax of €451m ($496.1m) and a net profit of €343m ($377.3m), both up five percent on the previous year. The increase was primarily driven by higher operating income. The bank delivered an ROTCE of 14.2 percent, a cost-to-income ratio of 42.7 percent and a Tier 1 common capital (CET1) ratio of 15.7 percent. Additionally, we received approval from the ECB for our share buyback programme of up to €400m ($440m), which we executed for the full amount in Q4 2019. Accounting for this and the year-to-date dividend accrual, the pro forma ROTCE was 17.7 percent for the first three quarters of 2019, with a pro forma CET1 ratio of 13 percent. As well as making progress in our strategic capital actions, we continue to execute a number of operational initiatives. In fact, we are on track to deliver on all of our targets in 2019 and continue to adapt to a changing operating environment. While the market for European banking continues to be challenging, our fundamentals at BAWAG Group remain strong. We will focus on the things that we control, driving operational excellence and continuing to pursue disciplined and profitable growth. n
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Leading the way Emirates Islamic has claimed many firsts in the Islamic finance market, becoming an early pacesetter in the race to provide customers with new digital solutions
Wasim Saifi DEPUTY CEO, EMIRATES ISLAMIC
Islamic finance has developed markedly in recent years. According to a study conducted by Thomson Reuters, more than 1,300 Shariacompliant organisations – holding combined assets under management of some $2.4trn – offered products and services under the umbrella of Islamic finance in 2018. In its modern form, Islamic finance is a relative newcomer to the financial services sector, with origins tracing back to the foundation of the Islamic Development Bank in 1975. However, it has certainly modernised quickly. In fact, many institutions have since embraced new technology to deliver faster and more reliable services to their customers. This is certainly the case for Emirates Islamic, where we are dedicated to providing the latest digital banking solutions and an enhanced banking experience. We were the first Islamic bank in the UAE to launch a mobile banking app and consistently lead the Islamic banking sector in terms of digital innovation. As new trends develop in the market, we will continue to adapt to give our customers the very best service.
On the way app At Emirates Islamic, our customers are helping to drive our pursuit of more innovative banking solutions. For example, they recognise the world-class features of our mobile banking app, which has received more than 25,000 reviews on the App Store and possesses an excellent average rating of 4.5 stars. We revamped 74
the app in late 2018 and have subsequently delivered regular enhancements and updates. As a result, it now has more than 250 features, including a demo that lets both customers and non-customers experience the app’s key services without having to log in. This feature makes Emirates Islamic the only financial institution within the region to have a fully working demo included within its app. Our app also allows customers to benefit from cardless cash withdrawals, a cash-oncall facility and a remote card management system that enables users to activate, block or unblock their cards, as well as change their PIN instantly. EMIRATES ISLAMIC Its QuickRemit funcIS DEDICATED TO PROVIDING THE LATEST tion, meanwhile, allows customers to DIGITAL BANKING transfer f unds to SOLUTIONS AND AN partner banks in InENHANCED BANKING dia and Pakistan in EXPERIENCE less than 60 seconds. Mor e o v e r, t he app’s peer-to-peer service, Instapay, enables customers to send and receive funds with just a mobile number. Other helpful services include a remote queue ticket for our branches, the in-app provision of Apple Pay, an enhanced security option called SmartPass and instant account opening. Collectively, the features included in the app have helped Emirates Islamic stay relevant and in tune with our customers’ needs.
First things first Emirates Islamic continues to pioneer innovations in the Islamic banking sector, becoming the first (and, so far, only) Islamic bank in the UAE to offer its cardholders all
three digital wallets – namely, Apple Pay, Samsung Pay and Google Pay. Digital wallets have found favour with many consumers due to the added convenience and security they provide. At Emirates Islamic, we are keen for our customers Emirates Islamic app: to make the most of these services. In Apr il 2019, Features Emirates Isla mic launched its ow n WhatsApp banking service, becoming Reviews the first Islamic bank in the world to do so. This service further enhances Emirates Star rating Islamic’s suite of digital financial products, enabling customers to conduct daily banking activities in a seamless and hassle-free manner. It also allows customers to enjoy features such as remotely checking their account balance and temporarily blocking or unblocking an existing card. Furthermore, in Q3 2019, Emirates Islamic became the UAE’s first Islamic bank to offer dynamic currency conversion for visitors using a non-UAE Visa card. As a result, customers can now view exact conversion rates and fees in their home currency before making withdrawals at Emirates Islamic ATMs. At Emirates Islamic, we are dedicated to enhancing the digital experience for our customers; our commitment to innovation can be seen through the many regional and industry firsts we have achieved. By creating a paperless, digital sourcing experience in both our physical branches and dedicated applications, we are making it easier – and, more importantly, faster – for customers to acquire and use our products and services. As the financial services market rapidly transforms, we are ready to keep pace while remaining true to the principles of Islamic finance. ■
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AW ThaiLife Award_ENG [Word Finance]2019.pdf
| Autumn 2019
Time to face facts Facebook CEO Mark Zuckerberg has announced the company will launch a digital currency later this year, but already the plan is fraught with issues, writes Alex Katsomitros »
Autumn 2019 |
“It was a neat idea that’ll never happen, and I have nothing else to say about it.” JPMorgan Chase CEO Jamie Dimon didn’t mince his words when asked about the fate of Libra, the digital currency expected to be launched by a Facebook-led coalition later this year. Dimon’s assessment came after several members of the Libra Association, the Geneva-based body overseeing the launch of the currency, withdrew from the project. The timing couldn’t have been worse. Announced just a few days before the group’s first board meeting, the exodus – which started with PayPal and soon included Stripe, Mercado Pago, Mastercard, Visa, eBay and Booking Holdings – dealt a heavy blow to the currency’s reputation. “It costs the Libra project some credibility,” John Sedunov, an associate professor of finance at Villanova University and an expert on cryptocurrencies, told World Finance. “You have institutions that are well versed in processing payments and handling data leaving the project. It can survive without these partners, but the costs of doing so will be higher.”
comfortable with the idea of a cryptocurrency through a company they already know.” One reason cryptocurrencies have failed to enter the mainstream is their high volatility. Bitcoin, the first and still best-known digital currency, has been plagued by abrupt price swings, attracting speculators but putting off less tech-savvy users. In December 2017, it reached its peak price of nearly $20,000, before dropping to $7,754 less than two months later (see Fig 1). To avoid this pitfall, Libra has been designed as a ‘stablecoin’ – a low-volatility currency backed by offline financial assets, such as a basket of fiat currencies and US Treasury securities. In September 2019, Der Spiegel reported that Libra’s reserve basket would comprise US dollars, euros, yen, pound sterling and Singapore dollars (see Fig 2), while each partner would contribute $10m. The structure of Libra departs in several ways from cryptocurrencies such as bitcoin and Ether: for example, Libra units will be issued by partner companies rather than independent miners, while partners will be responsible for the reconciliation of transactions and will have exclusive access to transaction data. Further,
Quick out of the blocks The mood was very different when Facebook announced Libra’s launch last July. Kevin Weil, Vice President of Product at Calibra, a Facebook subsidiary created to serve as a digital wallet for Libra, expressed hope that the currency would last “hundreds of years”. One of the project’s main goals is to boost financial inclusion by catering to the 1.7 billion adults around the world who do not have access to a bank account. The currency’s white paper set the tone: “Our hope is to create more access to better, cheaper and open financial services – no matter who you are, where you live, what you do or how much you have.” Facebook is far from alone in its attempt to tap into this booming market. Telegram, a popular messaging app, is planning to launch its own digital token, while other tech powerhouses are rumoured to be experimenting with similar projects. But it is Facebook’s user base of some 2.45 billion people that has raised hopes that digital currencies can finally break the silo of the close-knit blockchain community and gain traction with the broader public. As Sedunov explained: “In some ways, corporate-led cryptocurrencies may be beneficial for currencies like bitcoin, as they may provide an easier gateway into the cryptocurrency world. Individuals may change their dollars to Libra and then move from Libra to bitcoin as they become more 78
Fig 1: Price of bitcoin USD
20,000 15,000 10,000 5,000 0 Jul’13
Fig 2: Libra’s reserve basket of fiat currencies ● USD ● EUR ● JPY ● GBP ● SGD
Unbanked adults worldwide
Facebook users worldwide
1,500+ SOURCE: DER SPIEGEL
Organisations expressed an interest in being involved with the Libra Association
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Saïd Business School, told World Finance: “Apple Card… Google’s rumoured addition of checking accounts to Google Pay and offerings out of China like Alipay are a more serious threat [than Calibra].”
A crumbling coalition
unlike bitcoin and Ether – which use public, ‘permissionless’ blockchains that allow all users to validate transactions – the Libra Association is expected to operate as a central authority.
Show me the money One of the key components of the Libra venture is Facebook’s payment service, Calibra, which some pundits believe could bring about a revolution in online commerce by enabling micropayments. Christophe Uzureau, a blockchain analyst at research and advisory company Gartner, told World Finance: “Facebook increasingly invests in payment systems with services such as Facebook Pay, and that reflects a fundamental shift of strategy. They do not want to be perceived as a media company and they are also trying to reduce their reliance on advertising revenue. Shifting to e-commerce is an important component of this strategy. While Facebook has stressed this won’t be the case, a potential combination of Calibra and Facebook Pay could be a catalyst for this shift.” The withdrawal of important partners may set back these plans, however. EBay’s departure was particularly damaging, depriving Libra of a global marketplace of 182 million consumers, while credit card companies Mastercard and Visa could have helped introduce the cryptocurrency to older audiences. The project would have also benefitted from ac-
cess to the global network of merchants using Stripe or PayPal to process payments. Some experts, though, believe that Calibra could emerge as a competitor to these companies. “In time, the question is whether PayPal and the credit card companies can survive without Libra,” Sinclair Davidson, an associate at RMIT University’s Blockchain Innovation Hub, told World Finance. Andreas M Antonopoulos, an author and educator who has published several books on cryptocurrencies, believes there is a generational aspect that favours Libra, too: “Libra and other ‘corpocurrencies’ are most threatening to the existing financial system. They can serve the Millennial demographic much better than existing banks and payment providers. It’s most useful to think of them as a super PayPal than a cryptocurrency.” Others are more sceptical about the threat Calibra would pose to payment powerhouses. David Shrier, an expert on financial innovation who leads the fintech and blockchain strategy programmes at Oxford University’s
“Like other cryptocurrencies, Libra has been accused of being a potential conduit for money laundering”
While major partners have pulled out of the project, other organisations are jumping on the Libra bandwagon. In fact, the Libra Association announced in June 2019 that more than 1,500 organisations had expressed an interest in getting involved with the project, around 10 percent of which met the preliminary membership criteria. However, the withdrawal of household names such as Visa and eBay has brought the project’s viability – as well as potential imbalances in its internal governance – into question. As Uzureau explained: “Facebook, Calibra and the Libra Association are tightly aligned. As of the end of October, all the money invested in the Libra Association comes from Facebook; none of the other members have contributed so far. So, Facebook is likely to shape Libra’s governance model according to its own preferences. Facebook and Calibra engineers are behind the Libra protocol and the programming language Move.” Although no official explanation was given for the Libra Association exodus, it is widely assumed that regulatory concerns played a crucial role. Sedunov told World Finance: “I think that the companies left the association – at least, in part – because of the high level of scrutiny that Facebook is facing from regulators around the world. It may end up being just too costly to launch the project. There is also risk involved with an innovation like this and perhaps these firms didn’t like the level of risk that the project would require.” In October 2019, Senate Democrats Sherrod Brown and Brian Schatz warned Mastercard, Visa and Stripe that their involvement could pose a threat to the financial system: “If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities.” And after the companies announced their withdrawal, Brown commented: “Large payment companies are wise to avoid legitimising Facebook’s private, global currency. Facebook is too big and too powerful, and it is unconscionable for financial companies to aid it in monopolising our economic infrastructure.” For Antonopoulos, such regulatory pressure stresses the need for cryptocurrencies: “[Mastercard, Visa and Stripe] were basically threatened with audits for even being part of the [Libra Association]. That kind of »
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extra-legal coercion by regulators and legislators is one of the reasons cryptocurrencies exist and are needed.” Ironically, Sedunov believes the departure of household names from the coalition will make regulatory approval a thornier process: “These exits can also make the regulatory hurdles Facebook is facing more difficult to clear. The credibility loss also matters, as individuals may be less likely to adopt Libra if it is a Facebook-only project, relative to a project with backing from the full association.” For his part, Facebook CEO Mark Zuckerberg testified in front of Congress, pledging that Libra would not be launched anywhere else before getting the green light in the US. He did, however, warn that “if America doesn’t innovate, our financial leadership is not guaranteed”, and pointed to China’s development of a government-backed cryptocurrency as evidence of that fact. Some think Libra may be more successful in laxer regulatory regimes where the need for alternatives to fiat currency is more evident. As Shrier explained to World Finance: “Political resistance is the big obstacle to Libra’s success. With the major countries in the EU lining up to keep you out – France notably stating [that] Libra will be banned from the country – you lose a market of 500 million people. China is unlikely for market penetration due to the dominance of Baidu, Alibaba and Tencent, plus the launch of China’s [digital currency]. This means Libra could be launched, but will probably have more traction in emerging markets where the political will to ban them is weaker.” 80
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You shall not pass For the time being, Facebook faces an uphill battle to overcome regulatory hurdles, with critics pointing to its potential threat to national sovereignty as a main point of contention. According to Davidson, cryptocurrencies such as Libra could undermine the ability of states to use financial sanctions as a foreign policy tool. Another risk is that central banks may lose their grip on monetary policy by controlling the supply of money, making them toothless when the next financial crisis strikes. Dirk Niepelt, a professor of economics at the University of Bern, believes currency exchange rates may also be affected: “When customers hold Libras, they indirectly hold dollar or euro [denominated] securities. Accordingly, the demand for dollars or euros rises if customers who used to hold, say, rupees, switch to Libra. But the demand for rupees would fall.” In Europe, French Minister of the Economy and Finance Bruno Le Maire dismissed Libra as an “unacceptable” venture that would see “a private company controlling a common good and taking over tasks normally discharged by states”. The European Commission has also launched an investigation into potentially anti-competitive behaviour. And, like other cryptocurrencies, Libra has
“The advent of corporate cryptocurrencies could force governments and central banks to enter the fray”
been accused of being a potential conduit for money laundering, although Juan Llanos, a New York-based expert on fintech compliance, dismissed these concerns as scaremongering in an interview with World Finance: “If a digital record-keeping system had a way to attach the real-world identity of each user to each transaction, it would be less attractive to criminals. Well, Libra is such a system. It’s digital, traceable [and] potentially indelible.” For Shrier, though, Facebook’s leading role in the project is problematic: “Libra has political toxicity around it due to Facebook’s continued involvement. Arguably, Libra can’t work without Facebook – one of the world’s largest marketing platforms – yet it is that very involvement that makes Libra’s launch so challenging.” Over the past few years, Facebook has been embroiled in several scandals concerning privacy and manipulation, some of which had serious political ramifications – notably, the role the company’s data played in the lead-up to the UK’s EU membership referendum and the 2016 US presidential election. Shrier continued: “Politicians have Facebook in their crosshairs due to the numerous and repeated privacy violations, mishandling of personal data and suggested impact on sovereign elections, making Libra’s market access problematic.” Facebook has attempted to alleviate these concerns, clarifying that it will keep transactional data separate from other Facebook services and ensure the identities of users are not tied to transactions. Many critics take these assurances with a pinch of salt, pointing to
French Finance Minister Bruno Le Maire
loopholes, such as asking users to accept sharing their Libra-related data to access other Facebook-owned apps. As Uzureau told World Finance: “If Calibra is the only wallet available on Facebook services, including Facebook, Facebook Messenger, WhatsApp and Instagram, it becomes very easy for Facebook to use Libra as a reward programme for sharing data. So if a user agreed to share more data, they could offer them more units of Libra. The risk is that the customer would be highly dependent on such an ecosystem.”
A SWIFT response The advent of corporate cryptocurrencies such as Libra may force governments and central banks to enter the fray. A 2019 survey of central banks conducted by the Bank for International Settlements found that 70 percent of respondents were conducting research on centralbank-backed digital currencies (CBDCs) or were considering launching digital currencies of their own. Central banks in China, Sweden and Thailand, for example, are expected to issue CBDCs in the coming years, while outgoing Bank of England Governor Mark Carney has called for an international CBDC to replace the dollar as the global reserve currency. Although national digital currencies wouldn’t compete with the likes of Libra – due, in large part, to the fact they would be pegged to fiat currencies and would be centrally controlled – they could contribute to the acceptance of cryptocurrencies as a legitimate means of transaction. Shrier believes the announcement of Libra’s launch may have concentrated
“By rattling the cages of the financial system, Libra may push commercial banks to reconsider some of their practices” minds: “If anything, Libra served as a wakeup call to governments to move faster... Libra’s biggest threat today is [China’s state-backed currency] and Alipay. Tomorrow, it’s possibly a federation of government digital currencies.” As for commercial banks, Libra is an enigma wrapped in a riddle. By rattling the cages of the financial system, it may push them to reconsider some of their practices – especially the use of services like messaging network SWIFT, which is often dismissed as being antiquated. Some fear that Libra may turn Facebook into a competitor, with the Libra Association effectively operating as a private central bank. In an interview with the Financial Times, Weil acknowledged that Calibra could offer services traditionally provided by banks, but dismissed speculation that Facebook has bigger ambitions: “We’re not a bank, we don’t view ourselves that way. We’re not offering interest, for example, and things that banks do.”
Chain reaction For the blockchain community, the advent of Libra has been equally frustrating. Some pioneers have hailed it as a major event that will make cryptocurrencies more popular, but crit-
ics see it as a betrayal of blockchain’s libertarian origins. Bitcoin’s greatest selling point was the creation of a decentralised financial system that wouldn’t allow any participant to become dominant, effectively ending the monopoly of governments and central banks over money supply. According to Llanos, though, that was a naive vision from the outset: “They overestimated the capabilities of the technology and underestimated the power of the market constraints. On the one hand, the technology itself is very immature – as are, one may argue, many of its supporters. On the other hand, human nature hit the ceiling of the law and indifference of public opinion.” Libra is closer to a centralised model, only permitting members of the Libra Association to process transactions via the blockchain. The authors of the currency’s white paper express hopes of moving to a permissionless system within five years, but acknowledge that no solution currently exists “that can deliver the scale, stability and security needed to support billions of people and transactions across the globe through a permissionless network”. Many experts doubt that such a transition is feasible, or even desirable. “The white paper was a naive pipe dream,” Antonopoulos told World Finance. “Without decentralisation of control, you cannot have permissionless operations or any of the other characteristics of cryptocurrency.” Given the amount of research showing that permissionless consensus mechanisms can be improved, Uzureau believes scale is being used as an excuse to justify a centralised governance structure: “Being centralised or decentralised is not a dichotomy – it’s a continuum. You could move a bit more towards decentralisation, but the question is, can you reverse it? If Calibra becomes the main wallet used for Libra transactions – and Facebook has a lot of power on how Libra is used as part of its ecosystem – they could influence the evolution of Libra and reverse the process of decentralisation.” Some go one step further, pointing to Facebook’s track record. “Libra, as a cat’s paw for Facebook, has no strategic interest in becoming permissionless or decentralised,” Shrier said. “Zuckerberg swore when he bought WhatsApp that he wouldn’t break the end-toend encryption and run ads, and WhatsApp’s founder left Facebook when ‘plans changed’ to do exactly that. So I wouldn’t count on much in the way of consistency in Libra’s strategy.” But should Libra’s partners manage to build a cryptocurrency that is permissionless and scalable, the rewards could be massive. “This is a $29trn question,” Davidson said, referring to RMIT Blockchain Innovation Hub’s estimates of the size of the booming cryptocurrency economy. “I’m not greedy, I would just like one percent.” n
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A new direction for insurance
With a number of unprecedented opportunities and challenges sweeping the insurance sector, innovation is the order of the day. If they are open to change, companies within the industry will thrive in this environment The global insurance sector is undergoing an exciting transformation. This largely traditional industry, which can trace its roots back to the merchant traders of ancient Babylon, has firmly entered the digital age. Over the past two decades, technology has redefined the insurance landscape, opening companies up to new opportunities and challenges. Digitally savvy consumers have grown to expect on-demand, personalised services from their insurance providers, with smartphones radically transforming the customer service experience. In addition to managing these evolving expectations, traditional insurance companies must now compete with the emergence of highly digitalised ‘insurtech’ firms. Another by-product of the technological revolution, these nimble start-ups put cutting-edge innovation, such as artificial intelligence (AI) and the Internet of Things (IoT), at the heart of their operations, generating significant investor interest and expanding into spaces previously held only by established insurance behemoths. To deal with shifting customer expectations and an increasingly competitive market, many insurance providers are branching out of risk-based products and have begun to focus on developing a wide range of non-insurance services to supplement their current offerings. While the insurance industry has historically provided protective products to help clients when things go wrong, the sector’s future may well lie in preventative services that enable customers to identify and avoid risks before they happen. As these new challenges and changes sweep through the industry, insurance providers must adapt accordingly. The winners of this year’s World Finance Global Insurance Awards 82
have shown that they are innovative, resilient and forward-thinking enough to successfully navigate the testing times ahead.
Data is power Technology underpins many of the trends affecting the insurance industry. Digital innovation has enabled insurance companies to not only better serve their customers, but to better understand them, too. The advent of the IoT and AI has given companies access to incredible amounts of useful data, helping them create a better picture of who their customers are and what products will best suit their lifestyles. By analysing records from telematics – devices that collect data from cars – and wearable technologies such as smartwatches and fitness trackers, insurers can create a profile of their customers based on their habits and behaviour, offering them usage-based policies and personalised products that are tailored to their needs. Of course, it is understandable that insurance providers might feel wary of carrying out such large-scale data collection. Insurance companies must comply with data protection regulations and guidelines or risk hefty fines, as well as a loss of consumer trust and support. But for the companies that successfully tap into
“Tech-enabled services are allowing established insurers to explore new income streams and diversify their services away from the traditional, protective products of the past”
big data and analytics – all while adhering to regulations – these new technologies open up a wealth of lucrative possibilities. Indeed, personalised products are something of a win-win solution for customers and insurers. Customers can enjoy reduced premiums as a result of the data they share, with black box telematics devices being a prime example of this trend. These smart devices can measure a number of factors when driving, such as braking, speed and acceleration, creating a driving profile for whoever is sitting behind the wheel. Sensible drivers could, therefore, be rewarded with lower premiums, which might prove particularly appealing to younger motorists who often face high insurance bills. Meanwhile, the insurance companies behind these data-driven policies can enjoy improved customer satisfaction, while also benefitting from more accurate risk assessment. New technology is rapidly transforming the insurance sector, meaning established firms need to keep up with the rate of change if they wish to stay profitable in the years to come. This is especially true given the growth of insurtech companies, which are steadily eating into the market share held by traditional insurers. The successful adoption of new technology is undoubtedly the key to future success in the insurance sector, and if firms cannot effectively exploit systems such as AI and the IoT, they risk being left behind.
A relationship for life As technology continues to redefine customer expectations, it seems that traditional insurance products aren’t enough to attract new clients and retain existing ones. Instead, the future could well see non-insurance services
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WORLD FINANCE GLOBAL INSURANCE AWARDS 2019 Argentina
General – MetLife Life – MetLife Australia General – IAG Life – Zurich Australia Austria General – UNIQA Group Life – Vienna Insurance Group Bahrain General – Gulf Union Insurance Life – Bahrain National Life Assurance Bangladesh General – Nitol Insurance Life – Popular Life Insurance Company Belgium General – Ethias Life – Baloise Brazil General – Allianz Brazil Life – Brasilprev Bulgaria General – Armeec Insurance Life – UNIQA Life Insurance Canada General – RBC Insurance Life – Canada Life Caribbean General – Guardian Group Life – ScotiaLife Financial Chile General – ACE Seguros de Vida Life – SURA China General – China Pacific Insurance Life – Ping An Life Insurance Colombia General – Liberty Seguros Life – Seguros Bolívar Costa Rica General – ASSA Compañía de Seguros Life – ADISA Cyprus General – General Insurance of Cyprus Life – Eurolife Czech General – Komerční banka Republic Life – Allianz pojišt’ovna Denmark General – Tryg Life – Danica Pension
General – Allianz Egypt Life – Allianz Egypt Finland General – Fennia Mutual Insurance Life – Fennia Life France General – Covéa Insurance Life – SCOR Georgia General – Aldagi Life – Aldagi Greece General – Ethniki Hellenic General Insurance Life – NN Hellas Hong Kong General – China Taiping Insurance Life – Habib Bank Zurich (Hong Kong) Hungary General – Allianz Hungária Life – Magyar Posta Életbiztosítás India General – ICICI Lombard Life – Max Life Insurance Indonesia General – Asuransi Jasa Indonesia Life – Asuransi Jiwasraya Israel General – Harel Insurance Life – Clal Insurance Italy General – UnipolSai Life – Poste Vita Jordan General – Middle East Insurance Company Life – Arab Orient Insurance Company Kazakhstan General – Nomad Insurance Life – Kazkommerts-Life Kenya General – CIC Insurance Group Life – Britam Kuwait General – Kuwait Insurance Life – Al Ahleia Insurance Lebanon General – AXA Middle East Life – Bancassurance Luxembourg General – AXA Luxembourg Life – Swiss Life
and add-ons, which focus on prevention rather than protection, become the frontrunners. This shift away from insurance products might seem like an unusual step for insurers to take, but it could yield significant rewards for those bold enough to branch out. According to research carried out by Deloitte, 45 percent of consumers believe that the offering of non-insurance products is the most important factor when choosing an insurer. Insurers have been quick to respond to this burgeoning interest in non-insurance services, and the same study shows that almost a quarter of premium volumes now come from products and services that didn’t exist five years ago. The majority of these services are technology-driven and help alert customers to potentially risky scenarios that might lead to an insurance claim. When it comes to home protection, for example, some firms now offer to install leak detection kits in their customers’ homes. Some health insurers, meanwhile, have begun to provide customers with personalised
General – Etiqa Life – Hong Leong Assurance Berhad Malta General – GasanMamo Insurance Life – HSBC Life Assurance Malta Mexico General – GNP Life – Seguros Monterrey New York Life Netherlands General – ABN AMRO Life – ING Netherlands New Zealand General – Tower Insurance Life – Asteron Life Nigeria General – Zenith Insurance Life – FBNInsurance Norway General – Tryg Life – Nordea Liv Oman General – Oman United Insurance Life – Dhofar Insurance Pakistan General – Adamjee Insurance Life – EFU Life Panama General – ASSA Compañía de Seguros Life – Pan-American Life Insurance Group Peru General – RIMAC Seguros Life – MAPFRE Philippines General – Standard Insurance Life – BPI-Philam Life Assurance Poland General – UNIQA Group Life – MetLife Portugal General – Allianz Seguros Life – Grupo Ageas Portugal Qatar General – Qatar General Insurance Life – Q Life and Medical Insurance Romania General – ERGO Group Life – Allianz-Tiriac Russia General – AlfaStrakhovanie Life – Renaissance Zhizn Insurance
exercise and dietary advice. UK-based health insurance firm Vitality has taken things one step further, offering an array of awards to customers who opt-in to wearing a fitness tracker. These new, tech-enabled services are allowing established insurers to explore new income streams and diversify their services away from the traditional, protective products of the past. By building up these valueadded products, insurers can move away from simply being there for customers when something goes wrong. Instead, preventative services allow insurers to have a more active and ongoing conversation with their clients, creating a relationship for life.
Human touch Even as the insurance sector embraces new technology and digital innovation, it is important to remember the role that good customer service plays at any leading firm. According to Deloitte, 57 percent of insurers believe that access to friendly and knowledgeable
Saudi Arabia General – Al Rajhi Takaful Life – MEDGULF Serbia General – Generali Osiguranje Life – Generali Osiguranje Singapore General – AIA Singapore Life – AIA Singapore South Korea General – Samsung Life Life – Hanwha Life Insurance Spain General – BBVA Seguros Life – Seguros RGA Sri Lanka General – HNB General Insurance Life – Ceylinco Life Insurance Sweden General – Trygg-Hansa Life – Folksam Switzerland General – Helvetia Life – Swiss Life Taiwan General – Cathay Century Insurance Life – Fubon Life Insurance Thailand General – The Viriyah Insurance Life – Thai Life Insurance Turkey General – Zurich Sigorta Life – Anadolu Hayat Emeklilik UAE General – ADNIC Life – ADNIC UK General – AXA UK Life – Legal & General US General – Progressive Life – Lincoln Financial Group Uzbekistan General – Uzagrosugurta Life – O’zbekinvest Hayot Vietnam General – PVI Life – Fubon Life
staff members is the most effective way to maintain customer loyalty. Customers are increasingly choosing to communicate with their insurance providers online, and these virtual interactions must be as successful as any that happen over the phone. In today’s digital world, clients expect around-the-clock customer care as standard, and are demanding transparency, speed and efficiency in their interactions with insurance providers – right down to their communications with company chatbots on social media. With consumers expecting rapid responses and personalised care, insurance firms must ensure that customer service remains a priority. We might be entering a digital future, but insurers can’t afford to lose their human touch. Against this backdrop of rapid transformation, some firms have emerged as clear industry leaders. The World Finance Global Insurance Awards 2019 celebrate the industry’s most innovative players, shining a light on the insurers that are helping to drive the sector forward. n
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Innovation above the standard
Standard Insurance has led the way in industry development in the Philippines. As such, the company is embracing the opportunity to adapt further to coming changes in the market
Leticia C Tendero DIRECTOR OF INVESTOR RELATIONS, STANDARD INSURANCE
After steadily expanding over a number of years, the Philippine insurance industry is set to scale new heights, pushed forward by technological innovation. The industry has remained resilient and upbeat in recent times, riding on the country’s evolving economy. Though it faces myriad challenges, the outlook for the Philippine insurance industry remains optimistic. The Philippines’ Insurance Commission reported an increase in the country’s per capita insurance density of 16 percent from 2017 to 2018 – a value of PHP 2,054 ($40) for each Filipino with insurance. These numbers indicate a growing demand for insurance cover in the country. More than 60 million Filipinos had some form of insurance coverage by the end of 2018, compared with just 48 million in 2017. More importantly, the fact that the industry’s insurance penetration rate remains low indicates that there is still much opportunity for further growth.
Millennial modernising The Insurance Commission continues to push for digitalisation and further innovation by encouraging a better customer experience with more relevant products, thus increasing its levels of insurance penetration. Until recently, the industry has been known as a traditional market, with most individuals preferring the added comfort of 84
a face-to-face meeting with an insurance intermediary. However, with the evolving market landscape intensifying as the result of a growing number of technology-savvy young customers, the industry is being challenged to innovate. Increasingly, there is pressure to create products that cater to younger customers by utilising online platforms as promotional channels for products and services. Insurance companies have turned to insurance technology (insurtech) as another way to better serve its progressing market. Self-service dashboards, chatbots, SMS updates, the digitalisation of some parts of the claims process, and insurance comparison tools to guide customers to the best deal have all emerged in recent years. In fact, to encourage the use of insurtech, the Insurance Commission has issued a policy statement permitting insurance companies, subject to mandatory security requirements, to sell plans using apps on mobile phones, as well as to offer flexible payment frameworks in lieu of the usual payment methods.
Playing by the rules The growth of the Philippine non-life insurance sector has not been without its challenges. The Tax Reform for Acceleration and Inclusion resulted in dismal sales for new motorcars in 2018, exacerbated by economic headwinds such as a weakening peso and rising inflation. New car sales for 2018 plummeted by as much as 16 percent, down to a total of just 357,410 new units sold, compared with 2017 sales of 425,673. As a result, motor vehicle loans have slowed down, recording a paltry 9.4 percent growth rate
compared with 2017’s 21.6 percent. These conditions have understandably also had a knock-on effect on car insurance rates. Although motorcar dealers and financial institutions are major sources of insurance business, the industry as a whole – specifically, the non-life insurance sector – still managed to generate over PHP 89.04bn ($1.7bn) in gross premiums in 2018. This figure was six percent higher than the previous year, with the top 10 non-life insurance companies accounting for 63 percent of said 2018 gross premiums. Furthermore, the Philippine insurance industry is faced with two major regulatory developments: progressive increases in riskbased and minimum net worth requirements, and the forthcoming introduction of the new global insurance accounting standards, the IFRS 17. Based on the Insurance Commission’s list of insurance companies with valid and existing Certificates of Authority as of August 9, 2019, the number of insurance companies has decreased by 13 since 2013. Further contractions, mergers and consolidations are expected to be completed by year-end 2019, as several insurance companies are likely to remain significantly below the mandated PHP 900m ($17.8m) net worth level by this time. Aggravating the situation is the forthcoming implementation of the IFRS 17, which necessitates the implementation of new systems that change how data is collected, analysed and processed. The International Accounting Standards Board approved the effectiveness of IFRS 17 for 2021 but subsequently proposed a delay until 2022. The implementation was then further delayed to January 1, 2023, with the
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Standard Insurance is proud to be an all-digital business, and its underwriting tools (such as the Growth in Philippine insurance Web - Cat a strophe density per capita in 2018 Risk Management System), real-time claims evaluation system (iCATS) and telematics products, along Non-life insurance with many other solugrowth in 2018 tions, are all possible because of iINSURE. All subsystems that support the critical areas of Standard Insurance’s operations are powered and linked to iINSURE.
Risk and reward
Insurance Commission recognising a number of challenges to its implementation. Nonetheless, all these measures are envisioned to further strengthen industry players and make them more competitive when facing their counterparts at the Association of South-East Asian Nations, while also aligning themselves with global insurance accounting standards.
Staking a claim While insurance technology and other innovations are changing the industry almost imperceptibly, Standard Insurance has invested in a diverse range of skills, perspectives and approaches over recent years, and continues to do so today. This has allowed us to create and develop innovative products and new technologies, and maintain our relevance, even when faced with transformative market shifts. Standard Insurance continues to focus on proper underwriting, intelligent pricing across all lines and high levels of sustainability, as well as fast and accurate resolutions to claims. Equally important, Standard Insurance has been deploying innovative products and new technologies while improving efficiencies in critical areas of operations to maximise sales potential and distribution networks. Since 2009, Standard Insurance has been developing and maintaining a proprietary general insurance IT system called iINSURE, the core of which was designed based on a system inherited from Zurich Insurance Group following its acquisition in the early 2000s. Contemporary, flexible and affordably built in house, iINSURE enables Standard Insurance to meet existing and future customer needs.
As insurers, risk management is embedded in our nature. As such, a review of the company’s existing systems architecture was undertaken in 2016, which resulted in the eventual transition to using the cloud as a data centre. The past few years have seen the company exploring further ways of creating technological solutions to its business needs, increasing the pace of innovation and dramatically improving its already solid cybersecurity infrastructure. A collaboration with cloud services firm Cato Networks, formalised in early 2017, was used to connect our 60 branches nationwide, linking the head office and the company’s cloud infrastructure as a single software-defined wide area network. Firewalls, intrusion prevention systems and cybersecurity rules are now centralised in the cloud, providing greater operational stability. In early 2018, iINSURE, iCATS and all related apps were migrated to the cloud, making Standard Insurance the first insurance company to do so. Amazon Web Services was employed to meet the company’s quality, reliability, speed and redundancy requirements. Complementing the firm’s existing motorcar analytics, Standard Insurance has adapted tools like artificial intelligence and data science to enable a more in-depth analysis of its data sets. This has helped us to better understand the peculiar risks and characteristics related to different vehicle types and markets, to estimate our expected losses, and to improve churn rates. This approach serves as the foundation for intelligent motorcar strategies and pricing, improved customer services and the creation of innovative products that better address the needs of the evolving insurance population. To develop marketing capabilities that complement our traditional sales platform, we have ventured into online sales, which allows customers to buy private car and travel insur-
ance quickly and easily using our online risk assessments. Our digital sales platform has recently expanded to include social media as a tool for conversational marketing. As consumers turn to Facebook and Google to find answers about insurance, Standard Insurance is ready to provide them. Initially this involves creating social media posts that build brand awareness, followed by other relevant posts that seek to educate the market on the importance of insurance. Finally, we create brand-building posts that communicate the four pillars of Standard Insurance: innovation, empathy, service and excellence. In 2019, after eight months of regular calibration, the company successfully sold 1,200 policies with a media budget of less than 10 percent of the premium, proving that Standard Insurance is more than ready to develop social media selling as its next major distribution channel. Standard Insurance is well prepared and resilient when it comes to the challenges facing the industry, including the impact of new regulations, underpinned by the company’s strong f ina ncia l position and wellSTANDARD INSURANCE developed insurance infrastructure. The CONTINUES TO company has been FOCUS ON PROPER able to grow its total UNDERWRITING, premiums business, INTELLIGENT PRICING despite the dismal motorcar sales of ACROSS ALL LINES 2018, off the back of AND HIGH LEVELS its expanding branch OF SUSTAINABILITY, network and strong AS WELL AS FAST business relationAND ACCURATE ships with intermeRESOLUTIONS diaries. Likew ise, TO CLAIMS the business is well prepared for progressive increases in risk-based and minimum net worth requirements, and welcomes the implementation of new global accounting standards. As always, Standard Insurance continues to maximise the effectiveness of innovative solutions to solve the challenges at hand – whether they relate to generating premiums, client servicing or systems support. While our latest efforts in developing artificial intelligence and our use of data science have been geared towards improving operations, the company’s strategic ambition is to become an exponential organisation – one that is able to post disproportionately large growth compared to its peers in the medium term. If we continue to listen, respond to our customers’ needs and push forward with innovative solutions, we hope to achieve this objective. n
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A silver lining Like many countries around the world, Portugal is faced with an ageing population. With a new economic approach and emphasis on financial literacy, though, Portugal can turn this daunting challenge into a multibillion-dollar opportunity Growing old together
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GDP per capita USD
60,000 50,000 40,000 30,000 20,000 10,000
In recent years, Portugal has become an attractive place to live, work and invest. Between 2015 and 2018, the annual number of greenfield foreign direct investment projects in the country grew by 161 percent, according to data published by the Financial Times. This was partly thanks to Portugal’s open attitude towards foreigners – the Iberian nation offers tax breaks to skilled professionals and five-year residencies to nonEU citizens who buy property worth €500,000 ($553,140). What’s more, Portugal’s politically stable climate and low crime rate make it a haven for those looking to avoid the economic downturn and political tension caused by Brexit and the US-China trade war. But this hasn’t always been the case: six years ago, Portugal’s economy was on its knees. Amid the country’s worst recession in almost 40 years, unemployment climbed above 17 percent and hundreds of thousands of workers – many of whom were young and highly skilled – emigrated in search of jobs overseas. Today, though, Portugal’s economy is booming: unemployment has more than halved to 6.6 percent; two thirds of the 500,000 people who left the country during the crisis have returned; and strong performances in the tourism, export and housing markets have contributed to an economic resurgence that many have deemed miraculous. Still, there is plenty of work to be done. Portugal is growing slower than Spain, and in recent years has been overtaken by Estonia, Lithuania and Slovakia in terms of GDP per capita (see Fig 1). If Portugal is to make the most of the good times, it needs to address some of its chronic issues.
CEO OF LIFE, PENSIONS AND BANCASSURANCE, AGEAS PORTUGAL GROUP
Portugal boasts a warm Mediterranean climate, beautiful landscapes – from mountain ranges to idyllic coastlines – and a high quality of life for the people who call it home. It’s no wonder that it is the destination of choice for millions of tourists every year. However, Portugal isn’t just known as a tourist hotspot: it has also garnered a reputation in Europe for its ageing population. In its 2019 World Population Prospects report, the UN outlined the scale of the planet’s demographic crisis: by 2050, 16 percent of the global population will be over the age of 65, up from nine percent in 2019. As life expectancy increases in many developed countries, fertility rates are on the decline. Consequently, the working-age population is shrinking, which will have potentially huge repercussions for economic activity. Portugal is in no way exempt from this global trend. As a result of the country’s deep recession, many of the young people who didn’t emigrate chose instead to delay starting a family, causing Portugal’s birth rate to plummet. In fact, the Portuguese National Statistics Institute predicts that by 2060, the country
will be home to just 8.6 million people, down from 10.5 million in 2012. In the same window of time, the working population – those aged between 15 and 64 – will drop from almost seven million to just over 4.5 million. As well as potentially slashing Portugal’s productivity, this could put significant strain on the country’s public services. Although people in Portugal Proportion of the global tend to live to the age population expected to be of around 80 – the aged over 65 in 2050 average for European countries – they also experience health problems for most of their old age. This compares unfavourably with people in other European countries, such as Denmark. With an older population, Portugal could face spiralling health costs.
A window of opportunity Although the situation seems alarming, it could present a new opportunity for Portugal. Increasingly, policymakers and economists are recognising that older workers and retirees can fuel economic activity, rather than impede it. As the World Economic Forum has pointed out, the elderly are no longer as financially dependent on their families as they used to be. Furthermore, they have the potential to be both important participants in the labour market and big spenders in the economy. Through consumer goods and services, older citizens inject huge amounts of money into the ‘silver’ or ‘longevity’ economy, which the American Association of Retired Persons defines as “the sum of all economic activity driven by the needs of people aged 50 and older... [including] both products and services they purchase directly and the further economic activity this spending generates”. A 2018 study by the European Commission valued Europe’s longevity economy at €3.7trn ($4.09trn) in 2015 and suggested it could be worth as much as €5.7trn ($6.31trn) by 2025. Instead of seeing Portugal’s ageing population as a burden, we should see it as an untapped opportunity. The sheer size of this market should not be underestimated: in terms of scale, it is on par with discovering the econom-
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ic potential of an entire country, such as India or China when they were on the cusp of huge growth. However, what is unique and unprecedented about the longevity economy is that it has no borders – no country is immune to an ageing population, regardless of its particular social, religious or economic conditions. Given the new opportunities the longevity economy will create across society, all industries (including the insurance sector) must be able to adapt their product offerings to meet the needs of an older population. At the same time, we need to embrace innovation to address the challenges presented by this major demographic shift. Before we can think about creating products for an ageing population, though, we need to prepare new generations for the future. By encouraging people to save money and educate themselves about financial matters from a young age, Portugal will help its population prepare for the challenges of a longer life and later retirement.
Moulding young minds We are all faced with financial decisions daily – whether managing a family budget, contributing to our savings or making an investment. With better financial literacy, citizens can be more informed about the decisions they’re making. In the past few years, aspects of the financial sector that were typically considered to be
more obscure – such as insurance, the stock market and investments – have received greater meValue in 2018 dia attention. What’s more, it is now much easier for people to educate themselves Estimated value by 2025 on financial topics, thanks to self-help courses and the wealth of information available online. This has helped to demystify these concepts. Improved financial literacy has benefits for society as a whole. When a country has high levels of financial literacy among its citizens, it is more likely to have a healthy economy. It may also have a more engaged electorate, as its citizens will better understand decisions made around fiscal and monetary policy. There is no doubt that financial literacy is one of the key pillars for building resilience in today’s society – it should be a basic necessity for every individual, no matter their age. With that said, the sooner people start to “With an older develop their finanpopulation, cial literacy, the betPortugal could ter. The OECD recommends integrating face spiralling financial education health costs” into the school cur-
riculum to help people develop good financial habits from a young age. At Ageas Portugal Group, we believe that improving young people’s financial understanding early on will give them the tools they need to face life’s challenges. As a nation, Portugal has made important steps towards this, implementing initiatives such as the National Plan for Financial Education and introducing financial literacy as one of its citizenship education subjects. However, there is still a long way to go. Although the need for greater financial literacy is obvious, it is nonetheless a difficult issue to address. That’s why Ageas Portugal Group has helped found Ori€nta-te, a contest that teaches young people in Portugal how to save and prepare for the future. It introduces them to topics such as household budget management, expenditure and income, showing them how to formulate savings strategies so they can achieve their financial goals. Put simply, the contest rewards young people for learning as much as they can about financial products. Ori€nta-te was such a success that it is now in its second edition. The huge amount of enthusiasm the contest has received in the school community proves that financial literacy doesn’t have to be a chore to learn. In fact, it should be made as engaging as possible. After all, few other subjects have such a profound bearing on the rest of students’ lives. n
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Coming of age Sri Lanka has one of the most rapidly ageing populations in Asia. Ceylinco Life Insurance is helping to make sure the country is well prepared for this demographic shift
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Proportion of Sri Lanka’s population that is over 60 years old:
Sri Lankan fertility rate BIRTHS PER WOMAN
6 5 4 3 2 1
SOURCE: WORLD BANK
What is causing Sri Lanka’s current demographic shift? Declining fertility, falling mortality rates, increasing life expectancy and emigration have become major causes of the country’s growing elderly population. The World Bank reports that the fertility rate in Sri Lanka has steadily decreased over the decades, from 5.54 in 1960 to 2.2 in 2017 (see Fig 1). Life expectancy for Sri Lankans was 76 years in 2019, compared with 59 in 1960. These factors all contribute to a swelling elderly population.
Sri Lanka’s population is ageing faster than any other in South Asia. According to the most recent Sri Lanka Population and Housing Census, the number of over-60s in the country has more than doubled since 1953, comprising 12.4 percent of the population in 2012. The World Bank estimates that one in four Sri Lankans will be older than 60 by 2041. According to a 2012 World Bank report on demographic transition, for every 100 workingage people in Sri Lanka in 2001, there were 41 child dependants and 14 elderly dependants. The number of child dependants is predicted to decrease to 25 by 2036, while elderly dependants will increase to 36. As such, there will be fewer people to look after Sri Lanka’s elderly population in the years to come. The challenges that will emerge as Sri Lanka’s population gets older are vast. World Finance spoke with Rajkumar Renganathan, Chair of Ceylinco Life Insurance, about how the country can adapt to the coming demographic changes.
CHAIR, CEYLINCO LIFE INSURANCE
As Sri Lanka’s population gets older, what challenges will arise? One of the biggest challenges of an ageing population can be quantified by a life cycle deficit, which measures the difference between consumption and labour income for a certain age group. With Sri Lanka’s demographic shift, the proportion of the population that is consuming more than it earns will increase, putting pressure on the working-age population to finance this upward transfer. As the costs of medical care increase, supporting elderly dependants is only going to become more burdensome, especially if there is more than one person to provide for. Although Sri Lanka is traditionally a culture that cares for its elders, factors such as globalisation, industrialisation, better access to education and emigration have widened the gap between the elderly and the youth populations. The usual family unit has also shifted from extended to nuclear. This could pose a problem to those who become elderly dependants in the future as they have limited access to caregivers.
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How should individuals plan for retirement to ensure a good quality of life in their later years? The alarming statistics already quoted tell us that early retirement planning is of critical importance. Besides the factors outlined, another thing to consider is that the Sri Lankan private sector does not pay pensions after the retirement age of 55. Therefore, it is essential that individuals – especially those working in the private sector – make decisions about their retirement savings early in life. To ensure the whole population has access to advice about their pension, Ceylinco Life has more than 275 branches spread across the country. What does the company’s La Serena subsidiary offer retirees? Ceylinco La Serena is a first-of-its-kind retirement resort in Sri Lanka, catering to newly retired or semi-retired individuals who are looking to maintain their independence, be reasonably active and enjoy a hotel-like environment. It comprises 44 self-contained, fully furnished, well-equipped and regularly serviced living units, and is located on beachfront land in the Uswetakeiyawa fishing village, a few kilometres from the capital, Colombo. It is designed to give a sense of community to its elderly residents and bring like-minded people together. What makes Ceylinco Life Insurance stand out from other insurance firms in the country? Ceylinco Life has been in the business of insuring lives in Sri Lanka for more than 30 years. During that time, it was the market leader in the industry for 15 consecutive years. To date, the company has provided cover for nearly one million people and is committed to the principle that life insurance providers should have a relationship with their clients for life. The company has introduced ‘life insurance week’ and ‘retirement planning month’ to Sri Lanka in order to improve the public’s awareness and understanding of the benefits that preparing for retirement brings. We have consistently focused on the importance of educating people about how they can benefit from doing so. For example, in 2018, the company ran a retirement campaign titled ‘the 30 day plan for 30 years of serenity’. The scheme highlighted how people could prepare for a fruitful retirement in just one month. Some 4,000 members of the Ceylinco Life sales team were deployed in door-to-door visits across Sri Lanka to take this message to the masses. Ceylinco Life also recently launched an innovative life insurance product, the likes of
which had not been seen in Sri Lanka before. Named ‘smart protection’, it offers a payout that is eight times the sum assured and guarantees a refund of the sum assured plus total premiums paid at maturity. Products of this nature help drive penetration of life insurance and retirement planning in the country, setting the company apart from its competition. Could you go into detail about some of the company’s corporate social responsibility (CSR) programmes? Ceylinco Life’s CSR projects are mainly focused on education and healthcare. In the area of education, the company has donated 80 purposebuilt classrooms to disadvantaged schools over the past 15 years and continues to monitor and maintain each one to this day. Ceylinco Life has invested nearly LKR 50m ($278,500) in this initiative to improve facilities and the learning environment for students. In the sphere of healthcare, the company is well known for its ‘waidya hamuwa’, or ‘meet the doctor’, programme. In 2018 alone, more than 4,400 Sri Lankans – most of them from rural areas – were provided with access to doctors through the scheme. To date, Ceylinco Life has reached approximately 142,000 people through free medical camps held in 375 locations across the country. These medical camps are overseen by qualified and experienced doctors and nursing staff attached to the state health sector and private laboratories. Medical check-ups and health screenings, including blood sugar, blood pressure, vision, ECG scans and kidney scans, are offered at these medical camps. The company has also donated high-dependency units (HDUs) to five hospitals since 2012. Clinics that have benefitted are the Kandy Teaching Hospital, Lady Ridgeway Hospital for Children, the National Hospital of Sri Lanka, the Jaffna Teaching Hospital and the Colombo South Teaching Hospital. HDUs are used as a space for patients being upgraded from normal care or as a transition down from intensive care. They can be used for post-surgery care before transferring patients to other wards, or to treat intensive diseases such as dengue fever. What are Ceylinco Life Insurance’s plans for the next five years? As the market leader in Sri Lanka, Ceylinco Life Insurance will continue to set the benchmark in the industry by introducing new products and upgrading its existing offering, including attractive retirement plans to suit any client. The company will further drive awareness of life insurance and retirement planning to improve citizens’ later years. n
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A new lease of life At Thai Life Insurance, offering financial support to customers is just one of the company’s leading principles. Serving wider social and environmental needs is equally important, writes the company’s president, Chai Chaiyawan For more than 77 years, Thai Life Insurance has provided financial support to families. At the same time, the company has achieved sustainable business growth and adapted to meet the needs of a shifting market. We run our operations in a manner that prioritises stability to ensure we cultivate a sustainable competitive advantage. We are also careful to identify future marketing opportunities so we can respond to our customers’ changing needs and develop in tandem with new business trends. It is our mission to become the first brand that consumers consider for their life insurance needs. The world is rushing headlong into the digital age. This is causing significant disruption to many businesses, with consumers expecting access to new products, services and information. Thai Life Insurance is determined to develop alongside this change.
Finding the right fit Thai Life Insurance recently announced it would be reinventing its business model and revamping its corporate culture through technological innovation. This new model – which we have named the Life Innovation approach – includes changes to our work processes, products, distribution channels, service development and risk management. It will also involve a shift in mindset and personnel development across our IT systems, including the creation of social value through our sustainable development goals (SDGs). This new business model moves the focus of life insurance away from death and disability and towards reflection on life. We will 90
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now look to emphasise illness prevention and health promotion to reduce the burden of ongoing medical expenses. Alongside this, we will support our clients with financial planning through new investment channels, which will help them and their families to have long, comfortable lives that are eased by wealth during retirement. Thai Life Insurance has set a target of meeting every customer’s life insurance needs. In particular, we are keen to ensure our products are always customer-centric. We are developing five distinct insurance plans within our product range to deliver life-planning resources to our customers, regardless of their age. The first of our five insurance plans is called Money Fit. It combines financial planning and monetary savings with additional benefits, such as insurance, tax deductions, mortgages and pensions. The second, Investment Fit, provides investment-planning support that promises the returns needed to create a stable life foundation for the customer. It contains our Universal Life policy – a flexible life insurance plan that comprises adjustable benefits based on the client’s needs. They can increase or reduce their coverage, add or withdraw savings, and switch to receiving higher returns from the many funds the company meticulously selects. Our Legacy Fit plan allows clients to create a family heritage fund or save for a child’s education in order to pass on stability to a loved one. Customers can create business protection collateral to use against a mortgage or an emergency reserve fund – including a scholarship fund – to accompany a child’s estate.
Life Fit, meanwhile, provides life insurance and health protection when the insured individual is in good health, meaning there is a discount on the insurance premium and various privileges related to healthcare. This insurance plan aims to provide holistic healthcare and promote the four key areas of our Circle of Wellness scheme: self (strong physical health), sense (strong mental health), stability (financial wellbeing) and spirit (spiritual happiness). Finally, our Health Fit plan delivers health and medical expense coverage to individuals and their families, including additional health insurance contracts, accident insurance and protection in the event of a serious disease diagnosis.
Life skills In addition to creating our Life Innovation approach, Thai Life Insurance has worked on developing new technology that will deliver faster and more convenient services while increasing operational efficiency and boosting workflow. Our new business model attaches a great deal of importance to changing the attitudes of people within the organisation. In particular,
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“Thai Life Insurance’s aims stretch far beyond boosting profit; we look to meet the needs of all stakeholders” we recognise that our life insurance agents are more than just salespeople: with their understanding of the life insurance field, they have the knowledge and compassion to be support systems for our customers. To ensure all our employees are able to create value and deliver it to our customers, we regularly assess our personnel according to each individual’s skills, qualifications and production results. We are happy to provide guidance and support to ensure our staff join the training programme that suits their skill set and career ambitions. All employees must possess three key skills. First, knowledge is vital: our staff must have a strong grasp of various life insurance products, health insurance solutions, financial savings opportunities, potential investment areas, tax regulations and health developments to deliver the greatest value to clients. Technological aptitude is another vital skill: technical know-how helps our employees be more effective, whether they are making sales presentations or creating smart contracts. We call the third attribute the ‘spirit skill’. This is characterised by service that comes from the heart, displaying the kind of empathy and sen-
sitivity that sets the agents at Thai Life Insurance apart from those at other firms. By focusing on building skills across these three core competencies, we aim to shift the mindset of Thai Life Insurance sales personnel and empower them to cater to each customer’s needs. We also organise an annual Thai Life Family Spirit seminar, which allows sales agents to gain valuable customer insights regarding the importance of maintaining a human connection even as we embrace the latest technological innovation.
The greater good Encouraging our employees to realise the value of life and people while creating shared benefits for the company and wider society is of the utmost importance to Thai Life Insurance. Our aims stretch far beyond boosting profit; we look to meet the needs of all stakeholders, from customers to employees, shareholders and business partners. As an organisation that places a high value on operating responsibly, Thai Life Insurance maintains a commitment to serving the local community. In 1995, we established the Thai
Life Insurance Foundation to focus on community service. Since then, we have taken particular care to offer support to the country’s armed forces. To uphold our corporate social responsibility values, the company has set itself three SDGs. The first goal involves our ‘promise’ strategy, which emphasises the importance of managing the organisation with progressive human resource values and a strong adherence to good corporate governance. The second, our ‘protect’ strategy, seeks to bolster customer trust by delivering quality products and services that meet the needs of every consumer group, while also incorporating effective risk management. The third goal is our ‘prosperous’ strategy, an initiative that furthers our other SDGs by ensuring our operations are consistent with broader economic, social and environmental trends. Thai Life Insurance was among the first life insurance firms in Thailand to place an emphasis on social responsibility and champion it alongside business success. When it comes to achieving SDGs, private enterprise and wider society must work together to achieve a brighter future for all. n
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Larger than life The growth of the Philippine insurance market has coincided with the industry’s increased adoption of technology. It’s also the result of the customer-centric approach taken by providers like BPI-Philam Life Assurance, writes the company’s CEO, Surendra Menon
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Net profit growth in the Philippine insurance sector (2018)
More to come Aside from the incentives that we offer to potential customers, the hard work of our parent companies is one of the major reasons why we are the number one bancassurance company in the Philippines. BPI-Philam is formed of a strategic alliance between BPI and the Philippine American Life and General Insurance Company (AIA Philam Life). It is also a three-way venture, with BPI owning 51 percent of the company, AIA Philam Life 47 percent and private stakeholders two percent. Our clients and target audience are account holders of BPI. BPI is a leading commercial bank in the Philippines, with more than 160 years of ex-
THE GROWTH OF THE PHILIPPINE INSURANCE SECTOR GOES HAND IN HAND WITH THE COUNTRY’S EVOLVING ECONOMY AND ITS GROWING MIDDLE CLASS
2.5 2.0 1.5 1.0 0.5
Despite recent growth, financial literacy remains a hurdle to getting more Filipinos to invest in insurance. According to the World Bank, Filipino adults could, on average, only answer three of seven finance-related questions correctly. The survey, conducted in 2015, included
Value of Philippine gross written premiums
questions on basic numeracy, interest, inflation and investment diversification. It is important for us at BPI-Philam to inform Filipinos about the importance of securing their financial future in order to help them make better financial decisions and decrease their risk of falling into debt. Every October, BPI-Philam celebrates Bancassurance Month, which is part of our efforts to educate Filipinos on financial wellness, the benefits of insurance and the advantages of getting insured through a bank they trust. We’ve been celebrating Bancassurance Month for four years now, and through this initiative, we have been able to get both existing and prospective clients to visit BPI branches to talk about their financial health. In 2019, we named the celebration Banca Fiesta and held raffle draws for our customers, giving them the opportunity to win Garmin devices, gym memberships, wellness kits and other prizes. All they had to do was visit a Bank of the Philippine Islands or a BPI Family Savings Bank branch and talk to a bancassurance sales executive (BSE). They were then asked to take the Philam Vitality Age Test, an in-depth quiz that allows individuals to find out how old they are in health terms. BSEs will then educate the customers about the importance of insurance and all the health benefits of getting a Philam-Vitality-integrated policy.
The Philippine insurance market has undergone steady yet significant growth over the past few years. In 2018, the net profit of the entire sector grew by three percent, or a staggering PHP 37.43bn ($736m). According to GlobalData, gross written premiums are expected to grow a further 25 percent by 2022 (see Fig 1). The growth of the Philippine insurance sector goes hand in hand with the country’s evolving economy and growing middle class. GlobalData has stated that public infrastructure spending and vulnerability to natural disasters are two of the major drivers behind the rise in demand for insurance in the country. Philippine Insurance Commissioner Dennis B Funa, however, believes that many Filipinos are more likely to invest in insurance today because of the rise of ‘insurtech’. By using technology in the creation of new products and better distribution systems, insurance has become more accessible and more closely aligned with customer needs. In an article for BusinessMirror, Funa also noted the current trend towards fitness and healthy living. BPI-Philam Life Assurance’s Wellness Series (powered by Philam Vitality) is an example of how insurance has adapted to consumers’ desire for a healthier lifestyle. Philam Vitality provides several healthrelated benefits for policyholders under BPIPhilam, such as discounted gym memberships. Insurance has begun to appeal to those who are more wellness-minded, not only those who seek financial security and protection. By attracting new demographics such as these, the Philippine insurance market is expanding its customer base and looking towards a brighter, more robust future.
Note: Figures for 2019-22 are estimates
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perience in the local banking industry and an extensive network of 1,000-plus branches and 3,000-plus ATMs nationwide. AIA Philam Life, meanwhile, has been the country’s premier and most trusted life insurer for more than seven decades. We are also the official bancassurance arm of AIA Group in the Philippines. AIA Group is the second-largest life insurance company in the world and operates in 18 markets across the Asia-Pacific region. This is not to say that everything we’ve achieved is due to the success of our parent companies – it is a great achievement for a company as young as 10 years old to become the country’s number one bancassurance firm. In fact, we became number one at just five years old. We’ve currently only tapped a small portion of BPI’s customer base, yet we remain the market leader for bancassurance; if we can tap into an even larger proportion, the possibilities are huge. We became the market leader for many reasons, one of which was the people who work for us. BPI-Philam is a relatively young company made up of energetic and technologically adept employees with an average age of just 26. The enthusiasm and dedication of our employees has affected how we do things on an operational level. We are proud of the culture we’ve created within the office, too: BPI-Philam takes good care of its employees by promoting a healthy work-life balance,
providing sufficient training, giving free Philam Vitality memberships and encouraging them to participate in health-related activities. We also make sure that while we get the job done, we have fun at the same time. Despite only being 10 years old, our company has changed markedly over the past decade. In fact, BPI-Philam was called Ayala Life before AIA Philam Life acquired the majority stake in 2009. Just five years after our company began, we became one of the top five life insurers in the Philippines and boasted the highest total premium income. Today, we are the leader in Philippine bancassurance and continue to grow, with an increasing number of BPI branches nationwide. We also work alongside AIA Philam Life to improve our services, both for customers and BSEs. BPI-Philam’s annualised new premiums (ANPs) grew from PHP 659m ($13m) in 2010 to PHP 5.4bn ($106.2m) in 2018. As of June 2019, the company has a year-to-date ANP of PHP 2.8bn ($55.1m).
Purpose over profit At BPI-Philam, we have a passion for innovation and embrace technology because it means we can greatly improve our customer experience. We’ve adopted and developed new tools to expand our reach and make things easier for both our customers and BSEs. There’s always been a misconception that buying and selling insurance is difficult – even intimidating – due
to the amount of paperwork involved in securing a policy, but in this day and age, technology renders that argument invalid. At BPI-Philam, we want to promote digital habits so that buying insurance becomes easier for clients and selling insurance is a breeze for BSEs. With our customers in mind, we’ve developed a 24/7 online portal called ePlan. Here, clients can easily access their ePolicy, a digital version of their policy contract that can be opened anywhere using a mobile phone, tablet or laptop, provided there’s an internet connection. Through this facility, customers can also manage their policy, monitor policy values, view their payment history, update their contact information and perform policy transactions, including loans, partial redemptions and reinstatements. For BSEs, we have our Interactive Point of Sale (iPoS) and Interactive Customer Assistance and Requirements eSubmission (iCARE). IPoS was designed to make the application submission process easier for BSEs; iCARE, on the other hand, makes after-sales servicing quick and convenient. These two applications can be accessed through what we call our Bancassurance Portal, which is a suite of tools that BSEs can use for selling insurance and managing their clients’ policies. We invest a lot in our BSEs – we want to make sure they are equipped with the knowledge, skills and tools to best serve our customers. It’s not just a one-time effort, either: we ensure that we provide continuous support to our BSEs through regular training, effective communications and a nurturing company culture. They are our agents of change, playing a big role in the success of the business. All of our customer service efforts are anchored on customer centricity, which is a value our business fully commits to. Through customer centricity, decisions made within the company are judged upon how they will further improve the customer experience. We all know that insurance is an important investment. That is why the insurance industry is heavily reliant on how well the business understands and addresses customer needs. Customer service is not just about making a sale – it should also represent the business’ efforts to connect with its clients. Nurturing relationships with customers and putting their needs first are two of the best ways of making them entrust their life savings with you. What’s more, excellent service shows our customers that we are here to help secure their finances and protect what – and who – matters most to them. Our company has a purposeled promise to help our clients live healthier, longer and better lives. n
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the creation of a dementia patient searching network across more than 100 hospitals in Taiwan. In a short space of time, the adoption rate of this identification bracelet has increased by 33 percent. According to our data, nearly 100 percent of missing dementia patients are found if they are wearing the bracelet. Fubon organises workshops across the country to improve the lives of dementia patients and their carers. Through professional healthcare education, we work to ensure both groups receive the correct support. We are also involved in projects to raise public awareness of other age-related diseases.
Protecting the population Taiwan has one of the highest levels of insurance penetration in the world. However, gaps remain, particularly concerning the country’s rapidly ageing population, according to Fubon Life Insurance
Insurance penetration PERCENTAGE
25 20 15 10
5 SOUTH AFRICA
Taiwan’s insurance penetration and density rates are among the highest in the world (see Fig 1), but the overall market and social environment still poses risks. Fubon is always introducing innovative new products to meet the insurance needs of customers at every stage of their lives. For example, in response to the needs of our ageing society, we encourage policyholders to engage in
health management and disease prevention. Taiwan’s government has launched an ambitious long-term care plan, which offers subsidised nursing, meals and transport to senior citizens. We have responded to this policy by introducing basic insurance protection for older individuals. Fubon has placed great emphasis on tackling the complications that can accompany an ageing population, such as the increase in dementia cases. A major concern is that individuals may become disorientated and get lost, placing them in danger. To manage this issue, we have introduced a missing patient bracelet that is prescribed by physicians after a definitive diagnosis of dementia. This has assisted in
Life insurance benefits individuals and stabilises society. At Fubon Life Insurance, we uphold a spirit of serving the common good by bringing positive social influence to Taiwan. We have been awarded the title of Best Life Insurance Company in Taiwan by World Finance on eight occasions and have received numerous other industry awards, including in five categories at the Taiwan Insurance Excellence Awards and being named Best Insurance Company at the 2019 Insurance Faith, Hope and Love Awards. Fubon maintains a great focus on the sustainable development of the company. By leveraging our business strength, product innovation, digital services and community development projects, we have been able to act on market trends while maintaining stable growth. The company provides timely assistance to the public through considerate and efficient customer service, demonstrating our determination to serve the Taiwanese market.
We don’t just care for society through our policies, but also in the way our business operates. Through the adoption of digital finance and insurance technology, Fubon promotes paperless services to make the company more environmentally friendly. This doesn’t mean we have forgotten the importance of providing human interaction when delivering services to our policyholders, though. Fubon has optimised its operational efficiency at each stage of the insurance application process and has launched a smart claims system to ensure policyholders receive the best service. For example, applicants can now use video conferencing technology to communicate with our advisors. Talent is the key to all sustainable business development. As such, Fubon seeks to create a workplace environment that encourages our insurance agents to move up the career ladder. Through our professional training programme, we are able to improve the expertise of our teams. This helps us optimise our existing services and create new business opportunities through innovative insurance technology, which our staff are fully trained in. Being recognised for our work provides welcome validation, but it also reaffirms our responsibility and commitment to our policyholders. To protect the four million families that make up our customer base in Taiwan, Fubon has been actively embracing digital technology and focusing on talent cultivation to provide meticulous and well-rounded customer service. We are keen to respond to social trends and changing customer expectations, and are actively addressing the uneven distribution of resources between the rural and urban areas of Taiwan by expanding our service locations. Fubon will continue to shoulder the responsibility of being the guardian of families in Taiwan, pursuing global expansion and striving to become the number one brand in the Asian life insurance market. n
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Leading by example The pensions system in El Salvador underwent significant reform in 2017. The best pension fund administrators anticipated the requisite changes and adapted accordingly
Lourdes Arevalo CHAIRMAN AND CEO, AFP CONFÍA
El Salvador may be the smallest country in Central America – it has a population of just 6.4 million, according to the World Bank’s latest estimates – but its economy continues to show huge potential. Across 2018, GDP growth was measured at 2.5 percent, and its GDP per capita totalled $4,058. What’s more, pension funds, which make up 44 percent of El Salvador’s GDP, have registered a compound annual growth rate of more than 10 percent over the past 20 years. At the heart of this success is AFP Confía, a subsidiary of the Atlántida Financial Group. Founded in 1998, the company manages pension savings and retirement benefits for more than 1.5 million employees and retirees across El Salvador. And with $6bn in assets under management – over $2bn of which is made up of cumulative returns – AFP Confía is the largest pension fund in Central America and the Caribbean, according to data published by the financial newspaper Moneda. In fact, AFP Confía paid over $250m in retirement benefits in 2018 alone. Since launching, AFP Confía has been the largest pension fund (with the biggest monthly contributions) in the region and remains a market leader in almost every key indicator. We are keen to maintain this leading position moving forward.
Financing the future Having played an active role in El Salvador’s pension system for the past 20 years, one thing has become clear to us: change is never far away. Armed with this knowledge, we have been able to navigate shifts in regulatory standards and customer expectations while continuing to lead the market. Strengthening performance, attracting new customers, reaching organisational goals and generating positive returns are just a few of the aims we have set ourselves during this period. Innovation, efficiency and a highly motivated team are some of the core reasons for our success. Our investment team, which comprises young – but experienced – individuals who focus on achieving good investment returns and bet96
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ter pensions for our clients, has been pioneering investments in Central American markets since the day we opened our doors. Over the decades, this team has driven the regionalisation of our portfolios through investments totalling $500m in Costa Rica and Panama, including quasi-sovereign bonds, airports, petrol refineries, banking, communications and utilities. Our portfolios are invested in fixed-income securities and are always grounded in robust research. What’s more, we’ve supported the economic development of El Salvador and other Central American markets by financing a wide variety of industries, such as municipal infrastructure, highway expansion and maintenance, agriculture, airport and port expansions, electricity projects, water utilities,
The 2017 pension reform increased mandatory contribution rates, issued a new fully funded longevity guarantee, set out a gradual increase in the retirement age and improved investment regulation. For the first time, the reform also allowed pension funds to directly invest up to 20 percent of total assets under management in international mutual funds and exchange-traded funds. For AFP Confía, this amounts to approximately $1.2bn. As a way of anticipating future change, we remain focused on proven process management strategies like Six Sigma and new tools such as biometric identification and artificial intelligence (AI). We have supported these frameworks through a complete re-engineering of our processes and ensured that all of our business operations are focused on driving efficiencies, increasing savings and delivering best practices across the company. With these strategies in place, we can guarantee that our clients are always
AFP Confía in numbers:
Employees and retirees served
Assets under management
Retirement benefits paid (2018) Atlántida Financial Group’s board members
sovereign debt, real estate investment trusts and bank securities. Our cumulative return over the past 36 months was 4.61 percent – the highest in the local pension fund system, according to a report published by the Salvadoran regulator, the Superintendencia del Sistema Financiero, in September 2019.
Adapt and thrive As a result of our forward-thinking approach, we were able to adapt our core operating systems and investment strategies before the domestic pension system underwent significant reform in 2017. After years of debate, this much-needed reform was approved by the Legislative Assembly of El Salvador and received an actuarial validation by Mercer, the world’s largest investment consulting firm.
our primary focus, keeping them abreast of the latest developments and remaining in direct communication as much as possible. To achieve this, we are using data analytics and machine learning to improve the services we offer, as well as implementing new channels of communication via AI and other cutting-edge technology to get closer to our clients and resolve their problems remotely. Such tools will help us raise awareness of the pensions system, demonstrate how savings are invested and highlight the importance of savings in El Salvador. After all, it’s only with the continued support of our shareholders and the leadership of our clients that we will be able to anticipate and adapt to market changes long into the future. ■
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With great wealth comes great responsibility Many high-net-worth individuals are keen to shift their investments to ensure they align with sustainable goals. It is up to financial advisors to promote the adoption of these ethical funds
Florent Albert GLOBAL CFO, LOMBARD INTERNATIONAL GROUP
In 1971, the German business professor Klaus Schwab brought leading executives from Western Europe to a small town in the Swiss Alps. Schwab asked these corporate leaders to consider the impact of their businesses on all of their stakeholders – not just customers and investors, but the societies within their sphere of influence. This ethos of responsibility would form the foundations of a new non-governmental organisation committed to economic and social betterment: the World Economic Forum. Since that first meeting in Davos almost five decades ago, the need for corporations, governments and society at large to take responsibility has only grown. The World Bank estimates that $4trn worth of investment is needed every year to achieve the UN’s Sustainable Development Goals (SDGs) by 2030. With current annual funding from multilateral organisations amounting to just $1trn, the continued contribution of the world’s wealthiest people is more crucial than ever. The urgency of global issues has challenged high-net-worth individuals (HNWIs) to consider how they can leave a legacy greater than just financial security to the next generation. It is the responsibility of their advisors to support them in doing so.
The new face of wealth Finally, the misconception that responsible investments don’t bring high returns is being broken down. There is a growing understanding that wealthy individuals can meet their 98
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financial goals while also safeguarding the planet for future generations. August 2019 data from Morningstar showed that 73 percent of funds in its environmental, social and governance (ESG) index outperformed equivalent non-ESG funds over the past three years. This has led to HNWIs increasingly deploying capital to responsible investment opportunities – funds that preserve and grow their financial assets, and build a sustainable future. This has contributed to the soaring popularity of sustainable investing in recent years. According to research carried out by UBS, 34 percent of family offices globally are already engaged in sustainable investing, and a further 25 percent are engaged in impact investing. Of the latter, 62 percent are focused on fighting climate change. Further, a Standard Chartered Private Bank survey showed that 84 percent of HNWIs were open to shifting their funds from philanthropy to sustainable investing. Another major driver of ESG integration is the shifting high-net-worth demographic, with more women and Millennials joining the group than ever before. These groups are highly attuned to the broader social and environmental impact their investments have. For example, research by Morgan Stanley found that 86 percent of Millennials and 84 percent of women are interested in sustainable investing, compared with 67 percent of men. This has contributed to an influx of sustainable and impact-
THERE IS A GROWING UNDERSTANDING THAT WEALTHY INDIVIDUALS CAN MEET THEIR FINANCIAL GOALS WHILE ALSO SAFEGUARDING THE PLANET FOR FUTURE GENERATIONS
focused investment funds and strategies, and the number of options available in this space is only growing. After increasing just one percent in 2018, assets in this sector rose 15 percent to $52bn during the first half of 2019, according to research by Fitch Ratings.
Global goals Although interest in sustainability from HNWIs is driving the investment management industry to assess how it can meet financial goals and address global issues, the urgency of the situation requires more rapid action. Currently, three quarters of wealthy individuals knowingly hold shares in companies that are not aligned HNWIs’ interest in sustainable investing: with their ethics. This disconnect highlights the increasingly important role advisors of Millennials play in mobilising the high-net-worth community to pursue sustainable investment of women opportunities. The first step in achieving this is improving communication and of men clarity around ESG funds. Advisors must explain the options that are available to their wealthy clients so as to capitalise on the growing interest in aligning investment portfolios with personal concerns. The growing popularity of responsible investing presents an opportunity for advisors to fulfil their fiduciary duty to their clients by considering sustainable investments while understanding the unique nature of the footprint their clients wish to leave behind. Service providers must understand that wealthy individuals have a responsibility not just to their families, but also to their employees, the causes they support and the communities they live in. The contribution of HNWIs is essential to achieving the UN’s SDGs and to creating a fairer, safer and healthier society for a sustainable future. Personal advisors must take the necessary steps to ensure that their clients’ financial and wider objectives are both met. ■
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international regulatory initiatives that help tackle tax avoidance and eva sion, combat money laundering and prevent Duration terrorist financing. The Bahamas will not allow its financial services sector Minimum length of stay to be compromised in the Bahamas and remains committed to ensuring that it is a transparent, clean and comMaximum length of stay in pliant jurisdiction. It any other single country has already demonstrated this commitment through its swift response to the new international regulatory initiatives developed by the OECD, EU and Financial Action Task Force, allocating substantial human and monetary resources to ensure the necessary legislation and policies have been implemented.
The Bahamas’ tax residency programme:
Land of opportunity The Bahamas may be best known for its sun-kissed beaches and crystal-clear waters, but the archipelago is also home to a robust financial services industry that is committed to maintaining the highest regulatory standards
A piece of paradise
Elsworth Johnson MINISTER OF FINANCIAL SERVICES, TRADE, INDUSTRY AND IMMIGRATION, BAHAMAS FINANCIAL SERVICES BOARD
For more than 80 years, the Bahamas has successfully attracted foreign direct investment and offered competitive wealth management services to clients from around the world. One of the key reasons for the archipelago’s success is its position as an internationally recognised centre for the provision of financial services. In fact, while the country is small in size, it has consistently proven itself to be strong in terms of products and services. This strength has been challenged in recent years by the global consolidation of technological advancement, the region’s relative economic weakness, increased competition from other financial centres (both onshore and offshore) and regulatory pressures. To counter these issues, the Bahamian Government has begun laying the foundations for its financial services strategic outlook up until 2025. This strategy has a clear aim to cement the country as a location of choice for specialist international financial services and seeks to build on a number of the Bahamas’ strengths, including its local HR talent, well-regulated environment, technological development, product and service innovation, established infrastructure, excellent client services and friendly investment policies. Current trends are pointing towards a more technology-driven financial sector that 100
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is increasingly knowledge-focused. As such, the Bahamas must be prepared to adapt its product and service offerings to these changes, while also leveraging its existing strengths to seize the opportunities being created by new and emerging developments.
Offshore, but above board The Bahamian Government believes that fostering a continued alliance between the public and private sectors, while collaborating with both domestic and international regulators, is critical to growing the islands’ financial services industry and preserving the jobs of its citizens. In the past, the word ‘offshore’ has conjured up negative images of financial centres. Unfortunately, the word still casts a shadow over the continuing success and tremendous growth of legitimate private banking and wealth management businesses in well-regulated jurisdictions like the Bahamas. The government, therefore, believes the Bahamas must articulate its legitimacy as a responsible, wellresourced and compliant financial centre that is focused on lawful international business – in other words, a centre that is committed to the highest possible standards of service delivery, transparency and cooperation. As such, the Bahamian Government is dedicated to maintaining the integrity of the country’s financial services sector and ensuring full transparency in line with its international obligations – all while balancing clients’ need for safety and confidentiality. To this end, the Bahamas has been proactive in the global fight to increase tax transparency, complying with
Having recognised the importance of adopting a modern, progressive and development-focused immigration framework, the Bahamas’ Ministry of Financial Services has developed a tax residency programme that can serve as a gateway to more permanent residence for high-net-worth individuals. This programme grants successful applicants the right to reside in the Bahamas for a period of up to three years and bestows upon them a certificate of tax residence. To maintain access to these benefits, however, investors must make the Bahamas their home (or main) residence, living in the country for at least 90 days and declaring they will spend less than 183 days in any other single country. If they fail to abide by these rules, a ‘substantial presence test’ will be conducted to ascertain whether their benefits should be withdrawn. The ministry also recognises that the issue of residency is hugely important given global developments in tax transparency. With this in mind, the concept of residency – and, specifically, tax residency – in the Bahamas has been carefully defined. This has helped the country’s financial services sector remain progressive, while also keeping up to date with a changing global landscape. As always, a fine balancing act must be struck. The Bahamas will continue to abide by the highest regulatory standards – both domestic and international – while delivering new products and services that maintain the archipelago as one of the world’s most respected providers of financial services. ■
Nordea Sustainable Finance Nordea seeks to inform and engage our clients in environmental, social and governance issues. The world is challenged by impacts of climate change and increasing resource scarcity. These challenges are putting pressure on natural habitats, communities and people as well as on businesses, presenting a threat to global prosperity.
By acting on our clients behalf we can make important contributions to economic growth and prosperity, through capital allocation and interaction with companies. This is not only a business opportunity, but a part of our responsibility.
Sustainable Finance is about the mobilization of capital for businesses with economic, social and environmental benefits.
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A reality check for real-time tax reporting Optimising the benefits of instant data sharing among taxpayers and tax administrations necessitates a pragmatic understanding of the challenges and technology required, write George Salis, Principal Economist and Tax Policy Advisor, Aleksandra Bal, Senior Product Manager of EU Indirect Tax, and Michael J Bernard, Chief Tax Officer (Transaction Tax) at Vertex In light of recent challenges to multilateral cooperation, global corporations, individual countries and tax administrations are striving to improve their coordination on numerous matters, including indirect taxation. One way to enhance this collaboration is through the implementation of technologies that enable the real-time – or near real-time – reporting of a company’s transaction data to tax administrations in certain jurisdictions. Hungary and Spain have already adopted real-time reporting requirements for transactions subject to value-added tax (VAT), and many more countries could soon follow. At least, that’s what one might believe from the large volume of articles and analysis extolling the rapid rise of real-time reporting. In reality, though, the implementation of instantaneous transaction reporting has not been as widespread – nor as genuinely realtime – as initially predicted. There exists understandable resistance to this new requirement among companies, as well as plenty of confusion about the processes, technology and talent needed to make it work. Hungary may have followed the lead of Spain – which implemented a near-real-time reporting system called Suministro Inmediato de Información (SII) in 2017, whereby companies digitally share VAT sales and purchase invoice data with tax administrators within four days of issuance or receipt – but several issues are slowing the adoption of similar proposals in other countries. These obstacles must also be overcome if countries and companies are to optimise the potential benefits of real-time reporting, which include reducing a vast VAT revenue collection gap in Europe and avoiding lengthy (and disruptive) tax audits. Additionally, tax adminis102
trations will improve the processing time of exemptions, further helping revenue departments with cash flow and revenue cycle management, among other internal administration issues. Given the magnitude of the potential benefits and compliance risks, business and government leaders should develop a clear understanding of these issues and hurdles to implementation.
Not quite the real deal Real-time reporting can help tax authorities detect suspicious transactions and uncooperative taxpayers at an early stage, as well as prevent tax avoidance and fraudulent activities. The VAT gap – the difference between expected VAT revenues and the VAT that is collected – has been the primary driver of EU countries’ interest in adopting real-time reporting requirements. According to the European Commission’s 2019 VAT Gap in the EU-28 Member States report, the EU’s member states lost a combined €137bn ($151.5bn) in VAT revenue in 2017 due to tax fraud, tax evasion and inadequate tax collection systems (although bankruptcies, financial insolvencies and miscalculations also contributed to the gap). In the near future, the statistical data collection and analytics from comValue of the EU’s VAT gap bined taxpayers will provide tax administrations and revenue authorities with an improved understanding of taxpayer behaviour as it relates to compliance. Although this shortfall has existed for years, in 2017 it finally motivated Spain to adopt its real-time reporting requirement, which has since shown positive results. According to a recent evaluation surveying a three-month
period, SII covered 75 percent of the total turnover of VAT taxpayers in Spain, and the data supplied through SII matched the information given in VAT returns in 84 percent of cases. It is important to note, however, that 64,000 companies were initially obliged to join the new regime, but 10,000 companies left the monthly VAT refund regime or VAT grouping (both of which are optional) to avoid SII. Among the remaining companies within its scope, 90 percent complied with SII within the first three months of it being in effect. While Spain’s foray into real-time reporting may have partly inspired Hungary to follow suit a year later, Hungarian tax administrators were also motivated by an exceptionally high rate of VAT fraud. Hungary’s requirements stand out because they require companies to digitally remit details on B2B sales transactions daily. Spain and Hungary’s adoption of real-time reporting requirements was widely viewed as a trend that would culminate in the adoption of similar tax reporting requirements in most, if not all, EU member states. Irish Revenue Chairman Niall Cody even recently described real-time VAT reporting as “inevitable”. To date, however, no other country has implemented such legislation.
Slow progress As government leaders and business executives assess the viability and likelihood of new real-time reporting requirements, they should keep in mind several dynamics that affect how easily and cost-effectively these can be implemented. One issue to consider is that real-time reporting does not always translate to instantaneous data transfer or live-data transmission in practice.
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“Global corporations, smaller to mid-sized companies and public sector organisations are all competing for the same tax technology talent” Instead, real-time reporting rules may only require companies to submit VAT transaction data eveYear launched ry few days, or weekly. Given that companies already collect, report and remit inCoverage of the total turnover direct taxes monthly of VAT taxpayers in Spain in most EU countries, the actual time savings delivered via new real-time reportMatch rate ing requirement s should be clarified and then compared to the potentially significant costs of the changes companies – as well as tax administrations – need to institute to comply. This cost-benefit balance is crucial for businesses. If transaction data can be shared in real time (or close to it), these transactions can be immediately reviewed from an audit perspective by tax administrations. This would sniff out any inaccuracies within days of the transaction’s occurrence, enabling tax administrations and companies to resolve auditing issues at that point, rather than months or even years later, when the resolution process tends to involve far more time, effort, cost and disruption. This near-real-time assurance would greatly reduce the risk, disruption and cost of tax audits – benefits that can help companies offset the cost of implementing new tax management technology and related process changes. The quick and secure exchange and storage of a company’s transaction data also requires relatively advanced adjustments to tax data management technology. While a growing
SII in numbers:
number of global companies have this type of technology in place – in large part to keep pace with the competitive challenges posed by the digitalisation of the global economy – many enterprises still need to upgrade their tax technology. In fact, comparatively few tax administrations have the requisite tax data management technology in place. It is also important to keep in mind that the impetus, receptivity and technological capabilities needed to support real-time reporting vary significantly across EU countries and other regions. Many developing countries with VAT regimes do not currently possess the appropriate technology to achieve automated real-time reporting systems. Even the EU’s 28 member states have different VAT compliance requirements and widely varying technology capabilities. This makes the widespread adoption of similar real-time reporting requirements unlikely. In the US, for example, numerous state, municipal and local tax jurisdictions set their own unique sales and use tax rates and reporting requirements. There is also substantial pushback to real-time reporting in the US – due, in part, to resistance from credit card companies and retail and trade associations. Furthermore, many assert that this instantaneous reporting is not essential when considering the requirements of current regulation.
Bridging the gap While the VAT gap represents a massive challenge for EU tax administrations and is a primary driver of the recent push for real-time reporting requirements, two other gaps also figure as major implementation obstacles. The first is the technology gap. When governments want to implement real-time report-
ing, they quickly realise that they need systems in place to enable this capability. These systems must be able to accept transaction data from companies, run verification tests on the data and then store it securely. While tax data management systems with these capabilities exist, relatively few tax administrations currently have them in place. The cost-effective implementation of these systems depends on several factors that must be carefully evaluated, including the tax administration’s existing technology environment and any plans it has to alter or improve it. While some tax administrations rely on traditional on-premises information systems, many government bodies are in the process of migrating technology functions to a private ondemand or public cloud model. Given this fluctuating IT setting, any real-time tax management system should be hybrid-cloud friendly. In other words, it should be able to exist within the three technology models: on-premise, private cloud and public cloud. The other major challenge to implementing real-time reporting is the talent gap. Having advanced tax technology in place offers little value if an organisation doesn’t have access to the skills needed to operate these systems. And these relatively rare skills are in increasingly high demand: global corporations, smaller to mid-sized companies and public sector organisations are all competing for the same tax technology talent. The demand for technologically savvy tax professionals and the need for cutting-edge tax data management applications should only accelerate in the coming years, as tax compliance requirements intensify and more corporate tax functions implement additional technology such as robotic process automation, blockchain and artificial intelligence. As the global economy becomes increasingly digitalised, governments and their tax administrations will face growing pressure to advance their technological transformations. This pressure is also likely to increase demand for more expedient data sharing among public and private entities. When this data sharing can be conducted and governed thoughtfully and securely, tax administrations and the companies they work with – not to mention the societies that both entities serve – have an opportunity to achieve significant mutual benefits. Achieving this state of multilateral cooperation starts with a practical understanding of the issues, challenges, technology and skills needed to make these digital interactions thrive. In today’s modern digital tax compliance environment, both tax administrations and taxpayers should understand that the old technology that got them to where they are today will not be sufficient to take them where they want to go in the future. n
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The dangers of fiscal Europe The EU is moving to increase its taxation powers and create a more integrated, federalist Europe. This is bad news for many of its member states, which could see their competitiveness on the world stage suffer as a result
Thierry Afschrift MANAGING PARTNER, AFSCHRIFT LAW FIRM
Since it was established, the EU has harnessed tax measures to stimulate economic growth among its member states. Through the creation of a single market, it ensured the total abolition of customs duties between member states, as well as the elaboration of a common customs system. This system of free trade has made a significant contribution to the prosperity of European citizens. But the single market – founded on liberal principles – was accompanied by a common agricultural policy based on opposing ideas. This common agricultural policy led to the subsidisation of loss-making productions and made many self-employed farmers dependent on the state. The single market also unified rules on the taxable basis for value-added tax (VAT), which helped foster trade between states. 104
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What is less well known, however, is that this harmonisation is still incomplete, as it does not concern rates of VAT. Over time, the EU has started to take a position here, setting minimum – but not maximum – VAT rates. Unfortunately, this helps pave the way for a European fiscal policy that prevents tax competition without protecting taxpayers.
Stifling competition With the exception of the EU Savings Directive, Europe has done little in the field of personal tax – in principle, its institutions don’t have the power to do so. In the field of corporate tax, though, there is an increasing number of directives that harbour the sole objective of reducing tax competition between countries by preventing states from granting advantages to businesses. This policy is dictated by the larger, more influential members of the EU – such as France and Germany – and imposed upon the smaller ones. Unlike France and Germany, countries such as Belgium, Luxembourg, the Netherlands and Ireland can’t offer businesses access
to a wide net of customers. As a result, they have always felt the need to attract foreign companies through tax advantages. These tax advantages are lawful so long as they are not selective – that is, providing they are equally accessible to all. Today, the European Commission is trying to erode these advantages by using rules of competition law that have not been designed for this purpose. This is dangerous for small countries with tax systems that provide benefits by reducing their tax base. Without tax advantages to offer, these states could lose their appeal among foreign businesses. The EU is issuing more directives like this, including anti-abuse measures, bans on granting intellectual rights benefits, limits on deductible corporate interests and, most recently, new reporting obligations in the aggressive tax planning area. These directives are almost exclusively intended to maintain a certain degree of taxation. Fundamental issues such as the establishment of a European ‘fiscal shield’ – which would limit taxation in relation to GDP, or the taxation of each individual in relation to their income – are never discussed, as they’re not of interest to the EU. In fact, only the protection of tax revenues in individual members or the bloc itself seems to justify the EU’s interest. Certain EU states – principally the smallest – react by keeping tax rates low. This is
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“A Europe that can collect more taxes will have a larger budget and will more easily acquire additional capabilities” den their desire to achieve a uniform tax system. We can see this through the introduction of the Action Plan on VAT and the proposal for a Common Consolidated Corporate Tax Base. The European institutions believe that such measures could lead to the introduction of a single European company tax.
All for one, not one for all
what Ireland has long done with its 12.5 percent rate for corporations. Bulgaria, Romania and Lithuania also offer low rates, while Hungary has the EU’s lowest corporation tax at just nine percent (see Fig 1). This is a logical move that helps these nations remain competitive, but it is feared that the most federalist or statist Europeans could push for a set minimum corporate tax rate. As a result, the EU could start treating states in the same way it treats companies that operate in violation of EU competition laws. This is in line with the approach adopted by the European institutions that have never hid-
In light of these factors, a question inevitably arises: does Europe actually need taxes? In the EU, the principle of fiscal sovereignty generally prevails. This means that states freely regulate their tax systems and choose whether or not to implement certain types of tax, thereby determining their taxable base. The EU benefits from certain tax resources, such as customs duties or a small part of VAT, but can’t otherwise tax nationals or residents of the union. For this to happen, a treaty must grant it such power. In this period of European crisis, those who advocate greater European integration are torn between two contradictory feelings. On the one hand, Brexit is a danger to European unity – as one of the most important members of the union, many spectators fear that the UK’s departure could set a precedent among other states. On the other, federalists – those who dream of a United States of Europe – see this as an opportunity. The UK has never been a proponent of strong European integration and has often blocked common policy development. As such, its departure
Corporation tax in the EU
35 30 25 20 15 10 5
SOURCE: TRADING ECONOMICS
may lead to some European progress on policies that the UK had blocked. Some of these federalists want to give the EU greater influence over taxation, favouring a union that can levy a tax on the income of individuals or companies. In other words, they seek to implement the US model of taxation, in which there is a corporate and personal tax at the federal level, while states collect income taxes for their own benefit. In the case of indirect taxes, however, integration is most advanced in Europe. The introduction of additional tax power – on income, for example – at a union level is a key issue in the development of the EU and its possible orientation towards a federal system. Political power always depends on a state’s ability to raise taxes; a Europe that can collect more taxes will have a larger budget and will more easily acquire additional capabilities.
Europe as a federation We must ask ourselves whether it is desirable to create a European federal body with significant fiscal powers. The EU has made a significant contribution to the prosperity of its inhabitants by increasing freedoms, particularly through the creation of a single market. In doing so, it has somewhat reduced the influence states can impose on their citizens. But this has also restricted some freedoms. When the EU moved towards becoming a political authority, it began to regulate whole areas of the economy and people’s lives. It has itself become a power that is exercised – directly or indirectly – on businesses and individuals. By granting additional capabilities to the EU, at best, one only shifts the burden from individual states to a higher level. This means that the principle of subsidiarity – according to which, decisions must be taken as close to citizens as possible – will be further eroded. Worse still, there has been no instance of a government agreeing to reduce its revenues: for example, although the Federal Government of Belgium consistently claims that it is cutting taxes, its revenues are increasing in tandem. It seems certain that if the EU were to be granted fiscal power, individual states would not reduce their revenues and would continue to raise tax as much as they do now. The granting of fiscal power to the EU will, therefore, lead to an increase in taxes for businesses and individuals. Europe is already the most taxed continent in the world. Granting the EU taxation powers would only exacerbate this situation, making the bloc unappealing to investors and reducing its members’ competitiveness on the global stage. n
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STAGE The role of central banks as neutral stewards of the financial system is being undermined by a mix of populism and economic structural changes, writes Alex Katsomitros »
BREAKING THE BANKS
hina is not our problem, the Federal Reserve is,” Donald Trump tweeted in October 2019, in one of his usual tirades in the small hours of the night. It was not the first time the US president had vented his anger at Jerome Powell, Chairman of the Fed, whom he appointed last February, but this time the message was clearer: “People are VERY disappointed in... Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow.” Although the US central bank had already cut interest rates three consecutive times, this was not enough, according to Trump: “We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest country, but the Fed puts us at a competitive disadvantage.” Criticism of central banks is not unprecedented in the history of the US: Richard Nixon famously pressured Arthur Burns, the Fed chairman at the time, to loosen up monetary policy in the run-up to the 1972 election. Ronald Reagan was equally harsh towards Paul Volcker. However, Trump’s remarks open a new chapter in the history of the relationship between politicians and central bankers, the latter traditionally seen as non-political figures who – out of virtue or necessity – stay out of the diplomatic fray. “Trump has no intellectual or personal issues with Powell – he just finds him to be a convenient target,” said Professor Paul Wachtel, an expert on central banking who teaches at the New York University Stern School of Business. But, he added, Trump’s tantrums reflect a broader trend: “Powell has no political base of his own and bankers are a frequent target for anti-Semites and others; Trump is trading on the world’s hatreds.”
Autonomous no more An independent central bank has not always been an axiom of global finance. The rise of monetarism in the 1980s convinced politicians that thankless tasks such as setting interest rates would be better off left to technocrats. Depoliticising monetary policy was deemed the key to unshackling central banks from the whims of public opinion and party politics; their governing boards were left alone to achieve price stability. In the UK, it was Tony Blair’s Labour government that granted independence to the Bank of England in 1997, while the European Central Bank (ECB) has been independent from the outset, with low inflation stated as a key target in its charter. Slowly but surely, independence became the global norm, even in parts of the world where other institutions are particularly weak. A 2008 working paper from the IMF showed that the idea had been in the ascendant in emerging market economies since the 1980s, while international organisations such as the World Bank and the IMF often include central bank independence as a prerequisite to participating in loan and aid programmes. Even the People’s Bank of China, which is accountable to the State Council and 108
US Federal Reserve Chair Jerome Powell
the country’s ruling Communist Party, has occasionally resisted government pressure. However, the needle seems to have moved over the past few years. In various parts of the world, the privilege of central banks to set monetary policy unperturbed by external forces is increasingly coming under fire. In July 2019, Turkish President Recep Tayyip Erdoǧan abruptly sacked the governor of the country’s central bank, Murat Çetinkaya. The reason, Reuters reported, was that Çetinkaya had refused to succumb to pressure for an interest rate cut – a move that would be in line with Erdoǧan’s unorthodox view that high interest rates drive up inflation. In India, meanwhile, Governor of the Reserve Bank of India Urjit Patel cited personal reasons for resigning in December 2018, but many at the bank suggest he was forced to leave after a series of clashes with the government which pressured the bank to use its surplus to plug budget gaps, increase spending before a general election and loosen up lending to tackle a shadow banking crisis.
Overstated powers Central banks in advanced economies have not escaped this trend. In the UK, pro-Brexit politicians rebuked the Bank of England’s forecast that a no-deal Brexit would lead to recession and the collapse of the pound, referring to it as part of an anti-Brexit smear campaign known as ‘project fear’. The Canadian governor of the bank, Mark Carney, has become a bête noire for the Tory party’s pro-Brexit faction; the MP and prominent Brexiteer Jacob Rees-Mogg has called Carney the “high priest of project fear”. Even that pales in comparison with the salvo of insults regularly unleashed by the US president, who never misses an opportunity to fulminate against the Fed and its chairman. In October, Trump said that he’s “not even a little bit happy” about Powell’s performance – he also hinted that he may nominate economic advisor Stephen Moore and former Republican presidential candidate Herman Cain to the bank’s board. Francesco Bianchi, an
Depoliticising monetary policy was once deemed the key to unshackling central banks from the whims of public opinion and party politics
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BREAKING THE BANKS
associate professor of economics at Duke University, told World Finance that one explanation could be that Trump “needs the backing of the monetary authority in light of his trade war [with China] and to confirm the narrative that the economy is doing very well”. But public criticism of the Fed does not come without consequences: in a recent paper, Bianchi, along with London Business School academics Howard Kung and Thilo Kind, provided market-based evidence that Trump’s tweets have a direct impact on expectations about monetary policy: “Market participants believe that the Fed will succumb to the political pressure, which poses a significant threat to central bank independence.” Nor is this type of criticism a privilege of America’s conservatives: Bernie Sanders, a leading figure of the Democratic Party’s left wing, has often argued that the Fed is in bed with Wall Street interests. One reason why politicians don’t hesitate to criticise central banks is the shattered reputation of the financial sector after the Great Recession. Paul Tucker, former deputy governor of the Bank of England and author of a book on the role of central banks in modern democracies, told World Finance: “Being the ‘only game in town’ in [an effort] to stave off complete collapse and then revive the economy has, perversely, made central banks part of the political game. And avoiding complete collapse did not cure concerns about inequality or persistently weak growth.” Some take this argument one step further, claiming that central banks should be governed as any other political institution. In his book The Power and Independence of the Federal Reserve, Peter Conti-Brown argued that the Fed’s policies have political implications, and therefore the bank should be accountable to the public through increased congressional oversight. Another reason is that fiscal policy – a tool still controlled by national governments – is used with a light touch by politicians. Public spending programmes, once a standard response to economic downturns straight out
By pumping money into markets, central banks may have created a bubble of private and sovereign debt that could spark the next financial crisis
of the Keynesian rulebook, are avoided for fear of a negative reaction from global markets. Structural reforms such as those taken by Germany in the early 2000s can ruin political careers: Germany’s Social Democratic Party still hasn’t recovered from the backlash against its Agenda 2010, a programme of welfare system and labour relation reforms that laid the groundwork for the country’s economic rebound. The result of instances like this is that central banks are left alone to pick up the pieces when things go wrong. In Europe, many central bankers have pushed governments to use fiscal policy to stimulate the economy and undertake structural reforms, but with limited results. Facing contradictory demands, central banks often find themselves in a bind: when they step into the breach, as the Bank of England did after the Brexit referendum by cutting interest rates and pumping liquidity into the system, they are accused of interfering in politics. When they shy away from decisions that may have political repercussions, they are accused of inaction – often by politicians. “The spread of populism has increased the temptation for politicians to misuse the central bank as a scapegoat for their own failures,” Otmar Issing, former ECB chief economist, told World Finance. “Central banks are widely seen as having become too powerful, which has undermined the acceptance of independence and reduced the threshold for attacks.” Central banks’ power to intervene in global markets has also been overstated: although expected to have a cure for all diseases, they are frequently powerless in the face of forces they cannot control. Changes in national monetary policy often have little impact on areas such as international trade, fiscal policy or even the increasingly globalised financial system. Tucker said: “Central bankers, charged with maintaining a stable monetary system, need to be clear about what they can’t deliver, such as generating improvements in underlying dynamism (productivity growth), and stay close to base in their commentary.” »
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BREAKING THE BANKS
The next crisis If there is one issue that attracts the ire of politicians, it is the figure that central banks are supposed to get right by default: interest rates. Following the crisis in 2009, central banks on both sides of the Atlantic have stuck to a policy of low interest rates in an attempt to increase money supply and stimulate the economy (see Fig 1). It is this aberration from economic orthodoxy that drives the current US president’s preference for low interest rates. But the policy may have reached its limits, said Wachtel: “Persistent negative interest rates, such as the negative 10-year government yields in much of Europe, are unprecedented and should be a matter of concern. There is some natural real rate of interest – it is small but positive, and rates around the world have been below this for almost a decade.” The problem has been more acute in Europe, where interest rates hit the symbolic threshold of zero in 2012 and turned negative in many countries two years later. The ECB’s loose monetary policy has caused a rift in its ranks between southern and northern countries; the former favour any measure that eases the burden of sovereign debt, while the latter bemoan the impact of low interest rates on spendthrift citizens and their savings. In his parting shot in September, outgoing ECB President Mario Draghi announced a further cut to a record low of -0.5 percent. The move caused an unprecedented uproar, with an open letter signed by former central bankers denouncing the ECB’s policies. Issing – one of the letter’s signatories and a widely recognised architect of the euro – told World Finance: “With central bank interest rates still at zero and below, the ECB has missed the opportunity to create at least some room for action. In general, central banks with their asymmetric policy to react even on mild slowing of growth have continuously weakened their position in case of a strong downturn of the economy.” However, the ECB is unlikely to change course, said Frederik Ducrozet, an analyst at Pictet Wealth Management: “The ECB is de facto committed to asset purchases and negative rates for an extended period of time, around two years in our view, and at least until they see inflation ‘robustly converge’ towards the target... the balance of risks remains in favour of more monetary easing, not less.” When central bank independence became a sacrosanct mantra of the financial system in the 1980s and 1990s, the goal was to tackle rampant inflation. The Maastricht Treaty required signatories to keep inflation at low rates, aiming to bring high-inflation countries such as Italy and the UK closer to the European average. This goal has been largely achieved: in the UK, inflation has fallen to an average of 2.3 percent over the last decade from its peak of 24 percent in 1975. Global inflation, meanwhile, has lingered at a moderate four percent on average over the past two decades (see Fig 2). However, many economists warn that low inflation, or even deflation, is becoming a more worrying problem. Central banks have been constantly missing their inflation targets since the Great Recession, limiting the effectiveness of monetary policy. The reasons go beyond the remit of central banks, according to Danae Kyriakopoulou, Chief Economist at the Official Monetary and 110
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Former ECB President Mario Draghi
Financial Institutions Forum, a think tank specialising in central banking. She told World Finance: “The current environment of low inflation largely reflects structural factors that go beyond monetary policy and the actions of central banks. These include, for example, slowing productivity growth, weak demographics that create incentives for rising savings, and a scarcity of safe assets.” One tool central banks have been eager to use to stimulate the economy is quantitative easing, a policy that was deemed unconventional until 2009. Over the past decade, central banks have vastly expanded their balance sheets by buying bonds and other assets. In Europe, the ECB’s balance sheet has reached the unprecedented rate of 40 percent of the eurozone’s GDP, and in September, the bank announced it will revive its €2.6trn ($2.86trn) bond-buying programme after a break of 10 months. The Bank of Japan has been following the same policy for decades, while the Fed has been pumping up liquidity through injections in the repo market. Critics point to potential conflicts of interest, as central banks hold bonds and equities while they are expected to oversee the financial industry as a neutral regulator.
The European Central Bank in numbers:
Current account balance
ECB balance sheet’s proportion of eurozone GDP Note: November 2019 figures
Fig 1. Central bank interest rates PERCENTAGE
n Switzerland n Sweden n Japan n China n Hong Kong n Eurozone n UK n US
8 7 6 5 4 3 2 1 0 -1
Source: Delta Stock
Note: Figures are annual averages
BREAKING THE BANKS
“There is broad evidence that the positive effects of quantitative easing have declined over time and might have given way to negative effects on market liquidity,” Issing said.
ECB President Christine Lagarde
Fig 2. Global average rate of inflation ANNUAL PERCENTAGE CHANGE
50 40 30 20
Total issuance of green bonds globally by October 2019
$434bn Corporate bonds sold globally in September alone
“The extent to which the Bank of Japan and the ECB have been holding corporate and private sector bonds or equities creates risk that could be a concern,” Wachtel said. “The slippery slope is that they buy things to help out favoured elements of the economy. That makes the central banks no different than a government making bailouts or strategic investments.” A report by the Bank for International Settlements, released in October, found that oversized balance sheets may have distortionary effects on financial markets, including scarcity of bonds for private investors, squeezed liquidity and fewer market operators purchasing bonds. An even greater risk, according to critics, is that the financial system may have become addicted to cheap money. By pumping funds into markets, central banks may have created a bubble of private and sovereign debt that could spark the next financial crisis. When this hits the real economy, governments and central banks may be toothless, with budget deficits and public debts already at high levels and monetary policy having reached its limit.
Central banks may have to enter the political fray through a completely different route: tackling climate change. Their role in dealing with the biggest challenge facing our planet has already become a hotly debated issue: in April 2019, Carney and the Governor of Banque de France, François Villeroy de Galhau, published an open letter calling for central banks to take a more active role in the fight against climate change, including measures to “integrate sustainability into their own portfolio management”. The new head of the ECB, Christine Lagarde, also favours a green agenda, promising to make this a key priority of her tenure during a confirmation hearing at the European Parliament. Some central banks are already taking action. In November, Sweden’s central bank ditched bonds issued by oil-rich regions in Australia and Canada due to their high carbon footprints. The rest of the world’s central banks also have a role to play in the fight against climate change, Tucker said: “In their stress testing of the financial system, in order to see how far essential services (payments, credit supply, insurance) would be interrupted under certain scenarios. That’s the purpose of central banking: systemic safety and soundness.” Many economists and politicians go one step further, advocating green quantitative easing that would push central banks to favour green bonds – fixed-income financial instruments with a strong environmental focus. Critics point to the limitations of the policy: although the issuance of green bonds surpassed the $200bn threshold in October, this remains a small fraction of total bond issuance. A bigger threat, others warn, is the politicisation of central bank decision-making through the back door. In October, Jens Weidmann, head of Germany’s central bank, rejected the use of monetary policy to support a climate-focused agenda, arguing that green quantitative easing would threaten market neutrality and undermine central bank independence. But some change in central bank preferences might be inevitable, Kyriakopoulou said: “It is contradictory for central banks to have ‘brown’ [polluting] industries overrepresented in their portfolios on the pretext of market neutrality at the very same time that the governments they serve have signed the Paris Agreement, committing them to limit the increase in global average temperatures to below two degrees.” Such an approach would finally break the taboo of central bank independence. Tackling a climate-driven economic crisis might be a task that is too political in nature to be left to unelected economists. Central bankers may well find themselves returning to square one, having to steer monetary policy towards certain forms of economic activity. This is where politicians might have to step in, Tucker said: “The big decisions on that would best come as legal constraints imposed by elected politicians. Otherwise, unelected central bankers would be making society’s trade-offs [on its behalf], which is adventurous without a democratic mandate. What’s at stake here could hardly be greater.” n
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Oil & Gas
A power for good Against a backdrop of supply chain disruption, environmental challenges and price fluctuation, leading oil and gas companies have continued to thrive thanks to a willingness to change Over the past five years, market volatility has become the new normal for the oil and gas industry. Ongoing trade disputes, geopolitical tension and sanctions on oil-exporting nations have sent crude prices oscillating, while global demand has been unpredictable. Amid all this uncertainty, though, there has been a sense of cautious optimism sweeping the sector. Valuable lessons have been learned from the 2014 oil crash and the downturn that followed. With crude now swinging between $60 and $70 per barrel, prices might be far from the historic highs of the early 2010s, but they have certainly picked up since their post-crash slump. These higher, healthier prices are decidedly encouraging, and the industry has shown remarkable resilience in the face of volatility. Global growth is also expected to pick up to 3.6 percent in 2020, which could bolster demand. The turbulence of recent years has shown that the oil and gas sector is able to cope with hardships, from supply chain disruption to sustained low prices. But, as we look towards 2020 and beyond, the industry’s biggest challenge is much more existential. Climate change has been described by the UN as “the defining issue of our time”, and we are witnessing a global push towards green energy sources, prompting oil and gas companies to reassess what their role might be in the future. This year’s World Finance Oil and Gas Awards celebrate the companies that meet such challenges with confidence and a will to succeed.
Go green or go home Since the signing of the landmark Paris Agreement, the world has been moving towards a low-carbon future. Renewable energy is set to play a crucial role in this transition, helping countries meet their ambitious emissions targets and reduce their carbon output. According to British energy giant BP, renewables will be the world’s main source of power by 2040, with green energy accounting for around 50 percent of electricity in regions 112
such as Europe. Renewable energy is predicted to grow in popularity faster than any other fuel in history, and is already generating 85 percent of the growth in energy supply. While green energy is becoming more commonplace, fossil fuels are not set to disappear anytime soon. Indeed, many industry experts are predicting that the demand for oil and gas will continue to grow over the next two decades, driven primarily by emerging markets in China and India. In fact, BP believes oil demand will not hit its peak until the mid2030s if the current rate of change continues. This leaves oil and gas companies in something of a double bind – they must produce enough energy to meet this growing demand, while also reducing their carbon emissions. Firms are looking to deal with this challenge in a number of ways: larger companies can use their deep pockets to acquire smaller green energy providers, allowing them to diversify into the world of renewable energy without having to build the infrastructure from scratch. Others – Denmark’s Ørsted being a prime example – are transforming themselves into green energy companies by phasing out fossil fuels and shifting towards low-carbon alternatives. Ørsted has cut its carbon emissions by over 50 percent since 2006 by refocusing its business on wind and solar energy. As stakeholders and consumers grow more conscious of environmental issues, we may see similar pivots to renewables from leading oil and gas companies in the years to come.
examine how they can make their existing operations more environmentally friendly. This is a practical way for smaller companies to reduce carbon emissions, as it doesn’t require a costly expansion into alternative energy sources. By eliminating methane and CO2 leaks from existing infrastructure, properly maintaining equipment and considering carbon offsetting strategies such as reforestation, companies can make their current operations more effective and less environmentally damaging. Moving forward, oil and gas companies must also consider the environmental impact of decommissioning their ageing rigs. This poses one of the greatest challenges to companies working in the industry, from both a logistical and financial standpoint. A huge number of offshore rigs will reach the end of their production cycle over the next two decades, and these facilities need to be safely dismantled and disposed of. According to a report by IHS Markit, approximately 2,000 offshore rigs will need to be decommissioned by 2040, at a cost of around $13bn a year. With thousands of rigs, platforms and pipelines coming to the end of their life, oil and gas companies need to devise thorough decommissioning plans that are costeffective and considerate of the environment.
A comprehensive clean-up For smaller companies with less financial flexibility, however, these large-scale transformations and ambitious acquisitions simply might not be feasible. Fortunately, there are several cost-conscious steps that companies can take to improve their services and appeal to an increasingly eco-friendly customer base. The question of sustainability is unavoidable, and oil and gas companies of all sizes need to
“The question of sustainability is unavoidable, and oil and gas companies of all sizes need to examine how they can make their existing operations more environmentally friendly”
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Oil & Gas
WORLD FINANCE OIL & GAS AWARDS 2019 Best Fully Integrated Company Africa: NNPC Asia: PETRONAS Middle East: Qatar Petroleum Eastern Europe: Lukoil Western Europe: Royal Dutch Shell Latin America: Petrobras North America: ExxonMobil
Best Upstream Service & Solutions Company Africa: Century Group Asia: China Oilfield Services Company Middle East: MB Petroleum Services Eastern Europe: Schlumberger Western Europe: Archer Latin America: Baker Hughes North America: National Oilwell Varco
Best Sustainability Company Africa: Axxela Asia: PTT Middle East: Qatar Petroleum Eastern Europe: Hellenic Petroleum Western Europe: Equinor Latin America: Ecopetrol North America: Pioneer Natural Resources
Best Independent Company Africa: Seplat Petroleum Asia: MedcoEnergi Middle East: Genel Energy Eastern Europe: Irkutsk Oil Company Western Europe: Wintershall Dea Latin America: Petro-Victory Energy North America: PEDEVCO
Best Downstream Service & Solutions Company Africa: Chrome Group Asia: Puma Energy Middle East: Q8 Eastern Europe: Honeywell UOP Western Europe: VARO Energy Latin America: Rodoil North America: Motiva Enterprises
Best CEO Africa: Austin Avuru, Seplat Asia: Takayuki Ueda, INPEX Middle East: Amin H Nasser, Saudi Aramco Eastern Europe: Marina Sedykh, Irkutsk Oil Company Western Europe: Patrick Pouyanné, Total Latin America: Miguel Galuccio, Vista Oil & Gas North America: Joe Gorder, Valero Energy
Best Exploration & Production Company Africa: LEKOIL Asia: PTTEP Middle East: PDO Eastern Europe: Volga Gas Western Europe: Chrysaor Latin America: Vista Oil & Gas North America: W&T Offshore
Best Drilling Contractor Africa: ODENL Asia: Dynamic Drilling Middle East: ADNOC Drilling Eastern Europe: Maersk Drilling Western Europe: Valaris Latin America: DLS Archer North America: Nabors Industries
Best Oil & Gas Law Firm Africa: Templars Asia: Ashurst Middle East: Latham & Watkins Eastern Europe: CMS Western Europe: White & Case Latin America: Canales Auty North America: Maalouf Ashford & Talbot
Best Downstream Company Africa: Rainoil Asia: PETRONAS Middle East: ADNOC Refining Eastern Europe: Tatneft Western Europe: Repsol Latin America: YPF North America: Valero Energy
Best CTRM Company Best EPC Service & Solutions Company Global: Eka Software Solutions Africa: Nestoil Asia: WorleyParsons Middle East: Arkad Engineering & Construction Eastern Europe: McDermott Wuchuan Western Europe: Wood Group Latin America: Techint Engineering & Construction North America: Bechtel
The oil and gas sector has been slow to embrace new technology. It is only in recent years that companies have begun to tap into artificial intelligence (AI), robotics, the Internet of Things and blockchain, but these cuttingedge systems are already transforming the industry. As uncertainty remains over oil prices and demand, new technology is helping companies to effectively cut costs and streamline their operations, enabling them to better withstand external market shocks. Smart drilling, for example, has been designed to boost efficiency and has the potential to improve well productivity by up to 30 percent, while cutting construction times considerably. AI and machine learning, meanwhile, are enabling companies to use data in new ways. Companies can harness these advanced technologies to identify trends and pinpoint poor performance, as well as gauging the risks of new projects. AI can be applied at every level of a company, improving efficiency across operations, from offshore rigs to onshore head offices. While not yet as common as AI and machine learning, blockchain also offers a valuable means of simplifying processes and reducing costs – particularly when it comes to supply chains. Digitalisation is drastically reshaping the industry, and companies cannot afford to fall behind their competitors when it comes to adopting the latest technology. In an industry marked by uncertainty and changeability, success is reserved for the most forward-thinking and adaptable companies. The winners of this year’s World Finance Oil and Gas Awards see opportunity where others see challenges, demonstrating innovation and ambition even in testing circumstances. n
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Oil & Gas
Foot on the gas Irkutsk Oil Company has grown markedly since its founding less than 20 years ago. Now, it has a new project in its sights that will drive significant economic development in East Siberia, writes Yuriy Rubin, CFO of the company Irkutsk Oil Company (INK) was established on November 27, 2000. At the time, the company owned only three fields – Yaraktinsky, Markovsky and Danilovsky, with total annual oil production of just 30,000 tons per year. Delivery of oil to consumers over muddy roads was a major drain on revenue. To switch to yearround production, the company set about constructing a pre-fabricated aboveground pipeline – a unique undertaking considering the severe winter operating conditions in East Siberia. Later, the company built production wells, oil and gas treatment units and several other infrastructure facilities. Today, INK is a successful operator of oil fields in the East Siberia and Yakutia regions, and has invested RUB 80bn ($1.25bn) in the construction of gas processing plants and a gas chemical complex in the north of the Irkutsk region, in and around the city of UstKut. This covered around 17 percent of the total cost of the project, which is scheduled for completion in 2023. The project is an impressive one: for the first time in the history of East Siberia, a gas industry is being developed in remote territories, featuring sophisticated engineering solutions based on advanced technology. According to Russian petrochemical analysis firm Rupec, the construction of INK’s gas com114
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plex ranks among the most significant projects in the gas, chemical and petrochemical industries of Russia and the Commonwealth of Independent States.
On the up When the company was first established, its early oil fields were poorly explored. The first production well quickly filled with water and many sceptics doubted whether the Yaraktinsky region held any more than a disappointing three million tons of oil reserves. However, time has proved them wrong. In those early days, finance was scarce, but each employee worked towards the company’s long-term success. Now, INK is among the world’s leading oil and gas companies. Over the course of a decade, the company was able to reach the next stage of its development. In 2010, it built its Markovskoye oil custody transfer unit to export oil into the East Siberia–Pacific Ocean (ESPO) pipeline. By mid-January 2011, the company began shipping hydrocarbons to the Kozmino port oil terminal via ESPO, and by the end of that year, INK exported more than one million tons of oil into the pipeline. Global partnerships have also supported the company’s growth: since 2007, INK has been engaged in active cooperation with Japan’s Oil, Gas and Metals National
Corporation. Currently, two Japanese-Russian joint ventures are successfully operating in the Irkutsk and Krasnoyarsk regions. INK has been able to increase its production each year and, as of the end of 2018, production reached nine million tons. The company actively develops and implements innovative solutions, affecting core and auxiliary activities. The Yaraktinsky oil field has become a core asset, accounting for two thirds of total production. However, nothing lasts forever: as the oil aspect of INK’s activity begins to slow, the gas part is ramping up. Before long, oil production from Yaraktinsky may be on the decline, but just as soon, INK’s new gas project will be fully deployed.
In the pipeline The new gas project is already underway. It all began in 2009 when the company started construction on a processing complex in the Yaraktinsky field for the reinjection of dry stripped gas and associated gas into formation – known as the cycling process – while producing gas condensate. The ambitious project has earned the support of the European Bank for Reconstruction and Development, which has a minority stake in INK’s holding company and provided a loan so the group could begin work on the project. The cycling
Oil & Gas
used to produce a propane-butane mix and provide up to one third of total feedstock for the gas chemical complex. The latter stages of the gas project will involve extensive infrastructure construction. In the summer of 2019, INK began testing cold recycling technology on its future plant site. This technology combines tarmac reconstruction and soil stabilisation to make roads suitable for yearround operation. This method of road restoration has been used globally for more than 50 years and has long proved to be an efficient solution. The creation of an industrial complex in the north of the Irkutsk region will enable the efficient use of vast resources of natural and associated petroleum gas from Siberia’s fields, which have been unused for decades. Implementation of the company’s projects would require the support of federal and regional governments, which have recognised the benefits that will be brought to local com-
Tons of oil produced annually by INK:
FOR THE FIRST TIME IN THE HISTORY OF EAST SIBERIA, A GAS INDUSTRY IS BEING DEVELOPED IN REMOTE TERRITORIES, FEATURING SOPHISTICATED ENGINEERING SOLUTIONS BASED ON ADVANCED TECHNOLOGY
process was launched in 2010 – the first of its kind in Russia. It provided the company with an opportunity to dispose of unused associated gas and became the predecessor of a larger gas project that launched in 2014. INK then began the staged implementation of the gas project, including the creation of a production, treatment and processing system for the gas liquids produced by the company. The first stage was accomplished in 2018. At that point, the company had completed construction of the Yaraktinsky gas processing plant, as well as a liquefied petroleum gas uploading facility in Ust-Kut and a unique multiphase pipeline for the transport of natural gas liquids. The pipeline will transport feedstock with up to 40 percent ethane content. In addition, for the first time in the Russian petrochemical industry, the company has begun to use new custom-built railway tank cars to ship its gas mixture to consumers. At the second stage, three additional gas-processing plants will be erected in the Yaraktinsky and Markovsky fields, with a total capacity of 18 million cubic millimetres a day. The plants will feature innovative technology, enabling them to recover up to 98 percent of the ethane contained in feedstock. Furthermore, construction of a gas fractionation plant is currently underway near
Ust-Kut. The plant will produce up to 900 kilotons of high-quality ethane per year for the future gas chemical complex. The gas project will peak in its third stage, with the construction of a polymer plant in Ust-Kut with an annual capacity of 650,000 tons of polyethylene. The Toyo Engineering Corporation was contracted for the implementation of the third stage of the gas project. That plant will produce polyethylene of various densities, granting the company access to both the Russian and international polyethylene sales markets. In addition, the plant will include advanced technology for the production of bimodal HDPE, the raw material used for the manufacture of European-certified products.
A fuel injection Another factor behind the company’s success is its implementation of new production programmes and technology for enhanced oil recovery. Oil remains the company’s core product, reinforcing its stability and capacity to pursue business diversification. One of the most promising technologies used by the company – water alternating gas injection – brings a dual benefit: it improves oil recovery in the company’s core fields and preserves gas injected into formation. In the future, these reinjected gas resources will be
munities. The project is expected to create more than 2,000 highly qualified jobs in the region and generate over $1bn of non-raw material export per year. This will offer a real chance to improve the current situation in the northern towns of the Irkutsk region, which are still struggling in the aftermath of the ruble crises of 1998 and 2014. This expanding industry will create jobs for local residents and boost the development of towns and settlements, as well as local small and medium-sized businesses. INK is already building a team of several hundred gas industry professionals from across the country to manage the project and, as of the end of 2019, is in the front-end engineering stage of a housing district for up to 3,000 members of staff and their families. The new district will include childcare centres, a school, a polyclinic and a multifunctional culture and education centre. INK believes its independent status has enabled it to accomplish its goals, which seemed unattainable in the not-too-distant past. The company does not ask for external assistance: it discovers its own fields, builds the necessary infrastructure and is creating new jobs in the region. Over the past 10 years, it has discovered 13 hydrocarbon fields in the Irkutsk region and Yakutia. There is more to come for this ambitious player. n
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Oil & Gas
A depth of knowledge The Gulf of Mexico accounts for around one sixth of the US’ total petroleum production. Its vast resources are best utilised by companies that have extensive knowledge of the region, writes Tracy Krohn, CEO of W&T Offshore W&T Offshore has been active in the Gulf of Mexico (GOM) for more than 35 years, and knows the basin extremely well as a result of our keen focus in the region. We have always prioritised free cash flow generation and believe the GOM is the premier basin in the US for generating strong, sustainable cash flows. While other energy companies have moved onshore, we have repeatedly increased our position in the region through a series of successful acquisitions and drilling projects. We have operations in both shallow and deepwater regions in the GOM and intend to remain active in both sectors. We will achieve this through a combination of acquisitions, lease sale participation, and exploration and development drilling on properties we already own or can access via farm-ins. In terms of exploratory drilling, we tend to be more focused on prospects near existing infrastructure so we can put successful wells online quickly. We prioritise projects based on economic returns and cash flow generation, regardless of whether they are in shallow or deepwater regions. Being focused on the GOM for so long makes a big difference. Over this period, we have developed a strong reputation with other operators in the GOM as well as with property sellers. We also work well with all the relevant federal and state regulatory agencies. We are proud of our safety record and have a very strong drilling success record. We believe our positive operational track record, combined with an ongoing successful acquisition strategy, has enabled us to thrive and create value for our shareholders. It’s a reputation that we intend to maintain and bolster over many more years working in the region. 116
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Having a field day Over nearly four decades operating in the GOM, we have enjoyed a number of successes. In the shallow water sector, a great example is our Mahogany field. Since acquiring the field in 2011, we have substantially expanded its size and depth by drilling or sidetracking 13 new production locations. The field is one of our key assets, and we have a quality inventory of future drilling projects that will enable us to extend the reservoir even further. We have increased production more than 10 times since acquiring the field. In the deepwater region, a good example is the Gladden Deep well, which we discovered in June 2019. The well was drilled in approximately 3,000ft of water that encountered 201ft of net oil pay. W&T operates the well and owns a 17.25 percent stake in the discovery. The well was completed and placed on production ahead of schedule in Q3 2019, and is currently producing approximately 4,600 gross barrels of oil equivalent per day, with 89 percent of production being oil. We are proud of how quickly and efficiently we were able to get the well drilled and online despite it being a deepwater site, which used to take much longer to drill and start producing. As well as these successes, we have been granted additional offshore leases, which we have high hopes for. We have been active in federal lease sales for a number of years and participated in two that were held earlier in 2019. We were awarded 15 leases in the first sale in March, when we acquired seven leases in shallow water and eight in deepwater. In August, both leases we acquired were in shallow water. We paid less than $4m for all 17
blocks, covering 83,800 acres. We intend to continue participating in future lease sales, as this is a low-cost way to add new drilling opportunities that complement our existing operations in nearby fields.
Investing in information We have a pretty simple strategy for acquisitions. We look for properties that meet three criteria: first, they must have positive cash flow and a good reserve base; second, they should have opportunities where drilling can add value; and third, they must allow us to make an impact regarding workovers, recompletions and facility upgrades that can increase nearterm cash flow. ExxonMobil’s Mobile Bay assets met all these criteria, and our purchase of them made us the largest operator in the area. We also understand the Mobile Bay assets very well as we own and operate the Fairway field, which is adjacent to the acquired assets. At the Fairway field, we have more than tripled proven reserves since we acquired it in 2011 by substantially reducing operating costs and enhancing production, without drilling a single well. We believe similar low-risk, high-upside opportunities exist in the Mobile Bay assets. Currently, one of our priorities is maximising the potential of these new properties. We are looking at how we can improve efficiency and reduce operating costs. W&T Offshore also has an onshore gas plant that is near the one ExxonMobil owned, so we are looking at how to make use of that increased capacity. We have identified several exciting drilling opportunities on those assets and will be seeking drilling permits to potentially begin drilling them in late 2020.
Oil & Gas
“W&T Offshore prioritises projects based on economic returns and cash flow generation, regardless of whether they are in shallow or deepwater regions” Making the most of our current and future assets also involves exploring any new technological developments that emerge. We are committed to using technology in all facets of our operations, particularly in selecting our prospects and ongoing drilling activities. We have invested heavily in seismic predictors and have developed the expertise in house to fully utilise that technology. Our use of 3D seismic data has significantly reduced our drilling risk and increased our drilling success rate to about 94 percent on all wells since 2011. Unlike onshore shale plays, where acquiring data over large plays from numerous sources can be beneficial, every offshore field and reservoir is different. Data gathered over a large area in the GOM is not nearly as expensive as it is over a shale play onshore. The processing of 3D seismic data is a major key to our success and we will continue to invest in technology and a team that can best use that technology.
The Gladden Deep well:
3,000ft of water
201ft of net oil pay
17.25% W&T’s stake
Gross barrels of oil equivalent produced daily
of production is oil
Different from the rest In recent years, the development of the onshore US shale market has dramatically restructured the global oil and gas market. At W&T, our ability to consistently generate free cash flow helps us differentiate ourselves from competitors. All of the wells we drill in the GOM are conventional wells, compared with unconventional wells in the shale plays. Unconventional wells decline at a much steeper rate, and shale plays require considerably more capital to maintain or grow. Offshore, we can adjust our capital investments when oil prices fall, while the high porosity and permeability of offshore reservoirs often requires fewer wells to produce large reserves
of oil and gas. We have been cash-flow-positive for most of the time, and our strategy is focused on staying that way. We have the luxury of deciding whether to invest our free cash flow in acquisitions, drilling, reducing debt or paying dividends to shareholders. Most onshore exploration and production firms in the shale plays have to keep reinvesting in drilling wells and are trying to become free-cash-flow-positive. The huge growth in the shale plays has certainly had an impact on the amount of oil and gas the US produces. As an industry, we are exporting more oil and developing liquefied natural gas infrastructure along the Gulf Coast so we can export natural gas as well. For onshore players, this has caused pricing issues when there isn’t sufficient pipeline capacity to move onshore oil and gas production to the right locations. At W&T, we are well positioned to achieve favourable pricing as our crude is needed at Gulf Coast refineries, while our natural gas benefits from good Henry Hub pricing because of our access to a number of pipelines along the Gulf Coast. As well as competing against onshore shale players, W&T also makes sure to differentiate itself from its offshore peers. To do so, we are primarily focused on acquisitions and staying within the GOM. We believe this approach has served us well in the past, as it has minimised our risk and allowed us to use our expertise to reduce costs, increase cash flow and find additional reserves that were left behind by sellers who have moved onshore and sold their properties to us. We will drill exploratory wells, but our primary focus is on building value through acquisitions. We think our track record in that regard speaks for itself. n
Winter 2020 |
Oil & Gas
Unleashing Africa’s potential If Africa is to fully participate in global trade, it must first invest in the skills of its people and increase the value of its natural resources, according to Century Group CEO Ken Etete Africa is blessed with an abundance of natural minerals, but its rich supplies of copper, diamonds and oil have yet to translate into sustainable economic development. This is largely because Africa’s economy is driven by an ‘extractivist’ development model, meaning it sells resources in their raw state rather than developing them into more valuable exports. Consequently, the continent has poor valueretention levels, which in turn hinders job creation and economic growth. To become a middle-income society, Africa must transition away from its extractivist development model and focus on increasing its processing and manufacturing capacity – not only will this boost Africa’s competitiveness in global trade, but it will also benefit its citizens more generally. World Finance spoke to Century Group CEO Ken Etete to learn more about the importance of investing in Africa’s people and natural resources. Which of Africa’s resources currently show the most promise? In my opinion, the most promising resource is our human capital. If we invest in human resources through education, then we will improve the general purchasing power of Africans and unleash their true potential. At the moment, most Africans are unable to turn their attention to creativity and innovation because they are struggling with the basic needs of life, such as food, housing and healthcare. This has very negative repercussions for the wider economy. How can skills development in Africa boost economic growth? A skilled working population is critical to socioeconomic advancement. If we are to unlock the value of Africa’s natural resources, we must first ensure that people have the necessary skills to do so. People cannot develop these skills alone, though: governments and local authorities have a key role to play in establishing national programmes for skills development. 118
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How can African countries make skills development a top priority? At Century Group, we believe society needs to be thought of as a company – every resource must be utilised and nothing should go to waste. If Africa is to make the most of its resources, many changes will need to be made across the continent. First, Africa needs to invest in its people from an early age, laying the foundations for their professional success. From childhood, everyone should be provided with proper healthcare, public services and infrastructure, as well as a high-quality public education. For gifted children whose parents cannot afford to send them to school, scholarship schemes should be made available. Support systems like these are crucial to ensuring that all children receive a good education. The curriculum must also address the needs of the job market. All of these elements are very important to helping people realise their potential at every stage of life. Only when these factors are taken care of – and society has effective structures in
“If we invest in human capital through education, then we will improve the general purchasing power of Africans and unleash their true potential”
place for rewarding performance based on merit – will Africa have a skilled workforce that can champion innovation and spur economic progress. If African countries adhere to this development programme, coming generations will be able to enjoy successful and fulfilling careers. Is Century Group currently involved in any important projects? Over the past two decades, we have played a part in a vast number of projects with a combined value of approximately $2bn. These projects range from the cost-effective development of oil fields to the operation and maintenance of offshore production and storage facilities, including early production systems, f loating production storage and offloading (FPSO) vessels, flow stations and drilling rigs. We also offer services in mooring and installation, well intervention, drilling support, the chartering and management of offshore support vessels, procurement, the construction and installation of oil and gas facilities, logistics, and general engineering support. In Nigeria, Century Group has backed the oil and gas industry, regulators and international oil companies through infrastructural support that generates around $200m annually. As part of these efforts, Century Group recently acquired two FPSO vessels, valued together at approximately $500m. This is yet another strategic move to improve domestic capacity in Africa’s oil industry. With these acquisitions, Century Group became one of
Century Group in numbers:
Value of projects to date
Oil output (barrels per day)
Proportion of employees native to Nigeria
Oil & Gas
Our business is of no value if society is not peaceful and stable. Therefore, our strategy is to support economic inclusion and help reduce poverty, which is itself a weapon capable of significant damage to society. We should be deeply concerned about every person who cannot afford to live a decent life and the growing numbers of people who are falling into poverty around the world. Africa is in a unique and precarious position, as it is not yet fully integrated into global trade. Without investment in our people and natural resources, we will continue to miss out on the benefits of greater integration. This not only presents a risk to Africa, but to the world as a whole. By investing in Africa and championing
Nigerian crude oil production BARRELS PER DAY, MILLIONS
1.5 SOURCE: KNOEMA
the first African oil and gas companies to have full ownership of such assets. On behalf of a client and its partners, Century Group is also leading well intervention and data acquisition projects for additional performance management analysis at a major facility located some 55km from the Nigerian coast. Century Group is spearheading and funding the entire operation to produce an extra 4,000 barrels of oil per day. What impact have these projects had on local communities and the wider Nigerian economy? Century Group supports the production of around 200,000 barrels of oil per day, which is approximately 10 percent of Nigeria’s daily production (see Fig 1). The company’s product offerings are designed around the local economy, providing employment opportunities for both the highly skilled and unskilled. We pride ourselves on the fact that 90 percent of our employees are native to Nigeria. This helps to retain value, reduce unemployment and promote wealth distribution across the country.
Why are projects like these important to Africa more broadly? By embarking on major infrastructure projects, supporting the efficient development of the oil sector, prioritising cost efficiency, utilising local resources and teaching technical skills, we help Africa retain profits and generate long-term revenues from oil. Although most of our transactions are off-the-shelf and very expensive, the technology used by the industry is no longer exclusive to certain parts of the world. Our belief, therefore, is that every African country involved in the extractive industry should endeavour to develop their resources and spur growth within the domestic market to retain jobs and, by extension, create wealth for the local population. Why is investment in Africa so important? The world currently faces several major challenges. From a business point of view, we believe that creating additional wealth and building more inclusive economies is exactly what is required to overcome them.
sustainable economic development in the region, we can lift the continent out of poverty and transform it into a haven for global investment. In your mind, what does the future hold for Century Group? In the near future, we want to become a public company. Our ultimate aim is to be internationally successful and respected. By harnessing African resources as a key driver of growth, we will expand our reach across the globe, allowing everyone to invest in – and benefit from – the huge wealth of resources in Africa. We hope that when Century Group appears on the world stage, it will be a real win for the international investors who want to see what Africa has to offer. We are aware that African businesses have a responsibility to win the confidence of the global investing community. For this reason, we focus on minimising risks in the areas that we think are of the greatest value to investors. Put simply, we want to act as a guide for major investors hoping to explore opportunities that will add value to Africa and the global economy. n
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Oil & Gas
A victory for Brazilian oil and gas Brazil’s oil and gas sector is opening up after years of monopoly under the state-owned company Petrobras. Petro-Victory Energy is looking to take advantage of this unique opportunity, writes Richard Gonzalez, the company’s CEO
ploration and production (E&P) company to acquire a significant portfolio in the onshore upstream space. We are making the most of this, having already acquired 28 oil and gas licences in Brazil.
Licence to drill Brazil is one of the largest economies in Latin America, ranking ninth-largest in the world in terms of GDP (see Fig 1). But its emerging economy is still overcoming years of corruption, as exemplified by the charges filed against former President Luiz Inácio Lula da Silva and the impeachment of his successor, Dilma Rousseff, in 2016. In 2019, Jair Bolsonaro became president, and immediately set about trying to jump-start Brazil’s economy. Today, he is encouraging foreign investment with an emphasis on the energy sector. This has certainly been welcomed by Petro-Victory Energy. We view the Brazilian market as a huge growth opportunity. Strong commercial terms and an improving regulatory framework are helping to create an environment that is better suited to oil and gas investment. Additionally, in the wake of a corruption scandal involving state120
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owned oil and gas firm Petrobras, transparency in the country has increased and corporate governance has improved. These changes will all contribute to great returns for existing operators in the country. Petro-Victory Energy has identified onshore oil fields as an important prospect for expansion into the Brazilian oil and gas industry. With Petrobras historically focusing its efforts on deep-water, pre-salt projects, onshore fields in Brazil have suffered from a significant lack of investment. Onshore oil production dropped by 30 percent between 2012 and 2017, and the number of wells drilled fell by more than 70 percent between 2015 and 2017. Now, for the first time, significant portions of Brazil’s onshore fields are available for acquisition, including the majority of Petrobras’ onshore producing portfolio. This has created a unique opportunity for an independent ex-
On September 10, 2019, the National Agency of Petroleum, Natural Gas and Biofuels (ANP) held the initial cycle of its permanent offer round. It was the first bidding round in 20 years in which Petrobras did not participate. Petro-Victory was the biggest winner, gaining 16 oil concessions in the Potiguar Basin in the state of Rio Grande do Norte. The success of the bidding round brought about an 11 percent increase in the number of contracted blocks in Brazil, with the round predominantly focused on small to medium-sized players. This has created a more dynamic oil and gas sector, free of the Petrobras monopoly that defined the market for so long. We have identified the Potiguar Basin as an area of particular interest, mainly for its favourable geological features. Our technical team has experience in evaluations, from terrestrial fields to the shallow and ultra-
Oil & Gas
Petro-Victory in numbers:
its support through fiscal incentives in permanent offer licensing rounds, investment activity will increase across the onshore Brazilian oil and gas industry.
Onshore oil concessions
A shore thing
Wells to be drilled
Workovers to be carried out
deep waters found in this basin, giving us an unparalleled understanding of the area. Known geological conditions and quantifiable drilling and development costs make the Potiguar Basin attractive for expanded commercial oil development. In the onshore oil and gas space, Brazil is expected to welcome more small to medium-sized independent oil and gas producers. As the ANP continues to show
After the 2014 corruption scandal, Petrobras started making plans to divest its entire portfolio of onshore oil and gas assets located in Brazil. It was not until 2019 that the first major Petrobras onshore divestments occurred, when 34 onshore production fields in the Potiguar Basin were sold to Potiguar E&P, a subsidiary of PetroRecôncavo, for $384.2m. Since then, a number of onshore divestments have concluded, including Petro-Victory’s recent acquisition of the Lagoa Parda fields in partnership with Imetame Energia. The sales terms were approved in October 2019 and the deal is expected to close in early 2020. PetroVictory and Imetame Energia plan to invest significant capital in the fields to increase production from the current rate of 180 barrels of oil per day to more than 550. The Lagoa Parda opportunity is typical of the current onshore climate in Brazil. While many fields have considerable potential beyond their current daily production, the focus on the offshore pre-salt sector means capital resources have not been invested in fields. The last oil well was drilled at Lagoa Parda eight years ago, while many completed oil wells are currently shut due to mechanical problems that could be rectified by a simple workover programme to revitalise them. By using its technical resources and selectively investing capital, Petro-Victory plans to ramp up production, increasing government and landowner royalties, tax receipts and local employment. Before the start of the Petrobras divestments, the state-owned company held more than a 90 percent share of the Brazilian oil and gas market. With Petrobras almost certain to exit the onshore oil and gas space soon, a new competitive landscape is being
Nominal GDP of the 10 richest countries
A NEW COMPETITIVE LANDSCAPE IS BEING CREATED IN BRAZIL, LEADING TO A RESURGENCE IN THE ONSHORE UPSTREAM SPACE
25 20 15 10 5
created, leading to a resurgence in the onshore upstream space in Brazil. To take advantage of the opportunities being made available by Petrobras and the ANP, an international E&P company must become well established in Brazil. Petro-Victory has been present in the country since 2016, yet only completed its first E&P transaction in September 2019. We took our time establishing the right partners, from legal departments to accounting, operations and technical support, to ensure success in our new venture. We are now ready to expand further into Brazil’s upstream space.
Visions of success After almost four years of activity in Brazil, Petro-Victory is being rewarded for the time it has spent in the country. In September 2019, we received final approval from the ANP for our first transaction in Brazil: the acquisition of four onshore oil fields from Brazilian service company ENGEPET. In October, we received preliminary approval from the ANP for our second transaction in Brazil – the acquisition of 50 percent of five onshore concessions from Brazilian operator Imetame Energia. This transaction, plus the Lagoa Parda divestment and the ANP permanent bidding round, brings Petro-Victory’s portfolio to 28 onshore oil concessions and transforms the company into one of the largest licence holders in the onshore Brazil upstream sector. In addition, Petro-Victory has received certification from the ANP to qualify as a Type C operator, which means the company is qualified to operate in Brazilian blocks located in shallow water, onshore and in areas with marginal accumulations. The senior management team at PetroVictory, comprising myself, Mark Bronson, who serves as CFO, and Richard Lane as COO, will continue to expand our portfolio in Brazil, with ambitions to become the largest licence holder in our target geological basins. We now have an experienced cadre of geologists and geophysicists supplementing the team, with further expansions planned shortly. The company expects to participate in future Petrobras divestments and ANP bidding rounds, as well as evaluating a number of private transactions with other operators. Based on the licences acquired already, there are plans to drill up to 30 wells and 40 workovers in the next five years, which will transform Petro-Victory into one of the leading onshore oil companies in Brazil. We are very pleased with our position in Brazil and the foundations that we have built. We look forward to advancing and growing our portfolio in the upcoming year. n
Winter 2020 |
Drinking to success Israel’s winemaking traditions date back thousands of years. Psagot Winery is drawing on the country’s history as it introduces modern technology to its vineyards, according to the company’s founder and CEO, Yaakov Berg Winemaking in Israel has a long history, but it is far from straightforward. The country, like many others situated along the Mediterranean coast, is blessed with the right climate and soil to create some of the world’s finest wines, but a range of cultural factors meant that production fell out of favour in the country for centuries. However, it has since made an astounding comeback. Today, Israeli winemakers produce more than 33 million bottles a year, and they are often award winners. The country’s top wineries sell their wares around the world, with exports accounting for 20 percent of Israel’s total wine sales. Although the Jewish diaspora makes up a sizeable portion of these international sales – especially during the Rosh Hashanah and Passover holidays, when kosher products must be consumed – Israel’s wines have a broader appeal, too. Sales of Israeli wine in Asia continue to grow steadily, and many of the country’s winemakers are keen to enter new markets. 122
One of Israeli wine’s biggest success stories is Psagot Winery. Located just north of Jerusalem in the Binyamin region, the winery has gone from strength to strength since its formation in 2003, receiving numerous awards for the 11 wines it produces, including World Finance’s Best Fine Wine Producer in Israel 2019. We spoke with Yaakov Berg, the company’s founder and CEO, to learn how Psagot Winery is using innovative technology to breathe fresh life into an industry that has deep roots. What makes Israeli wine – and Psagot in particular – so special? Psagot’s wine is produced from grapes grown in the same area where the biblical Abraham – father of monotheism – grew and made his own wine. Some 3,000 years later, the region’s modern wines are being recognised by international publications as some of the best in the world.
My co-winemaker, Yaacov Oryah, and I are committed to producing world-class Israeli wines that are true to the terroir they come from; if our wines can’t be great, we simply won’t make them. Our particular focus is on achieving balance, but this can be challenging in a hot, arid climate like Israel’s. As such, we employ all kinds of techniques to achieve the perfect finished product. Ultimately, we make wine for the consumer, not the critic – the fact that critics like our products is simply an added bonus. The many accolades we have achieved over the years indicate that our approach is the right one. What role does history play in the story of Israeli wine? Until the end of the 19th century, no wine had been produced in Israel for hundreds of years – a result of the Ottoman Empire’s control of the region and the fact that wine was forbidden in the Islamic community. In the late 1800s, Edmond de Rothschild reintroduced Vitis vinifera (the common grape vine) to the region, prompting the first wave of modern winemaking. More recently, Psagot – alongside Domaine du Castel and other wineries situated in the Judean Hills – has committed itself to championing local winemaking. Psagot’s appreciation of history is exemplified by its branding. The coin seen on our wine bottles is a replica of one found in an ancient
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The Israeli wine industry in numbers:
Bottles produced annually
Varieties of wine produced by Psagot Winery
of wine sales are exports
cave located on our land. The cave dates back to the time of the Second Temple, more than 2,000 years ago, while the coin can be traced to the First Jewish-Roman War, which took place between 66 and 73 AD. One face of the coin shows an amphora, a vessel for storing wine, and the other side depicts a grape leaf. The coin symbolises the preservation of the winemaking tradition and our connection to our biblical and agricultural roots. In the cave, we also found the remnants of a winepress. How has Israeli wine been received by the worldwide market? France, Italy and Spain are internationally recognised for their wines. However, the Eastern Mediterranean region, where Israel is located, benefits from the same environmental factors that result in such excellent wines in Western Europe. Wine drinkers are always searching for the next great viticultural region, and many are now setting their sights on Israel. My feeling is that, while European wine drinkers often consume wine primarily from their country of residence, many are looking for something new, fresh and as good as what their home market has to offer. My goal is to say, “If you love Bordeaux, why not try our Edom?” Nordic countries, meanwhile, have always been open to trying wines from other countries. It helps that the Jewish diaspora has connected the country with people around the world.
How has Israeli wine become so relevant? The development of Israeli wine has been many years in the making. It advanced in the late 1980s when wines from the Golan Heights began to gain recognition from internationally renowned winemakers. A boost came in the 1990s when critic Jancis Robinson wrote about the wines being produced in the Judean Hills. More recently, the Wines of Israel marketing campaign has placed global attention on the quality and value of the country’s wines. Jay Buchsbaum, Director of Consumer Education at Royal Wine, the company representing Psagot outside of Israel, noted that the focus Israeli wineries place on quality has paid dividends. We’ve achieved this through attention to detail, starting at the source and continuing with multiple tasting sessions. It may appear as though Israel’s wine scene has grown quickly, but a great deal of hard work, effort and skill have been put into the process. What are the advantages of using modern winegrowing techniques? Israel is considered to have few natural resources, so its citizens have always used their spirit and intellect to achieve success, leading many to refer to the country as the ‘start-up nation’. This culture of experimentation and innovation is key to developing grape varieties that are not only new but also of a higher quality than previously achieved, which ultimately results in the production of better wines. Many of the practices used by Psagot and other Israeli wineries are now being employed
“Wine drinkers are always searching for the next great viticultural region, and many are now setting their sights on Israel”
around the world: drip irrigation was invented and perfected in Israel, and the country has also pioneered vineyard monitoring systems, among other technology-based innovations. Some wineries have transitioned to ecologically balanced vineyard operations, which don’t use pesticides. This has proved to be an effective means of production and brought additional benefits to local wildlife: many species have returned to areas that use this method. It has since been adopted by several Californian wineries. What makes Israel’s topography ideal for wine production? Israel boasts diverse topography and geography, which includes volcanic soil in the north, clay-rich terra rossa soil in the Judean Hills and sandy, loamy soil in the valleys of the Negev region. Each distinct soil profile produces a unique grape. The weather, too, is diverse. Although Israel is thought of as a desert area, snow often covers vineyards in both the Golan Heights and the Judean Hills, giving them full dormancy that brings out a complexity of taste in the grape. Overall, the diversity of vineyards and terroir is pronounced across Israel, allowing the country to build a truly broad range of wines. Israel is producing award-winning wines – why do you think that is? A huge number of factors are contributing to the country’s award-winning wines. First and foremost are our excellent grapes, which benefit from the strength and diversity of our terroir. When this is combined with cuttingedge winemaking technology, the latest growing techniques and talented winemakers, it’s easy to see why Psagot Winery and Israeli wines more generally are receiving such widespread acclaim. n
Winter 2020 |
Navigating new markets Transitioning from operating as a retail broker to an institutional broker has proven challenging for many firms. ATFX Connect has successfully managed this transition, and now plans to expand its institutional offering, writes Ergin Erdemir, Head of Marketing at ATFX The retail trading market and the institutional trading market are different in a number of ways. While retail traders buy or sell securities for personal accounts, institutional traders buy and sell for a group or corporation that they are managing. Costs can vary for the two forms of trading, and institutional traders may find that they have access to investments that are not available to retail traders, such as swaps and forwards. The differences between the two markets mean it can be difficult for brokers to transition between them. At ATFX, however, this hasn’t been the case. As a globally established company with 14 offices worldwide, our experience across numerous markets has provided us with a breadth of knowledge that enables us to adapt regardless of whether our clients come from retail or institutional spheres. We plan to expand even further during 2020, focusing on several emerging market locations as part of our global strategy to increase our footprint as both a retail and institutional broker. ATFX is already recognised among important regulators, including the UK’s Financial Conduct Authority and the Cyprus Securities and Exchange Commission, and we plan to achieve regulatory approval in several other markets in the near future. We have recently opened our new London-based institutional arm, ATFX Connect. This fintech venture is set to launch a contract for difference (CFD) package, whereby the seller agrees to pay the buyer the difference between an asset’s current value and its value at the time stipulated in the contract. With this new package, we hope to set ourselves apart from the competition, as our clients will be able to pass their CFD pricing on to their own clients via an exchange data solution. 124
Another way we differentiate ourselves from other players in the market is by meeting our clients’ strong demand for financial education. This has become a core part of the company’s offering. ATFX wants to ensure that all its clients fully understand the basics of trading and the risks involved with entering new financial markets.
Eastern promise China is currently the world’s second-largest economy and presents ATFX Connect with an exciting opportunity to expand its institutional business. Recently, the Chinese Government considered opening up the interbank foreign exchange market to include non-bank financial institutions; we believe this will drive huge demand from retail and institutional brokers, locally and on a global scale. The company sees the potential to partner with wealthy, long-term investors that are looking for an experienced financial institution offering a high level of regulation in order to safeguard their wealth. As our name suggests, ATFX Connect wants to be the bridge between customers and an expanding economy. There will also be growth in the spending power of high-net-worth individuals (HNWIs) in the region – this is who the company’s bespoke services are aimed at, along with asset managers, regional banks, family offices and other brokers. Considering the expected spending from this demographic, paired with middle-class consumerism, we see that sectors such as healthcare, travel and leisure will play a part in driving the region’s economic growth, presenting us with an environment in which to nurture and enhance our offering. Another opportunity lies with the growing number of brokers in Asia – especially in Hong Kong, South Korea, Japan, Singapore
and Indonesia. We are confident that our liquidity solutions will meet their needs. Asia is also recognised for its innovation, infrastructure and technology, and these key sectors reflect our ambitions and goals as a newly developed institutional broker. ATFX Connect’s head of operations, Matthew Porter, and senior sales head, Marc Taylor, have both participated in a media tour around SouthEast Asia in order to drum up interest in our solutions. The tour has been a testament to the relationships we have built with different media houses, as well as other professionals in the institutional sector. Porter and Taylor discussed topics including the technology powering our institutional platform and the investments behind our product offerings, providing insight into what next-generation execution services will look like.
A challenge worth tackling The growing tension between the US and China has led to drastic declines for some Asian stocks. At the beginning of October 2019, Japan’s Nikkei 225 dropped by 0.8 percent, while Hong Kong’s Hang Seng Index fell by 0.3 percent and China’s SSE Composite Index by 0.1 percent. Beijing started printing economic data in 1992 and in the time since, the country has never had economic growth as slow as that being recorded now (see Fig 1).
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mographic known to follow specific rules of business etiquette, shaped by traditional cultural practices. As such, we have positioned ourselves as the logical next step for China’s high-net-worth population. We have tailored our services to meet the demands of HNWIs, as well as asset managers, family offices and other brokers. We understand that wealth obtained by institutions and HNWIs must be carefully monitored, so risk management is and always will be a priority. ATFX Connect’s risk management solution enables the user to capture risk, view open positions and trades, and monitor equity in real time.
ATFX CONNECT WANTS TO BE THE BRIDGE BETWEEN CUSTOMERS AND AN ECONOMY THAT CONTINUES TO EXPAND
China’s Q3 2019 growth recorded just six percent. With the economy under this sort of pressure, it remains to be seen whether now is the right time to launch an institutional trading arm in the country. Nevertheless, there is much to be excited about in the Chinese market – particularly the growing number of HNWIs. Real estate prices and the stock market appear to be the two main vehicles driving personal capital appreciation for HNWIs in China. Catering for HNWIs in this region is sometimes considered challenging by western institutional brokers entering the market, as they are a de-
Chinese GDP growth PERCENTAGE
15 12 9 6 3
SOURCE: WORLD BANK
0 Note: 2019 figure is for Q3
October 2019 stock market decline:
0.8% Nikkei 225
Hang Seng Index
SSE Composite Index
We pride ourselves on being part of the AT Global Markets group, which has established a global presence. By combining this network with our establishments in the Far East, we plan to ease our transition from a retail-only broker to a rapidly expanding fintech company with the capability to facilitate and partner with a range of diverse clients via our new multi-access platform. Having successfully opened our institutional division in London, the next step for our team was to head to South-East Asia to discuss future plans in the region. They visited Shanghai, Hong Kong, Taipei and Malaysia – all economies where the company sees huge growth potential that will attract further investment from local and global businesses. Looking to the future, the company recently set up its bespoke digital platform, through which the fintech arm of the business can offer Tier 1 bank and non-bank liquidity solutions, competitive spreads, low latency and multi-platform access. We continue to invest in technology and infrastructure, and we are currently focusing on ways to enhance our own aggregator and bridge. Through our flexible, client-centric approach, we want to become the main institutional broker in China. Additionally, we want to expand to the Middle East and other regions in Asia in the future. Latin America has also seen a marked increase in multinational cross-border activity in recent years, both in terms of financing and business. There is now a growing demand from HNWIs based in the region to trade financial products. With AT Global Markets opening an office in Mexico, we will be able to work with clients in Latin America, ensuring they have the chance to participate in international markets and currencies via our multi-access platform. Whether in Asia, Latin America, Europe or elsewhere, ATFX Connect will continue to deliver the best possible services to our clients so that all their trading demands are met. n
Winter 2020 |
Science & Technology
Clear skies ahead Many sectors are aiming to reduce their carbon footprint over the coming years, and the business aviation industry is no exception. The use of sustainable aviation fuel is bolstering its green credentials
operations, continuing infrastructure improvements, market-based measures and the use of new technology, including the development of alternative aircraft fuels.
TECHNICAL FELLOW OF ENVIRONMENTAL STRATEGY AND REGULATORY AFFAIRS, GULFSTREAM AEROSPACE
A show of success
Business aviation is often targeted as a major contributor to climate change but, in actual fact, it contributes just two percent of the wider aviation industry’s total global emissions. Even so, it is imperative for the sector to do its part in reducing that figure. That is why, in 2009, the General Aviation Manufacturers Association (GAMA) and the International Business Aviation Council (IBAC) announced their Business Aviation Commitment on Climate Change, establishing aggressive industry targets to improve fuel efficiency and reduce carbon dioxide emissions. Both GAMA and IBAC urge the industry to lead the way in terms of sustainability, even as demand for business aviation continues to grow. In fact, business aviation has a strong record of environmental stewardship: as an industry, fuel efficiency has improved by about 40 percent over the past 40 years. GAMA and IBAC are now encouraging the industry to focus on four pathways in order to achieve its sustainability goals: more efficient 126
Business aviation’s most recent sustainabilityrelated efforts have focused on promoting the use of sustainable aviation fuel (SAF). In May 2018, a coalition of aviation organisations – the European Business Aviation Association (EBAA), GAMA, IBAC, the National Business Aviation Association (NBAA) and the National Air Transportation Association (NATA) – announced their renewed commitment to improving sustainability through technological advances such as alternative fuels. The initiative was created to address a knowledge gap regarding the availability and safety of SAF and to advance the proliferation of these fuels at all the logical touchpoints: manufacturers, ground handlers and operators at the regional, national and international levels. Accompanying the initiative declaration was the publication of the Business Aviation Guide to the Use of Sustainable Alternative Jet Fuel, which outlined the pathway to the adoption and use of SAF. The SAF initiative was the catalyst that produced the first-ever widescale public demonstration of SAF’s viability and safety
at Southern California’s Van Nuys Airport in January 2019. Industry organisations including NBAA, GAMA, IBAC and NATA joined business aircraft manufacturers, local officials and other industry stakeholders in sponsoring the event. An online resource, futureofsustainablefuel.com, was established shortly thereafter. The first European SAF demonstration day followed in May 2019 at the UK’s Farnborough Airport, ahead of the annual European Business Aviation Convention and Exhibition (EBACE) in Geneva. The Farnborough event hosted a variety of information sessions detailing SAF use and availability. More SAF demonstration events have since followed in Jackson Hole, Wyoming, and at the 2019 NBAA Business Aviation Convention and Exhibition (NBAA-BACE) in Las Vegas. The next major SAF-related event will take place in March 2020 at the Business Aviation Global Sustainability Summit, which is set to take place in Washington, DC. If the business aviation sector is truly committed to achieving carbonneutral growth in the years to come, the widespread adoption of SAF will play a major role.
Fuel for thought In aviation, we are continuously exploring new technologies, designs and materials to improve fuel efficiency. Aircraft will produce less carbon
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Science & Technology
Improvement in fuel efficiency over the past 40 years
Business aviation’s planned reduction in carbon emissions by 2050
dioxide if we continue to improve engines, enhance aerodynamics and use lighter materials in manufacturing. Good examples of business aircraft with a focus on fuel efficiency include the Gulfstream G500 and Gulfstream G600, which entered service in 2018 and 2019 respectively. These aircraft offer best-in-class fuel efficiency, fewer emissions and less engine noise. Additionally, for the first time in the company’s history, Gulfstream is manufacturing the wing and empennage of the G500 and G600 onsite, resulting in decreased transportation emissions and fewer shipping materials. At Gulfstream, we have long been committed to being good stewards of the environment by focusing on low-noise, low-emission and fuel-efficient aircraft. Much of this has come through technological innovation, including the use of winglets, advanced aerodynamics,
THE FUTURE OF PRIVATE AVIATION MAY DEPEND ON ITS ABILITY TO BALANCE ECONOMICS AND ITS ENVIRONMENTAL IMPACT
state-of-the-art avionics and more efficient engines. Gulfstream is firmly committed to continuing this path of improvement. Additionally, Gulfstream continues to support business aviation’s commitment to reducing its carbon footprint through three pledges: a 50 percent reduction in carbon dioxide emissions by 2050 (relative to 2005 levels); a two percent improvement in fuel efficiency per year from 2010 to 2020; and achieving carbon-neutral growth from 2020 onward. One of the most promising paths for fulfilling this commitment is through SAF. SAF is a term used to describe non-conventional aviation fuel. Rather than being refined from petroleum, SAF is produced from sustainable feedstocks such as waste oils of biological origin, agriculture residues or nonfossil carbon dioxide. The major advantage of using SAF is that it contributes to the recycling of carbon molecules from within the biosphere, rather than needing them to be continuously extracted from under the ground, where they have been sequestered for millions of years. SAF is also a ‘drop-in’ fuel, which means it can be blended with fossil jet fuel and requires no special infrastructure or equipment changes. Once blended, SAF is fully certified and has the same characteristics and meets the same specifications as fossil jet fuel. The key to reaching aviation’s goal of a 50 percent reduction in carbon emissions by 2050 is the broad use of SAF in place of fossil-based jet fuel, together with market-based measures. For its fuel, Gulfstream uses a blend of 30 percent SAF and 70 percent traditional Jet A fuel. Once blended and recertified in accordance with specification ASTM D1655, SAF is truly a drop-in fuel: it meets all the same specifications as traditional jet fuel, requires no changes to the aircraft, doesn’t result in any performance loss and has additional environmental benefits. For the SAF used by Gulfstream, every gallon saves at least 60 percent in CO2 emissions on a life cycle basis versus petroleum-based jet fuel. Some biofuels can reduce CO2 emissions even more. Additionally, these alternative fuels are purer and cleaner to burn. Many Gulfstream flights over the past decade have consistently demonstrated the viability and benefits of SAF: a Gulfstream G450 was the first aircraft to fly a transatlantic route on SAF in 2011, and in 2015, Gulfstream signed an agreement with World Fuel Services for a continuous supply of SAF. Produced by World Energy in Paramount, California, SAF has been used by Gulfstream on hundreds of flights since we began adopting it for our corporate, demonstration and test fleets in 2016, with the total number of nautical miles flown nearing one million. Today, Gulfstream’s facility in Long Beach, California, offers SAF to all customers and
uses it for all completions and delivery flights. Gulfstream’s latest sustainability efforts were announced at the Las Vegas NBAA-BACE event in October. The company has flown its fleet on a blend of SAF and traditional Jet A fuel to previous air shows, but this time, Gulfstream’s five in-production aircraft made carbon-neutral flights to the event using a combination of SAF and carbon offsets. At NBAA-BACE, Gulfstream announced it now offers carbon offsets to customers through a third-party provider. Indeed, the company is taking a strong leadership role in supporting SAF and helping business aviation confront the challenge of reducing global carbon emissions.
In full flight Designing a safe, reliable and efficient mode of transportation that minimises environmental impact is a vital aspect of the future of aviation. Increasing environmental pressures have resulted in more emphasis being placed on the early stages of aircraft design in order to meet those challenges, which has in turn impacted the basic planform of the wing, fuselage, empennage and engine. The results are low-noise, low-emission and more fuel-efficient aircraft, such as the Gulfstream G500 and Gulfstream G600. That said, the environmental landscape is changing, and business aviation will need to adapt to this shift. These changes have been caused by various external pressures, both domestically and at the international level, that are often interlinked, with a major focus over the past few years on reducing the industry’s carbon footprint. These pressures are real, justified and valid, and need to be proactively addressed by the business aviation sector. Some have suggested this may be the defining issue of our time. Gulfstream’s sustainability strategy is driven by both industry-wide goals and our internal commitment to integrity. This is at the core of Gulfstream’s business and is demonstrated through its commitment to conserving resources for use by future generations, protecting our employees, customers and their communities, and innovating sustainability programmes to ensure positive environmental impacts. The future of private aviation may depend on its ability to balance economics and its environmental impact. We made a commitment to sustainability 10 years ago and reaffirmed that commitment in 2018 at EBACE. We have another 30 years to achieve the 2050 goal of reducing CO2 emissions by half relative to the 2005 level. With a strong economy in place and a continued focus on improving operations and technology, along with the adoption of marketbased measures and the increased availability of SAF, the industry’s future looks bright. n
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off-piste The World Economic Forum Annual Meeting has failed to inspire much confidence in recent years. Attendees at the 2020 summit will need to adopt a new approach if they are to effect meaningful change, writes Barclay Ballard The World Economic Forum (WEF) Annual Meeting seems to have lost its mojo – particularly in the West, where globalisation is being rejected in favour of a more protectionist outlook. What’s more, most observers of the 2019 meeting found that it fell a little flat. Headline speakers were underwhelming and failed to live up to the box-office acts of previous years, which included the likes of US President Donald Trump and his Chinese counterpart, Xi Jinping. If future editions of the gathering are to prove their worth, they will need to consider the concerns of a world growing more antagonistic to the globetrotting elites who have become synonymous with the event. Nevertheless, many of the chief talking points from previous years remain unresolved and are likely to dominate the agenda in 2020. Finding the right regulatory balance that can rein in the excesses of Silicon Valley’s tech giants without stifling innovation will undoubtedly be up for discussion once again. Trade tensions, meanwhile, don’t appear to be going 128
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anywhere, and climate change looks as difficult to solve today as ever. But the WEF’s yearly showpiece has never claimed to be able to single-handedly solve the major issues facing our planet. Instead, the gathering of business elites, experts and heads of state in Davos, Switzerland, simply aims to better understand and engage with these challenges. Each year, even if the forum only manages to spark one idea that makes the world a better place, surely it must be deemed a success.
US against the world In 2018, when Trump was in attendance at the WEF Annual Meeting, few would have predicted that the trade war wrangles between China and the US would still be plodding along today. Tariffs remain in place on billions of dollars’ worth of goods, forcing businesses in both countries to explore new markets, make cutbacks or simply shut up shop. In fact, the only thing that seems to be traded freely between the two superpowers these days is insults.
The IMF’s latest estimates indicate that the US-China trade conf lict has wiped as much as $700bn off the global economy to date. It has reportedly already cost the technology industry $10bn and could end up setting back the average US household $460 a year, according to an analysis by Londonbased economists Kirill Borusyak and Xavier Jaravel. In China, meanwhile, the spat has contributed to an economic slowdown that has taken even the most pessimistic analysts by surprise. For the business leaders and government figures assembled at Davos, resolving the US-China dispute will no doubt be a priority. Fortunately, the WEF has always been unashamedly pro-globalisation. Shortly after the Trump administration extended its tariffs on Chinese goods in 2018, the WEF’s Aditi Verghese and Sean Doherty criticised the decision in an article entitled Trade Wars Won’t Fix Globalisation. Here’s Why. They wrote: “Short-sighted, protectionist measures ignore and erode the opportunities that [global value chains] provide for driving inclusive and sustainable growth and do nothing to optimise outcomes.” But while some parts of the world wait to see what these two global superpowers will do next, others are keen to get on with things.
For the business leaders and government figures assembled at Davos, resolving the US-China dispute will no doubt be a priority
$700bn Estimated cost of the USChina trade war to date
In Africa, for example, countries are refusing to pull down the shutters and are instead opening themselves up to more international trade. Plans are afoot to launch the African Continental Free Trade Area (AfCFTA), a tariff-free continental market for goods and services that, according to the WEF, would instantly become the world’s largest trade bloc. The AfCFTA will be implemented gradually, but it already has the support of 54 members of the African Union (AU), with the only exception being Eritrea. It’s hoped that the free trade area will boost intracontinental trade, which remains far below that found in other parts of the world: according to the African Export-Import Bank’s African Trade Report 2019, intracontinental trade in Africa sits at just 16 percent, far below the figures seen in Asia (52 percent) and Europe (73 percent). Preliminary estimates cited in the report suggest the establishment of the AfCFTA could see cross-border trade rise by 52 percent within 20 years if exports in each subregion reach their full potential (see Fig 1). “[The AfCFTA] will create jobs and contribute to technology transfer and the development of new skills; it will improve productive capacity and diversification; and it will increase African and foreign investment,” explained UN Deputy Secretary-General
Amina Mohammed at the formal launch of the AfCFTA. “Perhaps most important of all, the [AfCFTA] demonstrates the common will of African countries to work together to achieve the vision of the [AU’s] Agenda 2063: the Africa We Want. It is a tool to unleash African innovation, drive growth, transform African economies and contribute to a prosperous, stable and peaceful African continent, as foreseen in both Agenda 2063 and the 2030 Agenda for Sustainable Development.” At the WEF on Africa event held in August 2019, there was much discussion as to why Africa is choosing to integrate its economies
Fig 1: Intra-African export potential by subregion USD, BILLIONS
Central Africa West Africa East Africa North Africa Southern Africa 0
SOURCE: AFRICAN EXPORT-IMPORT BANK, AFRICAN TRADE REPORT 2019
at a time when other parts of the world are adopting a more isolationist approach. Crucially, the leaders of the AU are already discussing ways to ensure that the continent’s less developed economies – and, indeed, its poorest citizens – are not negatively affected by a more liberal approach to trade. It’s a topic that will undoubtedly be returned to in Davos at the end of January.
AI opener Silicon Valley’s technology giants had their toughest year for a long time in 2018: Facebook CEO Mark Zuckerberg faced a grilling from US Congress; Google saw several employee walkouts over the firm’s inadequate response to sexual harassment claims; and Apple had to navigate reports that some of its products were susceptible to Spectre and Meltdown security vulnerabilities. Scrutiny of said tech firms continued into 2019, albeit not to the same degree. In June, Facebook decided that its dominance of the social media space was not enough and began eyeing the financial services market. Its unveiling of a new digital currency called Libra, however, was met with a less-than-enthusiastic response. Reactions to Libra have ranged from the indifferent to the indignant. Some predict the currency will have little impact when it »
Winter 2020 |
Attendees at the 2020 WEF Annual Meeting will be hopeful that fresh leadership can set the planet on a course for closer economic collaboration
launches later this year, with detractors (such as The Week’s Jeff Spross) suggesting that it offers few points of difference from existing mobile payment apps. For others, the currency poses a threat to the monetary sovereignty of nation states. That’s certainly the view of the French Government, which has moved to block the development of Libra in Europe. Regardless of whether Libra goes on to change the world or not, the conflict between Facebook and France touches upon a broader challenge presented by today’s rapidly advancing digital economy: how to legislate on new developments in a way that protects citizens without stifling innovation. In addition to Silicon Valley’s heavy hitters, a number of entrepreneurs and pioneering start-ups are busy trying to create the next big thing in areas like self-driving vehicles, the Internet of Things and quantum computing. It is becoming increasingly clear that regulators will need to grapple with these developments sooner rather than later. Deciding just how obtrusive regulations should be is becoming more difficult. Not only is technology advancing rapidly, it is developing all over the world and in different regulatory climates. US institutions may determine that artificial intelligence (AI) needs another decade of research before it can be employed in, say, the medical field, but if China thinks such delays are unnecessary, the US risks falling behind. In today’s winner-takes-all economy, coming second is the same as not being in the race at all. Already, China’s less stringent regulatory approach is paying off. The country has quickly become a world leader in genome editing, overtaking the likes of Japan and the US, where obtaining government approval for human trials is more difficult. Similarly, China is making 130
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impressive strides in terms of AI development. To function effectively, the technology requires reams of data that will allow it to ‘learn’ the correct way of acting, whether that concerns autonomous vehicles, natural language processing or facial recognition. China, which has a very different attitude to online privacy than countries found in the West, has an advantage here, too. “Organisations should work on a responsible privacy programme,” Paul Breitbarth, Director of EU Operations and Strategy at Nymity, told World Finance. “That means looking at which requirements for privacy and data protection apply to you, in all the jurisdictions where you operate, and to implement policies and procedures to deal with them.” In China, however, a responsible privacy programme places national interests above individual ones. According to a national intelligence law introduced in 2017, organisations must support and cooperate with government authorities when they request information that relates to national security issues. Critics believe the wording of the law is vague enough to permit widespread state surveillance. Businesses all over the world may be trying to win the tech race, but they are not all playing by the same rules. Still, companies in Europe and the US should be wary of pushing regulators to place technological progress ahead of ethical considerations. Instead, markets need to clearly state that they will not use Chinese technology – regardless of how cheap or effective it is – if it has been developed using morally dubious means. That would send a clear message, while also giving firms a financial incentive to adopt sound principles. If this approach works, then perhaps the future could see western and Chinese firms
collaborating on new technology. This may seem unlikely at present, but this is the sort of long-term ambition that those present at Davos should be striving for – integrating China more closely with the global community.
Keeping a cool head As is the case every year, those gathered at the WEF Annual Meeting (many of whom arrive by private jet) will be set the unenviable task of trying to win the fight against global warming. While it is easy to sneer at the jet-set elite for not practising what they preach, fingerpointing will achieve little – the time for action is already long overdue. Throughout 2019, a number of natural disasters provided a reminder of just how urgent the situation is. In September, Hurricane Dorian became the strongest storm to ever hit the Bahamas, resulting in billions of dollars’ worth of damage and leaving at least 67 dead. While rising global temperatures do not cause storms like Dorian, they can boost their intensity. For the strongest storms, climate scientists have found that the sustained wind speed increases by approximately eight percent for every one degree Celsius of warming. The surface sea temperatures measured in the area where Dorian formed were higher than usual (especially when compared with pre-industrial levels), but such figures – and the disasters they engender – are likely to become the new normal if humans fail to cut their carbon emissions drastically and without delay. Although the Paris climate accord has been criticised for its ineffectiveness, all hope is not lost. Greta Thunberg, a speaker at the 2019 WEF Annual Meeting, continues to galvanise her supporters by preaching the importance
DAVOS 2020 Far left Facebook CEO Mark Zuckerberg discusses Libra in front of the US House Committee on Financial Services Left Chinese telecommunications giant Huawei displays its facial recognition technology in Shenzhen Right Climate activist Greta Thunberg protests global warming at the 2019 WEF Annual Meeting
Year by which the EU aims to be carbon-neutral
A new course Making things more difficult is the fact that these challenges must be tackled at a time when political and economic stability is far from guaranteed. More than 10 years have passed since the global financial crisis, but the world economy is still suffering a hangover. “Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential,” World Bank Group President David Malpass said in June 2019. “It’s urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt man-
Fig 2: Annual eurozone growth PERCENTAGE 3 2 1 0 -1 -2 -3 -4
SOURCES: EUROPEAN COMMISSION, WORLD BANK
Despite the efforts of politicians around the world, the most pessimistic estimates indicate that it will not be possible to reduce the planet’s CO2 emissions quickly enough to avoid catastrophe. Instead, states may need to deploy less conventional solutions to meet their environmental goals. One option would be to invest more heavily in carbon capture and storage technology. This can be used to greatly reduce the CO2 emissions produced by the burning of fossil fuels and, when combined with renewable biomass, can even lead to carbon-negative energy. Similarly, several organisations have developed methods to remove CO2 from ambient air using an absorption-desorption process. It is depressing that humanity has treated the planet in such a way that simply reducing fossil fuel usage is unlikely to be enough to sidestep disaster. At this year’s WEF Annual Meeting, talks will once again focus on efforts to cut down global greenhouse gas emissions. Ultimately, though, new technology may have to come to the rescue.
of sustainability. It’s a message that national governments have increasingly been espousing themselves. In both the US and Europe, environmental policies are now firmly part of the political conversation: for instance, new European Commission President Ursula von der Leyen has made the European Green Deal a central part of her plans in office, which also include making Europe the world’s first carbon-neutral continent by 2050. “We must go further; we must strive for more,” von der Leyen said in a speech during her candidacy for the commission presidency. “A two-step approach is needed to reduce CO2 emissions by 2030 by 50 – if not 55 – percent. The EU will lead international negotiations to increase the level of ambition of other major economies by 2021. Because to achieve real impact, we do not only have to be ambitious at home – we have to do that, yes – but the world has to move together.” On the other side of the Atlantic, figures on the political left, such as US Representative Alexandria Ocasio-Cortez, are pushing their own version of the European Green Deal that would reshape the US economy. The Green New Deal, as it is known, promises to decarbonise the manufacturing and agriculture industries, build a national energy-efficient smart grid and turn green technology into a major US export. These proposals are ambitious, but that’s because they have to be – according to the Carbon Brief website, even if the global temperature is limited to 1.5 degrees Celsius above pre-industrial levels, sea levels will rise some 40cm by 2100, freshwater availability in the Mediterranean will fall by nine percent and the intensity of heavy rainfall will go up by five percent. If temperatures increase to a greater extent, the outcomes are even worse.
Note: 2020 figure is an estimate
agement and transparency a high priority so that new debt adds to growth and investment.” The eurozone, for example, is expected to grow by just 1.2 percent across 2020 (see Fig 2), while US-China trade tensions threaten to dampen business and investor confidence in both markets for the foreseeable future. Political change may provide a path away from this stagnation: the US presidential election is scheduled for later this year, while the EU has recently appointed new heads of the European Commission and European Central Bank. However, as we are all well aware, politics is always rife with uncertainty. Change can be both positive and negative. Attendees at the 2020 WEF Annual Meeting will be hopeful that fresh leadership can set the planet on a course for closer economic collaboration, stronger financial stability and longer-term environmental sustainability. If discussions at Davos can help in any of those areas – even in some small way – then perhaps the event can recapture some of its lost spark. n
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The tough get going:
The best of 2019 The World Finance 100 acknowledges the individuals and businesses that have looked past a year of turgid economic growth to keep pushing their industries forward It’s difficult to know what to make of 2019 in terms of the global economy. There weren’t many disasters, but there wasn’t much to write home about either. This is perhaps most obvious in Europe, which experienced its seventh consecutive year of growth, but where debt remains high (see Fig 1) and future prospects are subdued. The current stagnation places businesses in a predicament. They could invest now in an attempt to capture greater market share, or hold off in the hope that tomorrow will deliver a more supportive economic climate. Despite this uncertainty, some firms have pressed on, aware that standing still is rarely the right approach. The organisations acknowledged by the World Finance 100 have been recognised for their ability to lead their respective industries even in unfavourable conditions.
ly attributed to Iranian forces, ramping up tensions between the two Middle Eastern countries. The following month, two missiles reportedly hit an Iranian oil tanker. The attacks served as a reminder of the impact that political turmoil has in this part of the world and the consequences for the oil and gas sector. Going back to China, ugly scenes continue to emerge from Hong Kong, after a dispute sparked by a new extradition treaty evolved into a broader struggle for the survival of democracy in the city-state. The unrest has caused much disruption to businesses situated in one of the world’s foremost financial centres. Recruitment has largely come to a standstill and companies that were originally set for expansion are beginning to reconsider their future in the Chinese territory.
In the wars
Stuck in first gear
Perhaps the biggest story of 2019 in terms of global finance Although the world’s major economies successfully naviwas the ongoing trade dispute between the US and China. gated 2019 without any major disasters, the year was Many analysts have argued that the protectionist policies far from inspiring. Slow growth was the order of the day initiated by President Donald Trump – and the retaliatory throughout Europe, and while the US fared slightly betmeasures launched by his Chinese counterpart, Xi Jinping ter, fears are growing there too that trouble lies ahead. – are in nobody’s best interests. But that In particular, economists seem at a “Persistently low interest loss over how to stimulate inflation. Inhasn’t stopped them remaining in place. rates give central banks terest rates and unemployment are low, While the statistics back up the assertion that the tariffs are causing little room for manoeuvre the global financial crisis lies more than substantial damage to global GDP, when the next economic a decade in the past, but still inflation businesses have soldiered on regardremains below central bank targets. It downturn arises – a less, recalibrating their supply chains has led some analysts to suggest that prospect that some to circumvent trade barriers where ‘Japanification’ has spread to the West. experts are claiming possible. With the cost of business Since the 1990s, Japan has been could happen sooner rising, a survey by BizBuySell found trapped in a cycle of def lation and rather than later” that 64 percent of small business anaemic growth. Initially, economists owners in the US have stated their blamed the Bank of Japan for not actintention to increase prices, while 65 percent are con- ing decisively enough when trouble arose. Now, a considering switching suppliers. sensus is emerging that Japanification might simply Aside from superpower posturing, conf lict was be inevitable – and not only for its namesake country. present elsewhere in 2019. In September, a strike on Rapidly ageing populations, which must support fewer two oil installations owned by Saudi Arabia was wide- people of working age, lead to smaller economies and 132
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struggled and others thrived. In August, Greece finally emerged from the international bailout programme that had imposed a series of restrictions on the country since 2010. The news was greeted with muted celebration – while it meant Greece could return to international bond markets, limitations to public spending remained in place and some predictions suggest the country will still be paying off its current debt in 2060. In the corporate world, the decade will be remembered for plenty of technological scaremongering – some of which was justified. Major corporations, from Facebook to Apple, faced scandal at one point or another – often related to their misuse of personal data.
lower levels of growth. It’s a fate that Japan has been living with for 30 years, and it might become the new normal in Europe and the US as well. If Japanification does spread, it would likely increase the amount of negative-yielding debt, which would be welcomed by borrowers but not by long-term investors. Perhaps more worrying, persistently low interest rates give central banks little room for manoeuvre when the next economic downturn arises – a prospect that some experts are claiming could happen sooner rather than later. The next recession is always a matter of when, not if. The US economy generally performed well throughout 2019, but there are fears that this was largely due to a
Fig 1: Euro area government debt to GDP Percentage
100 80 60 40 20
Source: Trading Economics Note: Q2 2019 data used
$1.5trn tax cut at the end of 2017, which has provided a stimulus that is likely to fade over the course of 2020. Should that occur – and if the US does succumb to a recession – the impact will be felt far and wide. With an election on the horizon and economic uncertainty brewing, the global gaze is likely to remain fixed on the US for the foreseeable future.
End of an era The close of 2019 brought with it the end of a difficult decade for businesses around the world. The 2010s will be remembered as a period that was dominated by the aftermath of the 2008 financial crisis. Although many markets have now been stable for a number of years, growth has failed to reach pre-crisis levels. And while unemployment has reached record lows in many western states, job security appears to have been permanently damaged: in 2018, the share of eurozone workers deemed to be at risk of poverty reached 9.2 percent, up from 7.9 percent in 2007. As ever, the economic picture in 2019 was not homogenous, and there were periods when some markets
These are concerns that are unlikely to go away and are a reminder for all businesses, large and small, of their responsibility to their customers. These responsibilities, however, will differ from country to country. The EU, which implemented its General Data Protection Regulation in 2018, has particularly stringent rules for digital firms to follow. China, on the other hand, boasts a very different political environment, with privacy policies that are more heavily weighted in the government’s – rather than the individual’s – favour. It is the responsibility of specific companies to make sure that they comply with the relevant legislation as it pertains to their particular industry and locale. Just as businesses hope for a regulatory climate that is not overly restrictive, they will also be hoping that a new year – and, indeed, a new decade – brings more favourable economic conditions. The firms that have ploughed on during difficult times, continued to innovate and even flourished in spite of adverse conditions are those that have earned a place in the World Finance 100. Congratulations to all those that made the final list. n
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Offering a comprehensive range of financial advisory services, Alpen Capital combines strategy, leadership and industry expertise to assist its corporate and institutional clients. The company is committed to helping clients increase the long-term value of their organisations. With offices in Dubai, Abu Dhabi, Muscat, Doha, Delhi and Mumbai, Alpen Capital has an impressive cross-continental reach that makes it accessible to a wide network of businesses. Furthermore, its Alpen Asset Advisors subsidiary provides vital services to high-net-worth individuals and firms within the region.
Since the British Virgin Islands’ Beneficial Ownership Secure Search System Act came into force in 2017, the territory’s reputation as a leading global financial centre – one that is adept at facilitating cross-border transactions in a transparent and convenient way – has only grown. In this context, the British Virgin Islands have promoted their role as a ‘regulatory sandbox’ – an enclosed environment supported by regulators where fintech innovation can safely take place. By encouraging financial experimentation while guaranteeing digital regulatory reporting, the British Virgin Islands have boosted innovation within their borders.
The world’s leading manufacturer of thin-film solar power products, Hanergy has established research and development centres in Beijing, Sichuan, Silicon Valley and Sweden since its founding in 1994. The company’s thin-film modules produce increased yield via three methods: unique light-soaking technology, a temperate coefficient and irradiance. The company has applied for nearly 1,000 patents during its lifetime, 60 percent of which have been invention patents, and has been the chief developer – or involved in the development – of multiple national solar energy standards.
Br i t i sh Vi rgi n Isl a n ds
1 A Pharma
Banco Atlântico Europa
MANUFACTURING & COMMODITIES
Christo Els, Managing Partner, Webber Wentzel
MANUFACTURING & COMMODITIES
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Robert Hazboun, Group CEO, ICS Financial Systems
French digital media firm Brut has accumulated millions of video views by focusing on high-quality news content and social engagement. While the start-up cannot compete with traditional news outlets in terms of resources, its neutral, explanatory approach has drawn praise at a time when trust in the media is at historically low levels. In October, Brut confirmed that it had successfully raised $40m in Series B funding, which would be used, in part, to launch its services in the US. If the start-up has as much success there as it’s had in its native France, it could cause serious disruption to the existing media landscape.
ICS Financial Systems (ICSFS) operates across various subsectors of the banking industry, including Islamic, retail and corporate banking. By extending its expertise in this manner, the firm has become a renowned banking presence in the MENA region. Its ICS BANKS software is powered by an agile digital banking platform that delivers maximum value to all clients, while its ICS BANKS ISLAMIC solution specifically caters to banks that operate under Sharia law. Group CEO Robert Hazboun has been a driver of ICSFS’ focus on Islamic banking technology – he advocates the standardisation of the industry in order to improve the quality of its products.
F r a nc e
Afschrift Law Firm Be l gi u m
Providing legal services to individuals, small companies, international corporations and auditors, Afschrift Law Firm’s expertise has made it an industry leader in Central Europe. The firm is committed to helping high-networth individuals optimise their assets and reduce their tax burden in an efficient and lawful manner. Its team of consultants delivers in-depth analysis of various tax implications in order to provide reliable solutions. By analysing key decisions and translating them into possible outcomes, Afschrift guarantees the lowest tax burden for its clients, as well as the ultimate protection.
MANUFACTURING & COMMODITIES
Global Bank of Commerce (Antigua)
Antigua and Barbuda
Industrial and Commercial Bank of China
Jesper Brodin, CEO, Ingka Group
Kenichiro Yoshida, CEO, Sony
Kim & Chang
Manchester Airports Group
Markus Tacke, CEO, Siemens Gamesa
Winter 2020 |
Jáuregui y Del Valle
With a mission to preserve the excellence of Mexico’s legal services, Jáuregui y Del Valle (JDV) has been advising clients since it was founded in 1975. Today, the firm is a regional leader in domestic and international transactions and corporate mergers and acquisitions, particularly in the highly regulated finance, tax and trade sectors. Over the past several decades, JDV has advised a variety of foreign government entities, including the US Department of Commerce, the US Treasury and the Securities and Exchange Commission, on projects worth up to $20bn. Its attorneys specialise in a wide range of legal areas.
Known as the world’s largest marketplace for digital services, Fiverr enables businesses to find freelancers for almost any creative task. The company’s catalogue ranges from design and marketing services to website customisation and voiceovers. Founded in 2010 and headquartered in Tel Aviv, the company’s revenue grew by nearly 45 percent in 2018, jumping from $52.1m to $75.5m, according to TechCrunch. Its net losses also increased during that period, however, leading Fiverr to file to go public on the New York Stock Exchange in May 2019. Since then, it has also launched an online store for influencers.
As Nigeria’s authorities work to sustain macroeconomic stability, Zenith Bank – one of the country’s leading commercial banks – has made the customer experience its number one priority. Its suite of electronic products and mobile solutions, which includes digital wallets, QR code scanners and USSD systems, ensure Zenith’s digital banking channels are available to all consumers, regardless of their location. The bank has invested significantly in such services to guarantee a seamless experience, and expects them to cut costs in the long term by dramatically improving efficiency.
M e x ic o
Isr a e l
Nige r i a
Markus Villig, CEO, Bolt
Matthew Layton, Managing Partner, Clifford Chance
MANUFACTURING & COMMODITIES
Michael F Mahoney, CEO, Boston Scientific
Nation Media Group
MANUFACTURING & COMMODITIES
NextEra Energy Resources
MANUFACTURING & COMMODITIES
Pablo Isla, CEO, Inditex
MANUFACTURING & COMMODITIES
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MANUFA CTURING & COMMODITIES
Nebojsa Karic, President, Dana Holdings
Comprising numerous subsidiaries and more than 30,000 employees, Hitachi is a multinational conglomerate with a history of success across multiple industries. Its manufacturing solutions have received particular praise, including its equipment life cycle management, f lexible services and live support systems. Hitachi is keen to transform the traditional factory using a combination of the Internet of Things, machine learning and advanced data analytics. The firmâ€™s smart manufacturing solutions have helped customers optimise their energy use, conduct predictive maintenance and improve decision-making.
As the only pan-African financial institution dedicated to the development of affordable housing, Shelter Afrique has committed to meeting the needs of the growing urban African population. A partnership of 44 governments, development banks and other institutions, Shelter Afrique aims to approve funding worth $1bn over the next five years for project financing, institutional lending and social housing, with an overarching ambition to provide decent and affordable homes for every person in Africa. Its three strategic goals are to promote financial sustainability, enhance shareholder value and improve organisational performance.
With a mission to improve the infrastructure of Belarus and drive public-private partnerships across all emerging markets, Dana Holdings is implementing a variety of large projects throughout the region. President Nebojsa Karic has been instrumental to this development: in 2017, the company began the construction of Minsk World, a three-millionsquare-metre multifunctional complex located in the heart of the Belarusian capital. One of the largest construction projects in Europe, Minsk World is a city within a city, providing accommodation, business opportunities and leisure facilities in a single destination.
Ja pa n
K en ya
Be l a rus
MANUFACTURING & COMMODITIES
Royal Dutch Shell
MANUFACTURING & COMMODITIES
Sebastian Siemiatkowski, CEO, Klarna
Seven and I Holdings
Sharq Law Firm
MANUFACTURING & COMMODITIES
Trust Juris Chambers
United Overseas Bank
MANUFACTURING & COMMODITIES
Volkmar Denner, CEO, Bosch
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Joining the dots In Morocco’s cities, infrastructural projects are well-developed and well-financed. Yet, in more rural areas, basic services are still lacking, writes Barclay Ballard
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It could be worse Nobody could accuse Morocco of neglecting its infrastructure in recent years, even considering the funding gap facing the country. After all, no matter which country is being analysed, infrastructure always appears to be in need of development: Japan has an infrastructure investment shortfall of $91bn, while the US has one of $3.8trn. Compared with some countries, Morocco’s infrastructural investment pipeline is not particularly worrying (see Fig 1). “Morocco’s infrastructure is second to none in Africa today,” said Dr Ali Bahaijoub, Editor-in-Chief of North-South Publications. “There are motorways linking all the major cities, the new Tangier-Med port is the biggest in
Africa and the Mediterranean, and there is a new high-speed rail link between Tangier and Casablanca, as well as new airport terminals in Casablanca, Marrakech, Rabat and Tangier. Roads within cities have also been widened to three lanes on both sides.” These projects owe their existence to the proactive approach the Moroccan Government has taken to finding outside funding sources. Over the last four decades, the AFESD has provided Morocco with 72 loans, totalling some $4.4bn. Nevertheless, Bahaijoub admits that “some regions in the country are better developed than others” and that placing a greater focus on rural areas and creating “schools and hospitals that are accessible to all” should be made a priority.
Infrastructure investment gap
NOBODY COULD ACCUSE MOROCCO OF NEGLECTING ITS INFRASTRUCTURE IN RECENT YEARS, EVEN CONSIDERING THE FUNDING GAP FACING THE COUNTRY
600 500 400 300 200
SOURCE: GI HUB
As Africa’s sixth-largest economy, with a GDP per capita of just over $3,000, Morocco is certainly no economic minnow. Although growth has slowed of late, it measured a healthy 2.95 percent across 2018 and inflation remains low. But there is still work to do – particularly in terms of the country’s infrastructural development. According to the Global Infrastructure Hub (GI Hub), in the years leading up to 2040, Morocco is set to face an infrastructural investment gap of $37bn. It is not a challenge that is being left unaddressed, though. In June 2019, the country’s government signed a $237m deal with the Arab Fund for Economic and Social Development (AFESD) to improve its dams and road networks. Then, in November, the African Development Bank approved a €100m ($110.6m) loan to finance further infrastructure projects. The Moroccan Government, however, should be wary of simply throwing more money at its infrastructural deficit. Overall, in terms of infrastructure, the country is actually performing pretty well; it is only in rural areas where a shortfall is particularly prominent. In many respects, Morocco’s infrastructure is the envy of the rest of Africa, but the country should not start patting itself on the back until all of its citizens can enjoy the kind of advantages in transport, education and healthcare that are available to those based in its major cities.
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Morocco’s annual investment need until 2040:
Left Aït Benhaddou, Morocco Right The Noor Ouarzazate concentrated solar power project Below Moroccan Prime Minister Saadeddine Othmani
The money entering the country has, by and large, been funnelled into infrastructure projects that bolster Morocco’s business environment, while residential areas remain underserved. Although corporate executives can travel between Casablanca and Tangier on Africa’s fastest train, in the country’s rural areas, Reuters reports that families are forced to travel by donkey to collect drinking water from outside wells. Infrastructure projects can be hugely effective in bridging inequality but, currently, the new builds in Morocco’s glittering cities are merely serving to accentuate it.
Work to be done Walking through the streets of Casablanca’s city centre, which harbours ambitions of becoming the foremost financial hub for companies doing business in Africa, it is easy to forget what life is like for those living outside the country’s urban areas. Approximately 40 percent of Moroccans live in rural areas and this often presents them with significant challenges that simply don’t exist for the urban population. Rural Moroccans receive an average of 2.2 years of formal education, compared with 6.1 years for their urban counterparts, while rural women are more likely to drop out of school early and exhibit higher levels of illiteracy. For many of these individuals, the difficulty posed by a lack of transport options means there is little time for education or economic development. While in urban areas, 100 percent of
the population live within 5km of a healthcare facility, in rural areas, this figure drops to just 30 percent. Thankfully, things have improved in this respect – a 13-year road-building initiative improved rural access to all-weather roads from 54 percent to nearly 80 percent – but more could be done, particularly in the isolated communities that have established themselves around the Atlas Mountains. The most prominent infrastructural project that the Moroccan Government has planned outside of its urban locales is the Noor Ouarzazate concentrated solar power (CSP) project, which forms part of the country’s Moroccan Solar Plan (MSP). The largest solar complex of its kind in the world, situated where the Atlas Mountains meet the
Sahara Desert, the project can supply around six percent of the country’s total energy needs using two million mirrors. “One of the key projects delivered under the MSP is the Noor Ouarzazate CSP complex, which will be one of the largest single solar complexes in the world,” Marie Lam-Frendo, CEO of GI Hub, told World Finance. “The government of Morocco has set a goal of reaching 52 percent of installed capacity from renewable energy by 2030 and is well on track to meet this target, reaching 34 percent of targeted installed capacity of renewable energy in 2016.” While infrastructural developments like the Noor Ouarzazate plant may not, strictly speaking, be located in one of Morocco’s urban hubs, the benefits that such projects deliver are unlikely to be felt in the isolated communities that need them most. Any employees will probably be drawn from the nearby city of Ouarzazate and the power it generates will not be much use to the people living in isolated Berber villages – not until much-needed cables are laid and power stations built.
Redressing the balance While the Moroccan Government has been praised for the way it has sourced funding for its infrastructure projects, it knows there is still much more to do to address the shortfall in those areas outside its major cities. In July 2019, Moroccan Prime Minister Saadeddine Othmani announced that $1bn would be »
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THE GOVERNMENT WOULD DO WELL TO FOCUS ITS EFFORTS ON THE PARTICULAR INFRASTRUCTURAL SECTORS MOST IN NEED OF IMPROVEMENT
Casablanca’s modern tram system
channelled into regional infrastructure projects by 2021 in order to achieve more equitable development. The government would do well to focus its efforts on the particular infrastructural sectors most in need of improvement. “According to our [Global Infrastructure Outlook] report, Morocco is estimated to have an annual infrastructure investment need of $9.8bn in the years to 2040, primarily in the electricity and roads sectors ($4.5bn and $2.8bn respectively),” Lam-Frendo said. “To meet the UN’s Sustainable Development Goals on universal access to electricity, water and sanitation by 2030, Morocco will need an additional cumulative investment of $16.2bn in the electricity sector and $4.6bn in the water sector.” Once again, attempts to plug the funding gap would be best served by targeting the country’s poorer regions. Although reports of major development projects being launched in the Laâyoune-Sakia El Hamra region may appear to be a step in the right direction – the area is not home to any of Morocco’s bestknown cities – it is already one of the country’s most prosperous regions. According to the World Bank, it ranks first in terms of education and access to fundamental economic, social and cultural rights. The Finance Act 2019, approved in October 2018, should improve inequality to an extent, with its promise to increase the regional share of corporate and income tax from four to five percent. As will Othmani’s commitment to delivering more interaction 140
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between government ministers and voters in these parts of the country. Similarly, a new approach to monitoring regional and local investment programmes should provide better accountability and transparency regarding the progress of any ongoing projects. These are the sorts of measures that are required – not more mega-projects that predominantly benefit those in society’s upper echelons.
Building a framework The reason why Morocco has been able to achieve its funding goals where other African states have failed is that the country boasts a solid regulatory climate, which gives investors confidence that they will achieve an adequate return on their financial support. “Among the 15 African countries included in the GI Hub Outlook analysis, Morocco is expected to be the country to meet the highest proportion of its infrastructure investment needs by 2040 (85 percent),” Lam-Frendo explained. “This may reflect Morocco’s relatively strong infrastructureinvestment-enabling environment.” In terms of governance, competition frameworks and permitting procedures, Morocco outperforms the average seen across emerging markets, as well as in many of its fellow African nations. And although Morocco does not have a national or sub-national infrastructure plan that covers all sectors comprehensively, the Moroccan Government has launched a number of separate sector-based infrastructure plans, including the 2040 Rail Strategy, Vision 2020 for tourism, the 2030 National Port Strategy and
the Noor Ouarzazate solar plan. These plans are often supported by their equivalent-sectorbased, state-owned enterprises and should help the country deliver more targeted infrastructure spending over the coming years. Another reason why Morocco has managed to maintain relatively healthy finances is its diversified economy, which is much less reliant on commodities and fossil fuels than its neighbours, such as Libya. This has ensured that, while several states in North Africa have struggled to entice investors to the region, Morocco has not. A stable investment climate should not be taken for granted, however. Morocco may have an economy that is spread across multiple industries, but it could do more to ensure that it is equally diverse geographically. This is where better infrastructure could make a significant difference. It would also help the country’s poorer citizens support themselves economically as better transport links allow citizens to engage with the job market, sell their wares and access the amenities they need. Morocco is certainly not ignoring its infrastructural shortfall in the hope that it goes away. The country’s government should be praised for the way it has secured funding sources that have created its first-rate cities, airports and rail networks. However, now is the time to direct this funding elsewhere. Discontent is rising alongside inequality in the country. Another brand-new motorway or high-speed rail connection might see this discontent rise further still. n
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people from attempting a very dangerous journey from other countries.” Funds committed to building In contrast, many walls in the EU’s next budget migration experts argue that increased border security does not act as a deterMigrant arrivals in Europe (2018) rent. Nick VaughanWilliams, a professor of International Security at the University of Warwick, has found in his research that migrants are “largely unaware” of the EU’s border security measures. “Those fleeing violence, poverty and persecution will not be deterred from seeking entry to Europe if they have no prior knowledge of these measures and the forces provoking their flight leave them with no option but to seek safety,” he told World Finance. As well as forcing migrants to take more perilous routes and put their lives in the hands of smugglers, increased security increases the risk of human rights abuses at the borders themselves. There is growing evidence of violence against refugees by border security guards along the Balkan Route in Croatia. Although the Balkan Route may be far from Paris or Berlin, Amnesty International has released a statement to say that the EU is nonetheless complicit in these human rights abuses.
Putting up walls In its next budget cycle, the EU plans to spend billions on border control. The biggest winner in this arrangement is the private border security industry, which plays a key role in shaping European migration policy, writes Charlotte Gifford Thirty years after celebrating the fall of the Berlin Wall, Europe has gone on a wallbuilding spree. In its next budget cycle (2021-27), the EU plans to spend €34.9bn ($38.4bn) on border security, to help manage the tens of thousands of migrants trying to enter the region every year. As a result, business is booming for Europe’s border security industry. A 2019 report by the Transnational Institute has revealed that a small cohort of European arms companies profit handsomely from the huge growth in the EU’s border budgets. These large companies are increasingly influential in shaping EU policy and encouraging the bloc to boost security efforts, but migration experts warn that the heavy militarisation of Europe’s borders only puts already vulnerable migrants in greater peril.
Up in arms According to the Transnational Institute, Thales, Airbus and Leonardo are among the companies benefitting most from border security spending. For these businesses, the refugee crisis represents something of a market opportunity. Thales, which produces radar and sensor equipment, is currently developing border surveillance infrastructure for EUROSUR, the European Border Surveillance System. Meanwhile, Italian arms firm Leonardo was 142
awarded a €67.1m ($73.7m) contract in 2017 by the European Maritime Safety Agency to supply drones for EU coastguard agencies. To keep the cash flowing, it’s in the interests of these companies that the EU treats border security as a priority. Through lobby groups such as the European Organisation for Security – which had a declared lobbying budget of €200,000 ($220,000) to €299,000 ($328,765) in 2016 – companies like Leonardo perpetuate the narrative that migration is a security threat first and foremost, and not a humanitarian crisis. On this premise, the heavy militarisation of Europe’s borders is a necessary course of action. Supporters of border security in Europe would argue that the spending boost is seeing results. In 2018, there were fewer than 150,000 new arrivals to Europe, according to UN data, down from more than a million in 2015. However, while the number of people arriving in Europe has fallen, the number of migrant deaths has risen, as heightened security has compelled people to reach Europe’s shores through more dangerous means.
A perilous journey One argument for border militarisation is that it deters people from making hazardous crossings. “Walls work,” said US President Donald Trump in January 2019. “They save good
A European fortress Militarised borders are the most visible way for a government to show that it’s acting on the public’s migration concerns, but in reality, their effectiveness is questionable. If migrant numbers were to once again reach 2015 levels, it’s likely that heavily militarised borders would just push refugees to take less conventional routes into Europe and risk their lives in doing so. This, coupled with the climate emergency the EU is currently facing and the global economic downturn, makes it hard to justify the EU’s €34.9bn expenditure on borders. Many analysts argue that border security measures pander to the desires of populists and the far right, and do not necessarily ref lect wider public opinion. “There is growing evidence that many EU citizens want accurate and trusted sources of information about migration rather than increased spending on border security – particularly in times of austerity,” Vaughan-Williams said. Border security firms only skew this narrative further. Through their powerful lobbying position, they use paranoia to push for greater militarisation at the edge of Europe’s territory. In doing so, they fuel a vicious cycle where fear justifies higher walls and an increased border guard presence. n
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“Despite sharing plenty of problems when it comes to transport infrastructure, the Northern and Southern Hemispheres have not cooperated much” A look across the Global South reveals a number of solutions that would probably face restrictions, logistically or legislatively, in more developed nations. Sometimes, without the weight of existing processes pressing down on the transport sector, new solutions can emerge. In India, a relay trucking system has changed the country’s logistics industry, while in Colombia, cable cars are not only a tourist attraction but a way of reducing social inequality in Medellín, the country’s second-biggest city.
Heading south The Global South is often considered the poor relation of its northern counterpart. In terms of transport infrastructure, though, there are areas where the developing world is leading the way, writes Barclay Ballard In the 1980s, former German Chancellor Willy Brandt proposed a way of dividing the world into the ‘haves’ and ‘have-nots’. The so-called Brandt Line provided a handy visual depiction of the north-south economic divide that had developed by that time. Although the Brandt Line continues to be used, it has also been criticised for promoting outdated stereotypes regarding the Global South. Certainly, several of the economies found on the ‘wrong’ side of the line have surpassed their northern counterparts in terms of digital technology, and many of their inhabitants live prosperous lives. Today, if the Brandt Line is used at all, it is alongside the caveat that it does not tell the full story of global development. In particular, recent evidence suggests that the Global North could learn a few things from the developing world – especially in terms of transportation. The International Transport Forum’s 2019 Transport Innovations from the Global South report challenges the commonly held view that progress, regardless of the industry in question, comes from the countries in the Northern Hemisphere.
On its head Innovation does not take place in a vacuum: new ideas build on the work that has been carried out previously and benefit from a 144
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constant exchange of information. Unfortunately, despite sharing plenty of problems when it comes to transport infrastructure, the Northern and Southern Hemispheres have not cooperated much. In the Global South, where there is generally less legacy infrastructure, innovation can be easier to cultivate. For example, Malawi’s Department of Civil Aviation created a drone corridor in collaboration with UNICEF for use in transport, imaging and data transmission. The trial has been successfully used to deliver medical supplies to remote areas and has led to similar initiatives being pioneered in Vanuatu and Kazakhstan, as well as several other African states. “Shared transport solutions are seen as the norm in the Global South, where rail networks are often less widespread and there are far lower levels of individual car ownership,” Eleanor Lane, a partner in CMS UK’s infrastructure and projects team, told World Finance. “Less pre-existing regulation permits greater innovation. A historically lower level of state involvement has fostered a culture of people working together to create their own solutions. In addition, a less ‘joined-up’ approach across and beyond individual countries allows communities to choose what works best for them.”
Better together Despite the innovation being witnessed in the developing world, the Global North isn’t rushing to adopt these developments. There are some good reasons for this. Substantial regulatory overhaul would have to take place in the developed world to leave room for bottomup innovation. This doesn’t mean stripping away transport safety rules, but it does mean reviewing outdated policies. “More developed nations are generally already heavily regulated,” Lane said. “Innovation requires f lexibility; existing laws are inherently inflexible, and changing policies and procedures takes time. The drive for standardisation across borders permits ease of travel but reduces opportunities for innovation and flexibility of approach at a local, city and regional level. It is also likely that existing transport providers will resist change, viewing it as a potential challenge to their position.” Other areas where the Global North could learn a thing or two include using transport innovation sandboxes to create a hierarchyfree environment, unburdened by regulation, in which to test new solutions. Greater interactions with non-traditional actors would also prove helpful, as these are often the entities driving progress in the fast-changing transport sector. Encouraging collaboration between these innovative actors and more traditional operators is one way of combining innovation with continuity. Perhaps most importantly, the transport sector in the Global North could benefit from a change of mindset. An appreciation that important developments are taking place outside of the traditional markets might lead to unforeseen progress. Expanded horizons could deliver advantages on both sides of the Brandt Line. n
As permafrost across more than half of Russia thaws, critical oil and gas infrastructure is becoming defective. If Moscow fails to curb its dependence on fossil fuels, it risks losing power and influence on the geopolitical stage, writes Charlotte Gifford Âť
| Autumn 2019
Autumn 2019 |
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here are many reasons why one might decide against buy ing a house in the Siberian city of Norilsk: the Sun doesn’t rise for three months each year; the name of the neighbouring town translates as either ‘forbidden place’ or ‘death valley’; and it’s so cold that the bodies of the Gulag prisoners who built it are said to be perfectly preserved beneath a memorial at the foot of Mount Schmidtikha. It’s fair to say that it’s no place for the fainthearted. At the very least, buying a house in such a dark, icy wasteland should be good value for money, but even this is no longer the case. “The population of the city used to be 300,000, give or take,” Nikolay Shiklomanov, Associate Professor of Geography and International Affairs at the George Washington University, told World Finance. “Nowadays, it’s 180,000… so you would expect that the housing market should be pretty light – that there should be lots of empty spaces – but now they’re experiencing some acute housing shortages because so many of the buildings there are critically deformed.” Norilsk is the largest city in the world to be built on permafrost – ground with a temperature that remains at or below freezing point for more than two years. Now, as the Earth’s climate warms, that permafrost is melting. In fact, approximately 60 percent of the city’s buildings have been damaged by thaw and 10 percent have been abandoned. The foundations of Norilsk – which was built in the 1930s during Russia’s push for indus148
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trialisation in the Siberian and Yakutia regions – are sinking and eroding, causing walls to crack, roofs to crumble and pipes to burst. As Shiklomanov explained: “The city was built cheaply and quickly. Obviously, nobody considered climatic changes.”
Warming to the idea The unenviable situation Norilsk finds itself in is not a unique one within Russia. More than half of Russia’s entire territory is covered by permafrost. As this ground thaws, it’s not just buildings that are in danger, but also pipelines and other oil and gas infrastructure vital to Russia’s economy. Alexander Krutikov, Deputy Minister for the Development of the Russian Far East and Arctic, predicts that the economic loss resulting from the thawing of permafrost could be as high as RUB 150bn ($2.34bn) a year. It’s difficult news to swallow for a nation with climate commitments deemed “critically insufficient” by the Climate Action Tracker, and whose leader has consistently denied the existence of global warming. Until recently, President Vladimir Putin argued that global warming was good news for Russia. At the 2017 Arctic: Territory of Dialogue international forum, he claimed it would result in “more favourable conditions for economic activity” in the northernmost reaches of the country. This idea isn’t as far-fetched as it might seem. In his bestselling book 21 Lessons for the 21st Century, historian and philosopher Yuval Noah Harari explained how Russia could
stand to benefit from climate change: “Whereas higher temperatures are likely to turn Chad into a desert, they might simultaneously turn Siberia into the breadbasket of the world.” But this year, the leader of the world’s fourth-largest greenhouse gas emitter changed his tune on climate change. Although Putin continues to insist the phenomenon can’t be confidently attributed to human activity, he admitted in June 2019 that Russia was warming 2.5 times faster than the global average. “This is a major challenge for us,” he said. “This is the reason for the floods and for permafrost thawing in the areas where we have fairly big cities. We must be able to understand how to react.” According to Shiklomanov, global warming could affect as much as a fifth of infrastructure across the permafrost area by 2050, costing Russia approximately $84bn, or 7.5 percent of its GDP. As the tundra melts, underground methane is released, causing gas pipelines to explode. At the same time, Russia’s shoreline is eroding by an estimated four metres annually, increasing the risk of damage to offshore infrastructure. “All that coastal infrastructure is extremely important and exceedingly vulnerable,” Shiklomanov told World Finance. Russia’s coast currently witnesses an accident involving power stations, nuclearpowered icebreakers, chemical facilities or communications installations every three months. Needless to say, Putin’s new stance on global warming is a huge paradox: by curbing greenhouse gas emissions, he hopes to keep feeding and expanding an emissions-
T H AW L O S E R
of Norilsk’s buildings have been damaged by permafrost thawing
Estimated annual economic loss resulting from permafrost thawing
While GDP and employment in petrostates such as Saudi Arabia revolve around oil and gas revenue, Russia has a relatively diversified economy
of the Russian Government’s income is linked to oil and gas revenues
Proportion of Russian GDP contributed by industrial bases in the Arctic Circle
Russian President Vladimir Putin
Fig 1: Share of global oil exports PERCENTAGE
Saudi Arabia 16.1 Russia 11.4
Greasing the wheels
Iraq 8.7 Canada 5.9 UAE 5.2 Kuwait 4.6 Iran 4.5 US 4.3 Nigeria 3.8 Kazakhstan 3.3 SOURCE: INVESTOPEDIA
Fig 2: Russian GDP by sector
● SERVICES ● INDUSTRIAL (INCLUDING OIL AND GAS) ● AGRICULTURAL ● OTHER
SOURCE: WORLD BANK
producing oil and gas industry. As the leader of the world’s second-largest oil exporter (see Fig 1), though, this position makes a certain amount of sense – arguably, the sector is simply too important for Russia to lose.
Russia is sometimes referred to as a petrostate, but as analysts like Michael Bradshaw – a professor of global energy at Warwick Business School – point out, this obscures the specific and complex role that oil plays in the Russian economy: “Russia has a fairly substantial economy that is not resource-based. However, it’s increasingly clear that large sectors of the industrial economy are tied one way or another to the resource economy.” While GDP and employment in petrostates such as Saudi Arabia revolve around oil and gas revenue, Russia has a relatively diversified economy. For example, the services sector makes up a larger share of Russia’s GDP than oil and gas (see Fig 2). Nonetheless, oil and gas revenues are still crucially linked to the non-oil economy in Russia, accounting for 40 percent of government income, according to the International Renewable Energy Agency (IRENA). The wealth generated by oil and gas – known as oil and gas rents – is extracted by the state and channelled into strategically important sectors or the economy more broadly, either in the form of taxes paid to the government or as subsidies for other goods and services. This system, however, means Russia can only prosper so long as oil prices are high.
As such, its economy is extremely vulnerable to sudden changes in oil demand and supply. “If you go back to the 1980s, one of the factors that led to the eventual collapse of the Soviet economy was the fall in oil and gas prices and the loss of substantial rent to the economy,” Bradshaw told World Finance. “That volatility, of course, continued through the 1990s and 2000s, at times supporting the Russian economy and at times punishing it.” One obvious way of reducing Russia’s exposure to oil shocks is through economic diversification, but such reform is made difficult by the fact that non-oil sectors are so heavily reliant on oil and gas rents. Moreover, beneficiaries of this system are reluctant to change the status quo. “Russia has been spectacularly unsuccessful in seeking to diversify its economy,” Bradshaw explained. “There’s been an awful lot of rhetoric, particularly under [Dmitry] Medvedev’s presidency, but very little change.” To maintain government income in the short term, Russia has to keep expanding oil and gas production. Currently, the need to do so is urgent. Russia’s main oil and gas fields are depleting: according to the Financial Times, West Siberia, a critical oil-and-gas-producing region, has seen a 10 percent decline in output over the past decade. What’s more, a 2016 report by the Wilson Centre showed that Russia is increasingly dependent on production from its more remote East Siberian and Arctic offshore fields. Covered almost entirely by permafrost, these are some of the most inhospitable regions on the planet. »
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T H AW L O S E R
A pipe dream As the Arctic sea ice retreats, the Northern Sea Route becomes more navigable to the world’s superpowers. With a fifth of its territory inside the Arctic Circle, Russia has long envisioned itself as the gatekeeper of this sea lane. Although the Northern Sea Route will never be as integral to global trade as the Suez Canal, it could nonetheless become an important passageway between Europe and Asia, saving freight companies millions of dollars and weeks in travel time. Russia is convinced that its economic future depends on Arctic exploration. As well as opening up a globally important shipping route, the melting sea ice makes it easier to access rich supplies of fossil fuels. The US Geological Survey estimates that the Arctic may be home to as much as 20 percent of the remaining oil and gas reserves on Earth. On the surface, Russia would seem to be making great progress towards seizing these resources: in late 2018, energy giant Novatek finished building Yamal LNG, a $27bn liquefied natural gas (LNG) plant. By 2030, Moscow expects it to produce 60 million tons of LNG each year. But extracting oil and gas in such a hostile environment with limited infrastructure is far from easy. “These are very capital-intensive areas where returns are not expected before 10 to 20 years of development,” Pami Aalto, a Jean Monnet professor at the University of Tampere, told World Finance. Consequently, oil and gas companies have to make large investments up front to carry out production, 150
meaning they are often dependent on both government subsidies and foreign technology. In this regard, Russia has faced some major setbacks. EU and US sanctions – imposed after Russia’s annexation of Crimea – limit the country’s ability to secure funding for new oil projects and import the hi-tech equipment needed for Arctic exploration. As Aalto points out, this presents a significant hurdle to Russia’s Arctic oil ambitions: “It is not feasible to explore, extract and develop much without international partners. In the Arctic, 80 to 90 percent of technology has been foreign, compared to 40 to 50 percent elsewhere in Russia before import substitution policies started big-time in 2014… Russian actors have been forced to [borrow] old equipment from Asia, and it is not in plentiful supply.” At the same time, Moscow is struggling to provide the necessary subsidies as a result of budgetary constraints. According to the Kremlin, Russia needs to invest over $200bn in Arctic infrastructure between now RUSSIAN INVESTMENT IN and 2050 to make its ARCTIC INFRASTRUCTURE: ambitions a reality; so far, it has stumped up just $14bn. The thawing permafrost Amount required by 2050 will only add to the required expenditure, as companies are forced to adapt their infrastructure Amount currently committed
and account for soaring repair costs.
Frozen in time
Infrastructure can be adapted to help reduce thawing, but this is expensive, particularly when done at scale
Economic activity in Russia’s Arctic territor y accelerated under former Soviet Union General Secretary Joseph Stalin, who believed that Russia could achieve economic independence from the West by industrialising the resourcerich North. As these settlements grew, Siberia became the crowning glory of Soviet Russia – the communist state had tamed the frozen wastelands, creating economic powerhouses in a region where free marketeers would never have dared venture. Putin is eager not to see the region’s economic prowess diminished. According to The Wilson Quarterly, Russia’s industrial base in the Arctic Circle currently accounts for up to 20 percent of the country’s GDP and nearly a quarter of its export revenues. And Putin is piling on the incentives to boost investment in the region: in addition to setting up the FPV, a special economic zone along its eastern coastline that offers tax and customs privileges, Russia awards 2.5 acres of free land in the Russian Far East to any citizen or foreigner willing to live there for at least five years. However, the thawing permafrost raises questions over the viability of economic in-
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T H AW L O S E R
outside of the established regions – be it in East Siberia or offshore – could be more expensive. In other words, you’re ploughing a lot of money into supporting an oil and gas industry that’s delivering less and less income.” In 2017, Royal Dutch Shell CEO Ben van Beurden predicted that oil prices would peak in the late 2020s or early 2030s, after which point the industry should expect oil prices to be “lower forever”. In this future, the nations still economically dependent on oil and gas rents could see their power and influence on the geopolitical map wane. In its 2019 report, A New World: the Geopolitics of the Energy Transformation, IRENA described how the transition could “profoundly destabilise countries that have not prepared their economies sufficiently for the consequences”. While Saudi Arabia is trying to curb its dependence on oil through its diversification plan, Vision 2030, Russia has no such strategy. In fact, Russia doesn’t seem to even acknowledge the importance of relinquishing fossil fuels. “They are, in true ostrich fashion, burying their heads in the ground – or firmly in the permafrost as it melts,” Bradshaw said. To demonstrate this, Bradshaw points to a case in 2014, when low oil prices – as well as US and EU sanctions – compelled Russia to develop its shipbuilding sector as a means of economic diversification. Even then, its diversification plan still benefitted the oil and gas sector, with ships being built to facilitate offshore production. Russia has chosen to continue its resource dependence at the expense of long-term economic growth opportunities. Its plans to push industrialisation in its most inhospitable regions indicate that the country is yet to move beyond its Soviet past and set its sights on becoming a knowledge economy, rather than a resource-based one. In a world where oil and gas are no longer the arbitrators of global economic power, Russia could find itself falling further behind nations that prioritise alternative energy resources and technological progress. n
Russia has chosen to continue its resource dependence at the expense of long-term economic growth opportunities
The Yamal LNG plant
vestment in the region. Infrastructure can be adapted to help reduce thawing, but this is expensive, particularly when done at scale. Moreover, it doesn’t stop the permafrost from thawing. With this in mind, Putin’s attempt to relocate citizens to these areas is not dissimilar to Indonesia or the Philippines encouraging migration to their shrinking coastlines. “Nobody in their right mind in Russia will ever even consider building something like Norilsk again,” Shiklomanov said. “Now the question is, how do they maintain it? And should they maintain it or not?” Some analysts would argue not. Over the past few decades, there has been a steady exodus of people from the Far North and Far East to the bright lights of Moscow and St Petersburg. The small mining town of Vorkuta in the Komi Republic, for example, has a dwindling population of about 60,000 residents, down from 217,000 in the late 1980s. One of the most basic reasons people are shunning these Arctic cities is the severe conditions. The coldest temperature ever measured outside Antarctica was recorded in the Yakutia region of Siberia. The other problem is that these cities are extremely remote – it takes 40 hours by train to get from Vorkuta to Moscow. In their book The Siberian Curse: How Communist Planners Left Russia Out in the Cold, Fiona Hill and Clifford Gaddy argued that cities in the Far North and Far East are a hangover from the Soviet Union, and that Russia must abandon them for the sake of economic progress: “People and factories
languish in places communist planners put them – not where market forces would have attracted them. Russia cannot build a competitive market economy and a normal democratic society on this basis.” In many ways, these cities are frozen in time – snapshots of a Soviet past. Few people moved there by choice; most were driven there by fear and ideology. Under Stalin, hundreds of thousands of people – many of whom came from Baltic countries – were deported to this remote and hostile territory. As Gulag prisoners, they built Norilsk and other cities like it. Repopulating these areas feels like a step into the past – one last desperate attempt to relive the days of Soviet industrialisation.
The cold, hard facts If Russia’s ambition to repopulate the Far North and Far East is backwards-looking, then so is its drive to exploit the fossil fuel resources there. Over the past decade, the cost of renewable energy has fallen drastically; assuming this trend continues and nations remain committed to decarbonisation, then it’s highly probable that the world will soon phase out fossil fuels. Consequently, the reserves of oil and gas that Russia is so desperately trying to retrieve from beneath the permafrost will decline in value. “We are looking at a future of constrained demand and continuing supply,” Bradshaw told World Finance. “In that world, where oil prices are lower… new production in Russia
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The business of sustainability As climate change continues to dominate cultural and political conversations, the business world is beginning to show its commitment to saving the planet In 2019, the issue of climate change rose to the top of the global agenda. People from around the world took to the streets in a series of largescale protests, walking out of their schools and workplaces to demand urgent action on global warming. The subject has dominated newspaper headlines and international political conversations, so much so that Oxford Dictionaries declared ‘climate emergency’ its word of the year for 2019. But citizens aren’t just looking to their political leaders to drive change. Increasingly, consumers are calling on businesses to play their part in tackling global warming, with companies’ environmental credentials coming under greater scrutiny. This significant shift in public consciousness, coupled with more stringent government regulations on climate change, has prompted businesses of all sizes to review their environmental, social and governance (ESG) policies, putting sustainability firmly at the heart of their operations. More than 200 of the world’s most recognisable companies – including IKEA, Apple, Google, Nike and Coca-Cola – have already joined the RE100 initiative, committing to using 100 percent renewable electricity across their global operations by 2050 at the latest. This pledge is just the tip of the iceberg, with many other global companies also taking steps to reduce their carbon footprint. As businesses across the globe begin to take real action to tackle climate change, World Finance introduces its very first Sustainability Awards. The winners of these inaugural awards 152
have shown an admirable commitment to environmentalism and sustainability, and are making the business world a much greener place.
Preparing for the future In the past, sustainability was something of a corporate buzzword, but it has since become a priority for all forward-thinking businesses. Consumers are growing more environmentally conscious, and this is reflected in how they are spending their money. According to a report by Nielsen, products with sustainable claims – such as being carbon neutral or ethically sourced – sell better than items without such credentials. What’s more, the study found that consumers are willing to pay more for the sustainable choice. With the public responding positively to eco-friendly products and sustainable brands, it’s clear that going green is not just good for the planet – it’s good for business, too. Indeed, embracing sustainability initiatives can improve a company’s financial performance and public image. Research carried out by Deutsche Bank shows that companies with high ESG ratings actually have a lower cost of debt and equity, and tend to outperform the market in the medium and long term. Investors are also moving away from ‘sin stocks’ and are looking to create low-carbon portfolios with eco-conscious companies. As shareholders get serious about sustainability, prioritising ESG initiatives might be the key to long-term success. Setting out the business case for establishing sustainable development goals, the Business
and Sustainable Development Commission has suggested that companies could unlock up to $12trn in savings and revenue by 2030 if they commit to pursuing a low-carbon future. Jeremy Oppenheim, programme director at the commission, said in 2017 these new goals “have the potential to trigger a new competitive race to the top”. He added: “The faster CEOs and boards make the Global Goals [for Sustainable Development] their business goals, the better the world and their companies will be.”
Tracking footprints In 2016 alone, companies on the Fortune 500 saved approximately $3.7bn by switching to renewable energy sources and reviewing their energy efficiency. In the years since, renewable energy has only become more accessible and affordable, encouraging a number of other companies to follow suit and make the switch to green power. In the UK, for example, businesses consume 56 percent of the nation’s total electricity, meaning individual companies have the potential to considerably reduce Britain’s fossil fuel consumption. Energy is just one factor that businesses can address to become more sustainable in their practices. The first step for any company is to measure its carbon footprint. When doing so, it is important to audit the company’s supply chain, as this can be an emissions-heavy element for many businesses. According to the Carbon Disclosure Project’s Global Supply Chain Report 2019, emissions from a company’s supply chain are around 5.5 times higher than its direct operations, so this cannot be left out of a comprehensive carbon footprint analysis. Addressing emissions in this area might involve switching suppliers or looking at different options for materials, but
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WORLD FINANCE SUSTAINABILITY AWARDS 2019 MOST SUSTAINABLE COMPANY Audi WSP Global Wärtsilä Vornado Realty Trust TUKC TOBAM The Cheeky Panda TenneT Holding Stanley Black & Decker Sonova Group Smithfield Foods Salzgitter Saint Ives Liquor Randstad Global QTS Realty Trust Pure Sportswear PTT Global Chemical Osram Licht Nori NOAH Molson Coors Beverage Company Logitech Huskee Holmen Havas Granite Construction Go-Ahead Group Getinge FrieslandCampina Firmenich International Ecolab Cybercom Group CSX Corporation Corticeira Amorim American Airlines Group
INDUSTRY Automotive car production Engineering Shipping Real estate Kitchens Investment Tissues Energy Machinery and electrical equipment Medical technology Food Steel Spirits HR services Data centres Sports apparel Chemicals Lighting manufacturing Carbon offset Footwear Brewing Consumer technology Coffee products supplier Pulp and paper Communications Infrastructure Transportation Life science Dairy Flavour and fragrances Environmental hygiene ICT Logistics Wine products Airlines
“In the past, sustainability was something of a corporate buzzword, but it has since become a priority for all forwardthinking businesses”
it could also have a significant influence on reducing a company’s environmental impact. Once a business understands its carbon footprint and where it might be losing energy, it can get to work on becoming more energy efficient. From there, in addition to considering a switch to renewables, there are a number of other steps that companies can take to reduce their carbon footprint. Transport, for example, is likely to be another highly polluting area, so businesses could consider switching to electric or hybrid vehicles, as well as incentivising employees to use eco-friendly modes of transport during their commute. Reassessing the use of paper and plastic can also have a positive impact on reducing day-to-day waste, and properly implemented recycling systems can stop reusable materials from ending up in landfill. From large-scale changes, such as committing to 100 percent renewable energy, to more minor, office-wide initiatives, every change will contribute to making the business world more sustainable.
Teething troubles While sustainable goals present businesses with a wealth of opportunities, they also pose several challenges. Companies certainly stand to benefit financially from embracing sustainability, with cost savings, increased shareholder interest and improved brand perception all motivating businesses to go green. But becoming an environmentally sustainable company is a complex process, and one that takes a considerable amount of time and planning. Time, however, is a luxury that businesses no longer have. Since the signing of the Paris Agreement in 2016, governments around the world have been pressing ahead with policies to tackle global warming, introducing stringent regulations that aim to reduce carbon emissions. From the UK’s newly established diesel tax to ultra-low emissions zones, new rules are transforming our societies and driving change. But if businesses are slow to adapt to these ecofriendly expectations, they have much to lose – not least, their reputations. Environmentalism is no longer a fringe issue in the business world, but one that will define companies’ growth plans in the years to come. The winners of the World Finance Sustainability Awards 2019 have shown a commitment to ESG policies in all aspects of their operations and have put green initiatives at the heart of their long-term visions. For an insight into some of the brightest names in the world of corporate sustainability, take a look at this year’s winners. n
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Gearing up for change The automotive space is not always viewed as an industry in tune with sustainable values. However, Audi has been working to reduce its carbon footprint for a number of years
Peter Kössler MEMBER OF THE BOARD OF MANAGEMENT FOR PRODUCTION AND LOGISTICS, AUDI
We are living in times of fundamental, and often disruptive, change. Nevertheless, the need for individual mobility has stayed the same. Never before has individual mobility provided transport for so many people. However, the growing trend for widespread car ownership, combined with a rapidly growing population, is causing unprecedented harm to the planet. Tackling this is a challenge faced by every major player in the automotive industry. At Audi, our job is to realise our vision for the future: mobility with a clear conscience. We are working hard to achieve this, placing sustainability at the core of our operations while maintaining a focus on trust and future viability, which have been key objectives of ours for a long time. All over the world, people are changing their attitudes and behaviour, ranging from their daily shopping habits to major decisions such as building a house, buying a car or where they want to make financial investments. In terms of global finance, sustainable investing is now a market worth more than $30trn world154
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wide – a trend that is accelerating. Investors are continuing to value the mutual relationship between economic success and sustainable commitments; our mission is to attract these investors once we have brought sustainable automobile travel to the market.
Four a better future Audi’s operations strictly adhere to environmental, social and governance (ESG) targets, which we achieve by integrating ESG criteria into our long-term management processes. We are also deeply committed to upholding high standards with regards to equal opportunities, human rights and environment protections. We demonstrate transparency by allowing ourselves to be assessed whenever asked, for example, by credit ratings agencies. The board of management is strongly committed to meeting the Paris Agreement’s climate goals – especially the two-degrees target. By 2025, we want to reduce our environmental impact from what it was in 2010 by 35 percent per vehicle. We have taken steps to reach 23.7 percent so far, and we intend to remain on target. Right now, we are on track to meet the objectives of Mission Zero, our initiative to reduce company-wide carbon emissions. Across the entire value chain, we are working with carbon-neutral production and
supply chains, closed resource loops and sustainable products. We have also established Four Rings of Sustainability – reduce, reuse, recycle and rethink – which we use in the planning of every project. The first ring of sustainability is to reduce. We want to consume fewer natural resources, particularly in terms of our energy use. This applies to all of us – those working in the automotive industry, retailers and private consumers. Almost half of all resources consumed are for energy production and are mainly sourced from coal, oil, gas and uranium – energy sources with well-known environmental risks. Making reductions here is particularly effective in improving overall sustainability. Audi has a clear agenda – to make all our production plants carbon neutral, on balance, by 2025. We are expanding this goal to encompass the consumption of raw materials and our own employees’ personal transport needs. Our Brussels plant has been carbon neutral since 2018, making us the first large-scale premium automotive manufacturer to achieve this. Moving forward, our plan is for the whole company to be carbon neutral by 2050. This makes production of the Audi e-tron and the e-tron Sportback, our latest electric cars, an important reminder of what we are striving for. Outside of Brussels, our other
plants have also made great progress: in Györ, Hungary, for example, Audi utilises geothermal and solar energy to power our operations. In addition, Europe’s largest roof-mounted photovoltaic system has just gone into operation at our Hungarian production site. This alone will reduce CO2 emissions by approximately 6,000 tons each year. As a result of these measures, we have reduced CO2 emissions by more than 23,000 tons at our four European plants each year since 2010. Similarly, our use of rail for transport between plants in Germany and North Sea ports has been powered by green electricity for an impressive amount of time. We became the first company in Germany with carbonneutral rail logistics in 2017, avoiding 13,000 tons of CO2 emissions every year.
Regarding the second ring of sustainability (reuse), many of the resources we need, such as water and air, remain in use for as long as possible. For example, our factory in Mexico now produces no excess wastewater. We have achieved this by cleaning the water we use so it can be consumed again in production. Other Audi plants are optimising their water consumption as well to meet this end goal and decrease the by-products of our plants. We are working hard to further develop the technology behind electric cars. For instance, we are currently testing concepts for how we can reuse lithium-ion batteries. These are extremely valuable as they can be used for storing electricity from renewable sources such as solar, wind or hydropower. The third ring of sustainability involves recycling. More businesses need to grasp the notion that waste is not worthless, as recycling can actually bring many benefits. At Audi, we have regarded waste products as valuable raw materials for a long time. We sort and separate waste products by their type, reuse what we can, and recycle the waste while ensuring material quality is maintained. We are already developing new recycling processes for our electric car products, and in lab tests, we have managed to recycle 95 percent of the materials used in high-voltage batteries, such as cobalt, copper and nickel. We are conscious of the negative impact that comes from the production of aluminium, which is why we act where we can to exert a direct influence on recycling the material. To minimise its impact, we separate it from any steel it may be welded to and press the waste metal to save space in transportation. It is then reused at in-house factories. We make sure none of our waste steel and aluminium is thrown away, as they are both recyclable materials. The recycling of aluminium alone prevented the release of more than 90,000 tons of CO2 emissions in 2018 – a 30 percent increase on the year before. A circular economy and efficient processes save resources, cut costs and reduce the environmental impact of production.
Everyone on board
Last but not least
To be truly sustainable, our efforts cannot stop at the factory gate. That’s why we also want to reduce CO2 emissions in our supply chain. We have developed a sustainability rating system for our suppliers, involving a dozen criteria concerning environmental and social factors. We have already checked and assessed more than 1,100 companies at their sites. Since these ratings were introduced earlier this year, they have proved decisive in how partner contracts are awarded.
Rethink is our fourth ring of sustainability. Rethinking means reflecting beyond the company and considering how we can make a difference. At our plant in Mexico, for example, we have planted more than 100,000 trees in the immediate vicinity. At our production site in Münchsmünster in Germany, countless insects fly between our large flower meadows and help pollinate rare varieties of fruit trees. Regular monitoring demonstrates a clear increase in biodiversity. These cases are sustainability at its best, put into practice.
Market value of global sustainable investment
Reduction of emissions per Audi car by 2025
Year by which Audi plans to be carbon neutral
AUDI’S BRUSSELS PLANT HAS BEEN CARBON NEUTRAL SINCE 2018, MAKING IT THE FIRST LARGESCALE PREMIUM AUTOMOTIVE MANUFACTURER TO ACHIEVE THIS
We are committed to the fact that the entire car industry needs to engage in sustainability, and rethinking has led to the conclusion that we need to do it together. Audi is now collaborating on sustainable solutions through its many alliances and partnerships. To solve global challenges, we need worldwide cooperation, such as the Aluminium Stewardship Initiative (ASI). We have been strongly committed to working as a member of this group since 2013, which has resulted in a global sustainability standard with criteria set for environmental and social issues, as well as business ethics. Audi was the first car manufacturer to receive the ASI sustainability certificate, putting us ahead of others in the sector. Managing your organisation according to ESG goals does not just involve risk management: it provides the basis for long-term economic success. It also includes activities that are not reflected in the bottom line on financial statements. Nevertheless, they contribute to our strength as a brand, our strategy and our path to achieve our vision. Take the Audi Environmental Foundation, which celebrated its 10th anniversary in 2019. The foundation promotes innovative ideas for environmental protection, using ideas from the fields of science and education, as well as from the public and our own employees. This nonprofit foundation is globally connected, helping innovative ideas become reality – for example, working out how we can remove plastic waste from rivers before it reaches the sea. The Audi Environmental Foundation empowers those who seek knowledge, resulting in projects that aim to create a better world – one in which all of us can live a good life with a clear conscience. It is evident that Audi is changing rapidly. By 2025, our portfolio will include more than 30 electrified car models, with 20 of them expected to run solely on electric power. These cars will account for around 40 percent of our worldwide revenue, demonstrating that we are serious about a sustainable future, caring for the environment and building a future we can all share. We truly believe that companies managed according to ESG principles are more successful and secure valuable market share. Sustainability has become a key element of corporate management, and thus a value driver instead of just a trend. That’s why we are working to create new Vorsprung durch Technik – advancement through technology – for our customers. The four rings of sustainability and Mission Zero are the key elements of our sustainable strategy, and they demonstrate that the entire company is moving in one direction. Our vision is to deliver sustainable mobility to preserve the planet and deliver state-of-the-art products to our customers. n
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For people, the planet and society Increasingly, companies are taking a long-term view that considers their social and environmental impact. Firmenich – World Finance’s Most Sustainable Company in the Flavour & Fragrances Industry 2019 – has understood the importance of doing so for decades
approach to sustainability and track record of having a positive impact was recognised by the first ever IMD-Pictet Sustainability in Family Business Award in 2019.
Inclusive strategy Founded in 1895, Firmenich is the world’s largest privately owned perfume and flavour company, present across more than 100 markets. We are in the business of creating emotions through the senses of taste and smell, and our work touches billions of people around the world every day, through products such as coffee, cereals, detergents, shampoos and fine fragrances. As a family-owned company that takes a long-term view of its operations, preserving the planet is embedded in our DNA. When you consider it takes 3.5 tons of rose petals to produce one kilogram of rose oil, there is no other option than to treat nature responsibly. That’s why Firmenich has always played a prominent role in preserving the environment. Firmenich is recognised as a global environmental leader, being one of only two companies in the world to have achieved A rankings in all three of the Carbon Disclosure Project’s categories: climate change, water security and forests. Firmenich started this journey towards sustainability in 1991 – one year before the UN Conference on Environment and Development brought sustainability into the mainstream – when we signed the International Chamber of Commerce Business Charter for Sustainable Development. We have been committed to reducing our environmental impact ever since. Three decades after our first public commitment, we continue to lead real change, placing sustainability at the heart of our growth strategy as we pursue a business model focused on inclusive capitalism. Our comprehensive 156
At Firmenich, we believe there can be no longterm value creation for shareholders without values. That’s why we have an inclusive capitalism business model that makes a positive difference for all stakeholders. Making our business work for everyone, we use technology to address some of today’s greatest challenges, such as nutrition, sanitation and climate change. The UN’s Sustainable Development Goals are embedded in our growth strategy and we were recently recognised as a UN Global Compact LEAD company after being an active member of the UN Global Compact for more than a decade. Today, we are the only player in our industry to be part of this elite group of 36 LEAD companies, actively ensuring that our business works for people, the planet and society. In terms of people, we ensure we are inclusive at all times, making our business work for the many, not the few. We were recognised as a diversity and inclusion leader at Ethical Corporation’s 2019 Responsible Business Awards, due to our well-rounded and scalable approach, which is firmly embedded in our culture. Firmenich was the seventh company worldwide and the first in our industry to be globally certified as a gender-equal employer by EDGE, the world’s leading business certification in this area. This standard goes well beyond equal pay to include gender balance across recruitment, promotion, training and mentoring programmes. Today, women represent 42 percent of our senior executives and 41 percent of our total workforce.
Being truly diverse means embracing all demographics, including race, sexuality, age, experience and disability. Firmenich has been working with people with different abilities across our business for more than 40 years. For instance, we count more than 100 visually impaired professionals in our sensory teams: visually impaired people tend to have a heightened sense of taste and smell, helping us to advance our sensory analysis. We also recently joined the Valuable 500 – an initiative committed to disability inclusion – to firmly anchor inclusion within our leadership agenda.
Healthy planet, healthy business To safeguard the planet, we are working hard on decarbonising our operations to combat global warming. We set ourselves ambitious and measurable science-based goals as part of our vision to become carbon neutral. For example, Firmenich’s sites throughout Europe, North America and Brazil operate with 100 percent renewable electricity; the group is currently using 86 percent renewable electricity worldwide and is well on its way to reaching the goal of 100 percent in 2020. We are decoupling our growth from our CO2 emissions, a key indicator of environmental progress. Since 2015, our manufacturing output has increased by 18 percent, while our CO2 emissions declined by 30 percent. Advancing our vision to become carbon neutral, we are taking a leading role in the UN’s Business Ambition for 1.5 degrees Celsius, a coalition of 87 companies committed to
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“We use technology to address some of today’s greatest challenges, such as nutrition, sanitation and climate change”
Firmenich’s research and development:
$390.53m Investment in 2019
stopping global warming. Together, we have set several science-based targets to achieve a net-zero carbon future by 2050. We also believe in the importance of responsible sourcing. At Firmenich, we have the broadest and finest ingredient portfolio in the industry, using only the most authentic and responsibly sourced natural ingredients. Whether it’s jasmine from India or Madagascan vanilla, we are committed to operating the most traceable, sustainable and ethical value chain in the industry. Through our Naturals Together initiative, we build long-term partnerships with some of the world’s best natural ingredient producers. We are proud to support the livelihoods of 250,000 farming families at the source of our 170 varieties of natural ingredients. By working with individuals to address their most pressing challenges, we help them embrace regenerative agriculture, diversify their revenue sourc-
es and ensure access to healthcare services, education and training. Advancing our commitment to biodiversity, Firmenich helped launch the One Planet Business for Biodiversity coalition at the 2019 UN Climate Summit in New York. Alongside 19 like-minded companies, we are stepping up our support for alternative agriculture practices to protect biodiversity.
Innovating for wellbeing Innovation is our engine of growth. We invest 10 percent of our annual revenue in research and development – CHF 390m ($390.53m) in 2019. We currently have 3,700 active patents covering a range of fields, from renewable ingredients to nutrition and sanitation solutions. As pioneers in biodegradable and renewable ingredients, we implement green chemistry principles to reduce our carbon footprint while minimising and upcycling
waste. For more than 10 years, all our new perfumery molecules have been biodegradable. As an industry leader in white biotechnology, we create renewable perfumery ingredients from sustainable biomass, such as sugar cane from Brazil. Tackling today’s nutrition challenge, we are shaping the future of food through a number of cutting-edge solutions. More than a decade ago, we started investing in ways to make healthier food and drink options taste great. These investments have paid off, and our latest technology, TastePRINT, can reduce sugar content by as much as 100 percent without compromising on taste. Last year, we removed one trillion calories from products that consumers love, making healthier options taste great. Supporting the growing popularity of vegan and ‘flexitarian’ diets, our ‘Smart Protein’ solutions produce plant-based food and beverages that don’t compromise on taste or texture. We are also working to accelerate access to sanitation. Today, 4.2 billion people do not have access to safely managed sanitation facilities. According to the UN, 300,000 children under five die each year from diarrhoea as a result of unsafe drinking water, inadequate sanitation and poor hand hygiene. Our most recent research found that malodour was one of the top barriers to using toilets – 87 percent of respondents in Kenya, 70 percent in South Africa, 62 percent in India and 51 percent in China. Once we realised smell was preventing people from using toilets, we decided to become part of the solution. We engaged in a research partnership with the Bill and Melinda Gates Foundation to reinvent toilets from an odour perspective, leading us to develop a range of breakthrough malodour-control technologies to make clean toilets smell good in an affordable and sustainable way. It is clear that clean and pleasant-smelling toilets are critical levers to addressing today’s sanitation crisis. Looking to the next 125 years, our vision is to be the indisputable leader in inclusive business. We will constantly strive to improve our environmental and social impact, tackling the climate emergency and improving the wellbeing of our stakeholders. We believe we can achieve all this while continuing to meet consumer expectations for healthy, ethical and traceable products. n
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of who we are and what we do. Meaningfulness has always been a solid part of our foundations. Ever since we published our first Meaningful Brands report in 2009, we have understood the importance of measuring the quality of brands’ services and associated business returns. This ongoing research – covering 350,000 individuals and 1,800 brands in 31 markets – has found that consumers expect brands to provide them with value beyond their products simply addressing the challenges facing society and taking a stand on various issues. Thanks to this precious insight, we know that doing good helps businesses grow, with brands that advocate responsible business outperforming the stock market by more than 134 percent. Meaningfulness is not just a posture – it is a growth driver.
Driving positive change through creativity At Havas Group, communication is about more than traditional marketing. It’s about building meaningful brands that ensure sustainable growth that benefits all our stakeholders
Yannick Bolloré CEO, HAVAS GROUP
At Havas, we’ve always tried to make a difference to the world around us by embracing innovation and pioneering new business models. When I joined Havas in 2013, we launched our ‘Together’ strategy, which was a game-changer at the time, setting us apart from our competitors. The idea behind the strategy was simple: to serve our clients’ needs by bringing together our most talented employees from all disciplines – creative, media, digital and design. We also created Havas Villages – unique office environments where teams work collaboratively to deliver great work to our clients. We now have more than 60 Havas Villages across the world, all sharing a common ethos and creative energy. Above all, these villages are designed to be welcoming, healthy and inspiring environments for our most valuable assets: the 20,000 talented individuals who make up the Havas family. In 2017, we made another transformative move by joining integrated content and media group Vivendi and shifting our focus to become a communications player operating at the core of the creative world, fully investing 158
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in culture and content. Our partnership with Vivendi has given us the competitive advantage of privileged access to premium content from other Vivendi assets such as Universal Music, Canal+, Editis and Gameloft. Thanks to our shared culture and global mindset, Havas employees can enjoy an entrepreneurial workplace and broader career development opportunities as a result of the partnership.
Meaning is everything Throughout its history, Havas Group has demonstrated its ability to rapidly adapt to changes in the communications sector. We have seen our industry transform dramatically in the face of multiple threats, from cuts in marketing budgets and the rise of in-house communications departments to the emergence of new competitors, such as tech giants and consulting firms. Looking beyond our own industry, more general issues face the world today. According to our The Future of Trust report, the world is seeing a widespread crisis of trust, with 85 percent of respondents considering trust to be a rare value these days. As such, today’s customers are looking for more meaningful and engaging content than ever, changing the way brands and companies operate and how they treat their customers. Our response to this challenging ecosystem was to put meaningfulness at the core
Leading by example We ‘walk the talk’ with our ambitious corporate social responsibility (CSR) commitments. We focus on three areas: nurturing our people, communicating responsibly and respecting the environment. We are also part of a variety of initiatives that positively contribute to society. One such initiative is the UN’s Common Ground projec t , which sees indusThe Future of tr y leaders across Trust report: the marketing and c om munic at ions industr y collabo of people consider trust to be rating to meet the the cornerstone of society U N ’s Sustainable Development Goals. In addition, in 2018, our teams dedicated of people consider trust to more tha n 8,000 be a rare value today days to pro bono work for the various causes we support. We have been of people are worried about awarded the Ecothe loss of trusted leaders Vadis gold medal for CSR performance two years in a row. We are also advancing our talent programmes and promoting diversity, equity and inclusion across all our agencies. It is obvious to us that our job at Havas extends beyond supporting brands with their communications: we must use our creative ideas to drive positive change and minimise any negative effect on society. We must share this ethos with the companies we work with by encouraging them to grow sustainably and explore how, beyond their products, they can tangibly improve people’s lives. Our mission is to make a meaningful difference to businesses and people. That is what defines Havas. ■
us to bring these two beliefs together. Creating clothes from polyester requires a lot of energy and water, so by using sustainable production methods, we can keep our carbon footprint and environmental impact to a minimum. In addition, we only store small amounts of stock and typically only produce our products to order, so we can avoid unnecessarily stockpiling material.
Sustainable sportswear The fashion industry has one of the largest negative impacts on the environment. By using sustainable production methods, Pure Sportswear is hoping to change that
Duvan Couvée CO-FOUNDER AND CEO, PURE SPORTSWEAR
The environmental impact of the fashion industry is huge. This can be attributed to the carbon emissions created in the manufacture and transportation of clothing, as well as the waste produced by consumers when products have reached the end of their life. The rise of so-called ‘fast fashion’ has created a wasteful culture: some shoppers will wear an item of clothing only a handful of times before throwing it away and replacing it with something more on-trend. However, some environmentally conscious fashion companies are trying to make the industry as a whole clean up its act. Pure Sportswear, a Dutch start-up that sells sportswear made from recycled plastic, has been one of the movement’s leading proponents. World Finance spoke to Duvan Couvée, the company’s co-founder and CEO, about the brand’s sustainable ethos and why it appeals to consumers. Could you talk us through the clothing production process at Pure Sportswear? Our sportswear is made from recycled polyethylene terephthalate, or PET, bottles. These are taken from the ocean, self-waste disposal sites and other collection points before being transported to a processing location. The col160
lected plastic is first washed and then ground into small pieces we call ‘flakes’. The flakes are sorted by colour, washed once more and melted into granules, which are used as the basis for creating our products. For our sportswear, the granules are spun into threads that are used to create fabric. The fabric AS A COMPANY, WE is then dyed to the BELIEVE IN PLASTIC-FREE OCEANS AND CLEANER required colour. Sustainability ENVIRONMENTS. USING is very important RECYCLED PLASTIC TO t h roug hout t h i s CREATE OUR CLOTHING entire process – ALLOWS US TO all the paints and in k s we use a re BRING THESE TWO free from toxic and BELIEFS TOGETHER carcinogenic substances, ensuring they are safe for contact with humans and the natural world. It is also important that there are no hormone-disrupting substances in the ink we use. The fabric is cut according to the clothing pattern, and the loose pieces (a front, a back and two sleeves) are sewn together using our yarn, which, as well as being sourced entirely from recycled material, is of the highest quality. Why is this approach so sustainable? As a company, we believe in plastic-free oceans and cleaner environments. Using recycled plastic to create our clothing allows
Consumers today are more aware of environmental issues. Why is sustainable clothing so important? Not only is sustainable clothing better for the environment, it is also beneficial for people. There are still many issues found in the clothing industry today, including the use of child labour in developing countries and unsafe working conditions throughout the sector. We were inspired to combat these issues by creating a brand that makes people aware of where their clothing comes from and how it’s made. Pure Sportswear originated from an ideology: change comes from people who take action. The world demands change and it happens gradually, step by step. Unfortunately, we have not seen a great deal of change in the sportswear industry, so by combining our passions for sport and the environment, we were inspired to launch a sustainable sports brand to try and make a change. Pure Sportswear is still a young company. How have you managed to grow so quickly in just three years? At the launch of every start-up, the question of its likelihood for survival is front and centre. Our perseverance, individual insights and lifelong friendships within the management team have helped us along the way, in addition to the uniqueness of our product. However, we should not forget the support of our friends, family and everyone who helped us during our first three years. What does the next year hold for you? We hope to see every piece of clothing in the sportswear industry sustainably and ethically produced, with a shift away from profits being the sole determining value of companies. We also hope to see manufacturers receive a fair share of the proceeds. Our priority over the next year will be to expand our product range: we are currently working on the development of women’s sports leggings made from recycled fishing nets, men’s shorts made from recycled plastic and a women’s top made of wood fibres. In addition, we want to look for other sustainable textiles to work with so that we can have an even greater impact in the fight against climate change. ■
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Powered to Perform CSX is redefining rail freight Weâ€™re bringing more on-time delivery, first-class customer service and a seamless shipping experience across our far-reaching network. With industry leading safety, reliability and efficiency, CSX is powered to deliver comprehensive service solutions that keep your shipments on track, on time and on target.
WE ARE RAISING THE BAR BY PROVIDING A NEW LEVEL OF SERVICE AND TRANSPARENCY IN THE RAILROAD INDUSTRY
Set the wheels in motion Transporting freight by rail rather than road can dramatically reduce costs and improve sustainability. Under its new streamlined Miles travelled on a gallon of fuel: operating model, CSX is making the most of these benefits
Bryan Tucker VICE PRESIDENT OF CORPORATE COMMUNICATIONS, CSX
Since the introduction of a new operating model in 2017, CSX has become a leader in the US rail industry, offering top-quality efficiency, safety, fuel economy and customer service. CSX is better positioned than ever to transition freights from the highways of America to the railroad – the most fuel-efficient mode of land-based transportation. In recent years, we have modernised our operations, all the while maintaining a commitment to our foundational principles. If we remain true to these, we will continue to deliver the best service to our customers.
Safe and sound The security of the employees and communities supported by CSX is our top priority. In the first three quarters of 2019, CSX maintained the lowest personal injury rate of all major US railroads, while also reporting the fewest train accidents in company history. Through focused improvements, we have strengthened existing safety programmes, and the results have been undeniable. We educate staff before taking disciplinary action, using every opportunity to help our teams learn for the future and utilise advanced technological capabilities to enhance our safety programme. 162
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CSX has not only improved our safety protocols over the last two years, but also the way we approach our business and customers. A fundamental difference between traditional railroading and our new way of operating is that the former focused on meeting train schedules, whereas CSX has developed a trip plan for each car. The company provides intermodal customers with personal, real-time trip tracking, and has recently rolled out the service to merchandise customers. We are raising the bar by providing a new level of service and transparency in the railroad industry. CSX was also a leader in terms of train speeds and dwell time in 2019, according to metrics reported to the US Surface Transportation Board. Quicker trains and reduced journey times resulted in a more reliable service for CSX customers. Not only does this allow us to achieve unprecedented efficiency, but it also makes us a more competitive option for freight shipments, which provide immense sustainability benefits.
Less is more CSX President and CEO Jim M Foote has affirmed the company’s commitment to constant improvement, stating that CSX is “never done with creating efficiency in the organisation”. As such, we are always looking to remove any unnecessary aspects of our operations and change processes that could be conducted more effectively.
A s ra il travel becomes more efficient, CSX is taking a leading role in the transport sector. After years of lagging CSX trains behind the rest of the industry as a result of high operating costs, over the past Average truck three years we have Note: When transporting a ton of cargo reduced our locomotive count by over 30 percent. On average, CSX can transport a ton of freight 492 miles on a single gallon of fuel. This is 228 percent more efficient than the average truck, which moves a ton of freight about 150 miles on a gallon of fuel. Our CEO set out a goal of establishing CSX as the best-run railroad company in North America – the most efficient, safe, reliable and sustainable. Guided by Foote’s vision, CSX continues to set company and industry records in each of these areas, including recently being named as the only US Class I railroad on the Dow Jones North America Sustainability Index for the ninth consecutive year. It is clear that the employees of CSX have a unified drive for continuous improvement. Beyond corporate goals, CSX operates a robust community engagement programme – Pride in Service – through which we are committed to having a positive impact on the lives of more than 100,000 US military service members, veterans, first responders and their families by the end of 2020. This dedication to sustainability, safety, operational performance and social responsibility is driving CSX towards a successful future. ■
Best Banking Group in Turkey World Finance Worldâ€™s Best Digital Bank Euromoney Best Bank in Turkey Euromoney Bank of the Year in Turkey The Banker Best Bank in Turkey EMEA Finance Best Bank in Turkey Global Finance
First comes your trust then come the awards Our profound appreciation and gratitude to all our stakeholders, in particular our customers and employees, for the pivotal role they play in our continued success.
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Helping societies thrive sustainably As businesses around the world come under pressure to reduce the negative impacts of their operations, demand for environmental consultancy services is on the rise Meeting today’s challenges words by
André-Martin Bouchard GLOBAL DIRECTOR, ENVIRONMENT AND RESOURCES, WSP
Across the globe, there is a growing awareness of the urgent need to restore and protect the natural environment. Mitigating climate change through the reduction of greenhouse gases is at the heart of discussions between businesses, regulators and communities. As a result, environmental consultants are now in high demand. As one of the world’s leading professional services firms, WSP understands how important it is to deliver ecologically sound solutions to clients. This can be seen at each stage of every project we undertake: for example, the company cleans up environments and restores natural habitats that have been disturbed in the past, such as forests, streams and wetlands. We also improve our clients’ processes to minimise their carbon footprint and waste generation, as well as help them achieve a net positive impact on biodiversity. On top of this, WSP advises on the design and construction of a future-proof world. Through our Future Ready programme, we account for coming trends in climate change, society, technology and resource use, and integrate these trends into our services. In this way, we provide solutions that prepare our clients for today and the years to come. 164
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With many clients adjusting their business strategies to include carbon neutrality as a top priority, global warming not only affects the way we operate, but also the types of services we offer. Through our environmental consultancy practice, Future Ready programme, company culture and purpose, we are positioned to become one of the leading firms supporting clients facing the huge climate challenge. Our environmental consultancy services feed into our core role, which is to plan, design, manage and engineer our communities to thrive. We believe these services are as strategically important as our other engineering and professional services. At WSP, we place our environmental offering at the forefront of our strategy to ensure clients have access to high-quality, multidisciplinary advice. Furthermore, we are committed to minimising our carbon footprint: we aim to achieve a 25 percent reduction in the market-based greenhouse gas emissions produced across our global operations by 2030.
Empowered by purpose Environmental consultancy services are offered by large multidisciplinary firms, and by ‘pure-play’ consultancy firms of all sizes. Many consultants, however, position their environmental services as a support function for construction or as a commoditised service to secure permits and achieve compliance, rather than as a strategic benefit. At WSP,
we stand out by offering an integrated strategic approach, leveraging the breadth of our services to take advantage of large multidisciplinary projects that pure-play consultants have difficulty accessing, while building the same renown for our environmental practice as said consultancies. We also offer those services on any scale, in any part of the world. WSP’s environmental services have enjoyed very strong growth, expanding 22.5 percent annually over the past five years – including six percent organic growth. We have also welcomed many firms to the WSP family, strengthening our services in the sector through pa r tnerWSP in numbers: ships with the likes of Orbicon in Denmark and Lievense in Annual growth in the Netherlands. environmental services Our rapid growth can be attributed to the innovative work being carried out by Organic growth in our teams, which environmental services continue to step outside their comfort zones, penetrate new markets and grow Targeted reduction in greenrelationships with house gas emissions by 2030 existing clients. There is a strong sense of enthusiasm, dynamism and energy among our employees, largely because they all believe in WSP’s key purpose: to future-proof our cities and environments.
Challenging the status quo Our data shows that laws and regulatory frameworks have historically determined around 80 percent of market drivers in environmental consultancy services. Today, however, we are seeing a shift away from a highly regulation-driven market towards one where compliance alone is not enough. Businesses must go the extra mile – to stay competitive, we must show we can go beyond the minimum requirements. At WSP, we are extremely excited about the future of the environmental consultancy services sector. We were named among the top 10 environmental consultancies by Environment Analyst and ranked in the top five of Engineering News-Record’s list of top 20 environmental firms working in non-US locations. In the future, we plan to become the world’s premier environmental consultancy. For us, success isn’t defined by the size of our workforce or revenue sheet, but by market recognition and the positive influence we have within the sector through our value proposition and the quality of projects we deliver. ■
30/10/19 10:00 AM
Reimagining the transformation process Many organisations are sceptical of business transformation, perhaps as a result of having tried and failed to implement it in the past. With Brightline’s support, however, businesses can follow a clear process that is guaranteed to deliver results, write the initiative’s executive director, Ricardo Vargas, and Stanford University’s renowned expert in transformation, Behnam Tabrizi Transformation is often a difficult, expensive and doomed organisational endeavour. According to Harvard Business Review, 70 percent of large-scale digital transformations fail to meet their goals, with $900bn being wasted on restructuring efforts in 2018 alone. Yet, a recent survey by The Wall Street Journal indicated that transformation risk remained the number one concern among directors, CEOs and senior executives. Clearly, not everyone has been put off by past failures. It has become increasingly clear that organisations need support to deliver changes that work for their employees, customers and bottom line. At Brightline, we have developed a guide for transformation that helps organisations and their leaders achieve sustainable performance improvement. The Brightline Transformation Compass, as it is known, is built around five mutually reinforcing building blocks: the North Star; Customer Insights and Megatrends; the Transformation Operating System; Your Volunteer Champions; and Inside-Out Employee Transformation. Overcoming these challenges is never easy, but the rewards make it worthwhile. Successfully restructuring your organisation can lead to improved employee performance, reduced costs and increased company agility.
Changing minds The biggest challenge we have seen in the field of transformation is not technology, structural issues or process bottlenecks – it’s shifting people’s mindsets. That’s why the Brightline 166
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Transformation Compass puts employees at the centre of any major movement. It is people who have to change. Often, business leaders profess a desire to revamp their company, but their commitment is soon found wanting. If they don’t have a personal commitment to it, their organisation is never going to change. But it doesn’t start and finish with the CEO: everyone in an organisation needs to be a part of the process. Most of the time, people don’t put enough effort into this simply because it’s difficult. Employees hear ‘transformation’ and they associate it with optimising cash flow, financial results and, ultimately, people losing their jobs. The negative connotations associated with the term stem from the fact that leaders too often fail to see companies as collections of human beings. When people don’t feel like part of the process or believe they’re being excluded, they disengage. To move away from this negative perception, leaders must identify new ways of getting individuals to move in the same direction as the company. Two critical things are identifying the North Star – the principal reasons for change – and putting people at the centre of any developments. When we say Inside-Out Employee Transformation, we mean two things: the first is that employees, not outsiders, must lead the change; the second is that all employees (from the CEO to front-line members of staff and everyone in between) will be a part of the process moving forward. That starts with a vision statement – one for the organisation and one that every employee understands in the con-
THE NEGATIVE CONNOTATIONS ASSOCIATED WITH THE TERM ‘TRANSFORMATION’ STEM FROM THE FACT THAT LEADERS TOO OFTEN FAIL TO SEE COMPANIES AS COLLECTIONS OF HUMAN BEINGS
text of what they can contribute. Asking people to create a vision is less threatening than asking them of large-scale digital transforto change. mations fail to meet their goals We often enjoy talk ing about remoulding organisations and governments, but we are not Amount wasted on digital so keen on changing restructuring efforts in 2018 ou r s e l v e s . W he n people don’t know where a transformation’s North Star is, they think it stems from shareholders putting pressure on executives to make adjustments. We need to alter the way people behave and the way people see work: we should all stop seeing work as a job and start thinking of it as a part of our personal journey. Start-ups are not powerful because they are lean and small – it’s because they are driven by an inner passion from the founders, and that is contagious. The best protection any employee at any level can have is being able to evolve. It’s the ability to move somewhere else if a job comes to an end or the workplace culture no longer suits them. That, ultimately, is very empowering. People will always act in their best interests, so it’s important to help them understand how transformation can work for them.
Measure for measure To gauge success, businesses need to create clear key performance indicators that will allow them to see and forecast results. For example, when you shape your organisation’s transformation operating system, you choose how you want to relate every single item of the process to the metrics that are driving them. Before a project begins – at, what we call, the inspiration phase – we ask organisations to decide on those metrics and come up with a baseline. If they don’t know what those numbers are today, there is no way they can track progress. For example, a county hospital needed to improve productivity because money was running out after the implementation of the Patient Protection and Affordable Care Act. This hospital was treating patients from some of the most vulnerable sections of society – namely, the poor, homeless and those with mental illnesses. By restructuring the entire hospital flow, we were able to improve productivity by around 30 percent. That meant the hospital was able to help 30 percent more people – a big win not only for staff, but also for wider society. As important as a metric like this is, what makes an organisation successful is how it places people at the centre of this journey.
People are willing to die for a cause, but they work for their money. How do you position transformation as a cause for people? Everybody wants to be part of a winning team, so it’s about creating a winning culture where everybody matters, where people feel safe, learn daily and know their input is valued. If you can achieve this, success is guaranteed.
A journey of discovery One of the biggest trends we are seeing in the workplace currently concerns digitalisation, but in many ways, this is no different from any other kind of transformation. The only distinction is the scale of workplace anxiety it is creating. People are not just worried about their jobs disappearing at any given organisation – they fear for their entire job function. As a result of the technological progress we’ve seen in the past 20 to 30 years – especially the past five to 10 – we are witnessing disruption in a lot of industries, so transformation has become a matter of survival. But the principles that drive successful transformation are the same, regardless of what type is being done or the reason for doing so. Another concern we see stems from businesses that have previously tried to alter their operations with little success. They often wonder what the point of trying again is. In this case, we ask them to cite the reasons why it didn’t work the first time. Inevitably, it turns out that the reasons – employees aren’t engaged, there’s too much infighting, it’s in the hands of consultants – are addressed by the building blocks of the Brightline Transformation Compass. These five building blocks are supported by a three-step methodology: inspire, mobilise and shift. It provides a roadmap that gets organisations started within a matter of weeks – maybe 10 to 12 – and starts delivering fast. It should be remembered that a transformation is a journey and the cycle usually lasts between one and two years. But using our roadmap means that you’ll have something to show for your efforts roughly every three months. That helps make the change sustainable. During the inspire phase, you motivate everyone, put the structure together and complete vision statements. You then meet with stakeholders and create an inside-out movement during the mobilise phase – this is when you learn about and understand all the adjustments that are happening in your corporate ecosystem, including how your customers are changing, how you need to evolve as an individual and how the organisation must adapt. The final stage, shift, is about execution. Business transformation always starts with a vision – getting that right is the first step on the road to success. n
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A series of failed IPOs has highlighted the risks of going public. Alex Katsomitros explores the pitfalls of bringing a company to market too early When WeWork filed for a public listing last April, expectations were high. Although the New-York-based company had made its name as an office space rental company, it rebranded as the We Company in early 2019 to prepare the ground for its expansion beyond real estate. With a self-proclaimed valuation of $47bn and start-ups scrambling to rent its coworking offices, the firm aimed to tap into public markets to fund growth. But it was not meant to be. Filing papers submitted to the US Securities and Exchange Commission (SEC) revealed ballooning losses and a host of controversial practices. Its cofounder and CEO, Adam Neumann, owned a large chunk of properties on lease – an unusual move in the real estate industry that sparked concerns over a conflict of interest. Neumann then cashed out over $700m in stock options before the listing, something that raised suspicions further. Following increased media scrutiny and reduced investor interest – the company was, by that point, being valued closer to $15bn – WeWork cancelled its initial public offering (IPO) and Neumann stepped down as CEO.
A fall from grace WeWork might be an extreme example of an IPO that has gone wrong, but the phenomenon 168
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is far from rare these days. In September, Endeavor, a holding company for entertainment and talent agencies, pulled out of its IPO the day before it was expected to list on the New York Stock Exchange (NYSE). Although the company had lowered the offering price, it failed to attract investors. Even some of the most celebrated IPOs of the past year have failed to produce success stories. Uber and Lyft, two giants of the sharing economy, went public last spring amid investor euphoria over their potential to disrupt the transport industry. Their performance in the stock market so far has been lacklustre, though, with shares trading around 30 percent below their IPO price, as of December 2019 (see Fig 1). Lise Buyer, a partner at the IPO consultancy Class V Group who was involved in Google’s 2004 listing, told World Finance that regulatory concerns may have played a role: “Since [Uber and Lyft’s] public offerings, there has been a significant legislative change in California’s [Assembly Bill 5 – a law that makes it more difficult for sharingeconomy companies to use independent contractors –] that could, if enacted as proposed, have a real negative impact on the [profit and loss] statements for those companies. That’s a fundamental new risk that is currently
priced into the stocks, but did not exist at the time of their offerings.” According to Aswath Damodaran, an academic currently teaching at the New York University Stern School of Business, other factors might have played a role, too: “IPOs are a pricing game, driven by mood and momentum. The mood shifted for these companies mid-year, partly because of overreach on the part of the IPO companies, partly because of arrogance on the part of founders and venture capital firms, and partly due to just luck.”
Red flags WeWork’s failings can serve as a cautionary tale for companies aiming to go public. Scott Galloway, a professor of marketing at the Stern School of Business, had been a vocal critic of the company long before its predicaments started. He told World Finance: “The We Company, specifically its prospectus, is littered with red flags, ‘yogababble’, invented metrics and bullshit. [Neumann] sold $700m in stock before the attempted IPO and was effectively saying... ‘get me the hell out of this stock, but you should buy some.’” In Galloway’s eyes, the company lacked a clear vision for the future: “The company’s losses were scaling as fast as its revenue, with no clear path towards profitability. To make up
WeWork in numbers:
Approximate valuation following IPO postponement
Sum paid by SoftBank to rescue the company
$1.25bn+ Loss posted in Q3 2019
Former WeWork CEO Adam Neumann
for this, the We Company invented the metric ‘community-adjusted EBITDA’ in its S-1 to provide a false sense of financial stability.” When it was revealed that Neumann owned properties that were being rented back to the company, the firm shrugged off concerns, responding that the board had approved the deals. That was a tipping point, according to
Galloway: “It became clear that this board was failing to uphold their fiduciary duty to the company.” Damodaran believes firms on the verge of going public should acknowledge their shortcomings before it’s too late: “Be transparent about not just your financials, but open about your biggest vulnerabilities and risks and how you plan to deal with them, and talk about the business model that you hope to build on.” Some of the most prominent backers of WeWork – notably, the Japanese conglomerate SoftBank and its f lamboyant leader, Masayoshi Son – have not escaped criticism. SoftBank was forced to take control of the We Company to rescue the firm, reporting a $4.6bn hit. Another investor, Goldman Sachs,
“For tech firms, being in the black is less important than having a clear vision of how to get there”
Uber and Lyft share prices
40 35 30 25 Jul 2019 80 70
60 50 40 30
SOURCES: NYSE, NASDAQ
had valued the company between $61bn and $96bn, while the main IPO advisor, JPMorgan Chase, has seen its reputation as an investment bank suffer a heavy blow. “Certainly, there were failures in WeWork and in the leadership, but the willingness to believe the story landed on the heads of the investors and bankers,” Jim Schleckser, a Washington-based consultant to fast-growth start-ups, told World Finance. “This suspension of disbelief was additionally responsible for the incredible destruction of wealth.”
False profits Tech companies whose IPOs have gone awry tend to have one thing in common: an unclear path to profits. WeWork reported net losses of over $1.25bn in Q3 2019. Uber and Lyft, meanwhile, have never returned a profit, focusing their attention instead on grabbing market share – although both aim to be in the black by 2021. Galloway believes this is a new breed of company: “We have created a new term to classify WeWork, Uber and Lyft: incinerator. [In other words,] firms with low gross margins, [a] lack of operating margins and access to cheap capital.” Some tech powerhouses, including Snap and Uber, even warned investors in the run-up to their listings that they might never make a profit. The rise of the tech sector has made profitability an afterthought when firms choose to go public. According to data compiled by Professor Jay Ritter, a leading authority on IPOs, three out of four companies that went public in the US in 2017 were making a loss the previous year, compared with an average of 38 percent over the past four decades. Being in the »
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Elizabeth Holmes, founder of defunct start-up Theranos
black, it seems, is less important than having a clear vision of how to get there. Leslie Pfrang, a partner at Class V Group, told World Finance: “[Being profitable] is not important at all if the company can demonstrate convincingly that its model will generate cash somewhere down the line and that management has the ability to dial back spending if situations were to make that a necessity. Often, companies need to spend ‘now’ to effectively realise [the] potential ahead.” Schleckser believes the market has internalised this trend: “Many tech companies are valued on [their] potential for profit rather than [their] demonstrated profits. More material is the growth rate and underlying metrics that demonstrate potential, such as market size, customer acquisition costs and [the] lifetime value of [a] customer.” Choosing the right time to go public is also paramount. Many tech companies delay their IPO to grow at breakneck speed and achieve a high valuation. “This only works if venture capital firms keep pushing up the pricing as the companies scale up,” Damodaran explained to World Finance. “If they do that, and there is enough venture capital… available, companies will scale up more before they [launch an] IPO.” Venture capital firms such as SoftBank’s Vision Fund have also been accused of artificially inflating valuations, but this strategy can backfire. As Buyer explained to 170
World Finance: “Private investors and board members appear to have assumed that the public markets would pay any price for certain brand names regardless of changing growth trajectories. In fact, public investors have noticed that, in some cases, they are being offered shares as the slope of the growth curve is flattening, but at prices that suggest otherwise.”
Apple of my eye One of the lessons the market is learning the hard way is that the era of charismatic founders is over. Since Steve Jobs’ passing in 2011, the tech industry has witnessed a series of false dawns, with several prominent entrepreneurs getting mired in controversy and blunders. For a few years, Tesla CEO Elon Musk seemed to be the most likely candidate to take Jobs’ mantle as the omniscient tech prophet. His reputation received a heavy blow, however, when he announced last summer that Tesla would be going private, only to change tack after the SEC launched a securities fraud
“For fast-growing companies on the verge of going public, the dangers of relying on a charismatic founder can be fatal”
investigation into his conduct. A few weeks later, Musk was forced to step down as the company’s chairman. Another prominent founder, Uber’s Travis Kalanick, resigned from his post as CEO in 2017 following pressure from investors over several scandals. For fast-growing companies on the verge of going public, the dangers of relying on a charismatic founder can be fatal. WeWork’s Neumann is a case in point. According to a profile of the entrepreneur by Vanity Fair, Neumann believed that the company was “capable of solving the world’s thorniest problems” and became personally involved in a US Government initiative – led by US President Donald Trump’s son-in-law, Jared Kushner – to resolve the conflict between Israel and Palestine. Over time, it seems, visionary founders can lose the ability to accept criticism. “Arrogance is the most dangerous character defect in investing,” Damodaran said. “When a CEO makes it all about [themselves] and acquires a God complex along the way, my advice is that you stay away from the firm [they] are leading.” Companies whose governance structures are obscure, complex or grant unlimited control to founders are particularly prone to failure. Many founders own shares that offer them extra voting powers and maintain control after the IPO. Take WeWork, for example: prior to its planned listing, the company created Class C shares through a corporate restructure, effectively reducing Neumann’s tax liability on future profits at the expense of public investors. Neumann’s stock was also worth 20 votes per share, double what other CEOs usually get. For Damodaran, unscrutinised leadership is a recipe for disaster: “Stop the founder worship and all it entails… [such as] different voting share classes and, in the case of WeWork, dynastic rule, with... Neumann’s wife picking his successor if he became incapacitated.” Another example of a false prophet is Elizabeth Holmes, founder of defunct biotech startup Theranos, whose claims of holding groundbreaking blood-testing technology proved to be false. Once the youngest female self-made billionaire, Holmes currently faces 11 criminal charges and will stand trial later this year. According to media reports, she was obsessed with Jobs and tried to imitate him, going as far as recruiting Jobs’ personal friend and chief technologist, Avie Tevanian, as a member of her company’s board. “Visionary and charismatic CEOs are fun to watch, but the ones that last have a balance of communication skills, strategy and humility to learn and grow,” Schleckser said. “We have to be careful of the Svengali-like leader that brings us all on the journey and causes us to miss some basic questions.” n
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RISKY BUSINESS The Rohingya crisis has dominated international coverage of Myanmar in recent years. But while potential investors should be wary of inadvertently supporting the persecution, well-placed investments could yield rewards and spur a developing economy, writes Barclay Ballard Âť
INVESTING IN MYANMAR
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Fig 1: Myanmar GDP growth PERCENTAGE 10 8 6 4
SOURCES: TRADING ECONOMICS, WORLD BANK
On the surface, many things might encourage a foreign investor to place their money in Myanmar. The country has English heritage and a strong legal system similar to those found in the UK and Singapore – a remnant of the country’s time as a British colony. As a developing market, it also regularly posts strong growth: even considering the economic damage caused by the Rohingya crisis, the Myanmar economy is expected to expand by 6.5 percent across the 2018/19 financial year (see Fig 1). “Myanmar is not far into the democratic process following the country’s landmark 2015 elections, but already you can see things happening that are improving the business
A bad reputation
climate,” Enrico Cesenni, CEO of Myanmar Strategic Holdings, told World Finance. “Now, four or five years into the process, industry leaders are emerging that can really contribute to the country. Over the next five to 10 years, we will witness the rise of more accountability and more expertise that will accelerate the pace of investment in the country.” But the investment world is no longer solely concerned with immediate returns. Companies – both large and small – rarely miss an opportunity to flaunt their progressive values, regularly boasting of the importance they place on issues relating to the environment, political governance and wider society. Unsurprisingly, as the persecution of Myanmar’s Rohingya minority began to amass attention abroad, businesses started pulling out of the country. Luxury jewellery house Cartier, Belgian satellite communications firm Newtec and French energy company ENGIE are among the organisations to have severed ties, with many others publicly criticising the Myanmar Government for human rights abuses. Companies that have any connection to the military, which is usually held responsible for the crisis’ worst atrocities, have found themselves placed on Burma Campaign UK’s Dirty List. Facebook, in particular, has been singled out for criticism for allowing its platform to spread misinformation about the Rohingya Muslim community. Given Myanmar’s economy was ranked as the 73rd-largest in the world by the IMF in 2019, the reputational damage accrued by continuing to operate there simply isn’t worth the risk for most firms. This has been particularly notable among businesses based in the West: according to the latest data from the Myanmar Government, Asia invested five times more in Myanmar than the EU and US combined in the 2017/18 financial year.
ot all publicity is good publicity. In late 2016, Myanmar made international headlines following reports that the country’s government was engaged in the widespread persecution of its Muslim Rohingya minority. Over the following months, stories of police detention, arson, gang rape and state-authorised murder emerged. Hundreds of thousands fled from Rakhine State in the country’s west to refugee camps over the border in Bangladesh. Since then, the UN has said the Myanmar Army should be investigated for genocide. Although the world’s media have largely moved on, the crisis remains unresolved. According to the UN Office for the Coordination of Humanitarian Affairs, some 900,000 Rohingya refugees remained in Cox’s Bazar, Bangladesh, as of March 2019. In addition to the considerable social challenges that have emerged in Myanmar over the past few years, the economic toll of the crisis has been considerable. At an investment forum held in Singapore in 2018, then Director General of Myanmar’s Directorate of Investment and Company Administration (DICA) U Aung Naing Oo admitted that he “totally underestimated” the economic impact of the Rohingya displacement, citing sharp declines in foreign direct investment (FDI). At the same time, the country has had to cope with diminished growth and sharp currency depreciation. While it may not be possible to state with certainty that Myanmar’s investment shortfall results from the plight of the Rohingya, it is not implausible that the reputational damage it caused is keeping businesses away. The refugee crisis is undoubtedly already a humanitarian disaster; it is now up to political and corporate leaders to ensure that it does not become an economic one as well.
Note: 2019 figure is an estimate
“To the West, Rakhine equals Myanmar and Myanmar equals Rakhine, and there doesn’t seem to be anything else,” Serge Pun, a local business tycoon and chair of Serge Pun and Associates, told The ASEAN Post. “Whereas the East has another lens, and that is Rakhine is a problem, but Rakhine is a small part of Myanmar, and there is still Myanmar left, [so] we should engage and not isolate. We should help and not punish.” Pun’s views are echoed by Cesenni, who believes that wrenching investment away from Myanmar does little to help Rohingya refugees or Myanmar citizens more generally: “I personally think that the way Asian countries are engaging with Myanmar is a little bit more productive in terms of their willingness to move forward and drive development. Greater engagement is required if we are to solve some of these issues, instead of just pointing fingers. “Myanmar is a country in transition. Every month across the country, there are multiple conflicts, not just in Rakhine. I think it is naive to think that a country that has been closed
INVESTING IN MYANMAR
IN ADDITION TO THE CONSIDERABLE SOCIAL CHALLENGES THAT HAVE EMERGED IN MYANMAR OVER THE PAST FEW YEARS, THE ECONOMIC TOLL OF THE ROHINGYA REFUGEE CRISIS HAS BEEN CONSIDERABLE for 50-plus years will sort everything immediately. Myanmar needs time and support if it is to move forward socially and economically.” It may well be that outside investment starts to return to Myanmar naturally as the outcry surrounding the Rohingya crisis subsides. After all, this is far from the first time that businesses have been put under pressure for operating in the country. Burma Campaign UK published its first Dirty List in 2002; since then, some companies have ceased operating in the country, while others have moved in. Where there is money to be made, ethical concerns are often transitory.
909,000+ Rohingya refugees housed at Cox’s Bazar (March 2019)
Not so noisy neighbour The economic challenges currently facing Myanmar are in stark contrast to some of the positive rhetoric emanating from the country. That’s understandable when you consider that this should be the time when Myanmar makes its mark on the investment stage, showing off its newly democratic, rapidly growing economy. Many firms are currently looking to reallocate their production from China in response to its ongoing trade war with the US – Myanmar should be jostling with the likes of Vietnam and other South-East Asian states for the attention of these businesses. In the country’s defence, though, its failure to boost FDI is not for want of trying. At the first ever Invest Myanmar Summit in January 2019, State Counsellor Aung San Suu Kyi spoke at length about the advantages her country offers to investors, including several recently enacted financial reforms, such as the Myanmar Investment Law and the Myanmar Companies Act. “To understand Myanmar’s contemporary investment landscape, we must also seek to »
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INVESTING IN MYANMAR
THE RAW MATERIALS FOR A THRIVING INVESTMENT CLIMATE ARE ALL PRESENT IN MYANMAR IF BUSINESSES ARE WILLING TO ENTER THE MARKET understand the broader forces at work,” Suu Kyi said. “The pursuit of market-friendly economic policies, together with rapidly increasing regional cooperation and integration, has been highly beneficial for the Asia-Pacific region, allowing many of us to make a successful transition from low-income, low-growth [economies] to middle-to-high-income, high-growth [economies]. Myanmar seeks to do the same.” Following the National League for Democracy’s landslide victory in 2015, there was genuine optimism that the Myanmar economy could thrive, finally free from the shackles of military rule. Some of this optimism has since been extinguished, with FDI inf lows proving largely disappointing after an initial upsurge in 2016 (see Fig 2). This is perhaps because investing in the country is not as simple as it would appear on the surface. Although Myanmar did move up six places in the World Bank’s Doing Business 2020 report, it still ranks a disappointing 165th out of 190 countries. The positive movement suggests that business reforms are working – it should be remembered that the country was only added to the index in 2014 – but Myanmar still compares poorly with its regional neighbours. Currently, investors don’t seem to be in any rush to make inroads in the country once branded ‘Asia’s final frontier’.
East or famine While the expected post-dictatorship boom in investment hasn’t arrived, there are still areas of the Myanmar economy that are drawing attention. In terms of real estate, the hotel chain Hilton continues to work with local development firm Eden Group, hoping to take 176
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advantage of rising tourist numbers. The consumer business sector has also witnessed some landNumber of listed mark deals of late, companies on with the Philippines’ Myanmar’s Yangon Ayala Corporation Stock Exchange recently committing to a multimillion-dollar investment in First Myanmar Investment. Further, the regulatory climate is becoming more favourable. Myanmar’s Yangon Stock Exchange (YSX) is currently in the process of changing its rules to allow foreign individuals and entities to own up to 35 percent of its listed companies. A more liberal approach would not only be good for investors looking to enter Myanmar, it could also spark some much-needed life into the country’s limp trading market. Today, there are just five listed companies on the YSX.
Fig 2: FDI inflows in Myanmar USD, BILLIONS 4 3 2 1 0
SOURCE: TRADING ECONOMICS
The lack of development in Myanmar’s investment market – certainly when compared to other countries in the Association of South-East Asian Nations – can be viewed either negatively or positively. On the one hand, it suggests that businesses may have to deal with a corporate ecosystem that is not as supportive as those found elsewhere; on the other, it means there is plenty of space to operate in and, more importantly, grow. “One of the negative things that is affecting the success of… investors is the fact that there are not many companies that are already of size… have the right teams and the right governance in place,” Cesenni said. “You can view these factors as either an opportunity or a potential challenge. Clearly, the market is not as developed as, say, Vietnam, where you have proper brokers, fully fledged institutions and a market in which deals are, in a sense, pre-cooked. In Myanmar, you need to be fully
INVESTING IN MYANMAR
prepared before conducting any deals. There is value to be found, but it will take some time and a lot of operational involvement to extract it.” If investors do want to capture a slice of the Myanmar market before it gets too crowded, it’s worth acting quickly. According to DICA, foreign investment is already starting to show signs of recovery, rising 79 percent yearon-year across the first six months of 2019. Investment from Singapore almost tripled in that time, while funds originating from Hong Kong and mainland China rose 150 percent. “In general, what has happened over the past two or three years is you’ve seen a real acceleration of investment from Asia,” Cesenni continued. “A lot more investment from Japan, Thailand, South Korea – I guess Singapore is a bit of a conduit for Asian investment in general – and then, of course, you have China. I think China is sometimes misrepresented as having underhand motives for its investments, but the country is really just taking a leading role in development when nobody else is stepping up. You don’t see the US coming and building highways in Myanmar, but I defi- Myanmar nitely see China and population: other Asian countries supporting that.” Regardless of where businesses and individuals are Citizens based, there is no denying that Myanmar boasts some attractive qualities. Aside from its steady economic growth, the Median age
AS INDIVIDUALS AND CORPORATE ENTITIES LOOK FOR THEIR NEXT BIG OPPORTUNITY, THEY COULD DO A LOT WORSE THAN INVESTIGATING WHAT MYANMAR HAS TO OFFER country has a population of around 55 million people and a median age of just 27, representing great potential for firms in the consumer sector. Its location, bordering the twin behemoths of China and India, is also favourable. The raw materials for a thriving investment climate are all present if businesses are willing to enter the market.
Slow and steady Even as investment opportunities in Myanmar pick up, businesses and individuals should exercise caution when deciding what assets to acquire. The Rohingya crisis and the corporate backlash that followed demonstrated the important role that international finance can play in supporting repressive political and military regimes, even if unintentionally. Money can also be a force for good, though. According to 2017 data from Myanmar’s Central Statistical Organisation, roughly a quarter of the country’s population still lives in poverty, with rural inhabitants the most likely to be poor. Economic development is desperately needed in the country, and outside investment can help spur this on. What’s more, many jobs in Myanmar rely on FDI inflows; shutting them down abruptly could end up hurting
ordinary civilians more than the military forces being blamed for the Rohingya persecution. “It is extremely important that any investment coming into the country benefits the local people,” Cesenni told World Finance. “That’s why our business has been built alongside local people. At the end of the day, most foreign investors will operate in a country for two or three years – maybe five. But the people that will stay and help build a better future for their country are the locals. Our divisional CEOs… are still foreign because we are still encouraging knowledge transfer, but many of our other executives are now local. Our second line of management is already local and more than 50 percent of our staff is female.” In various nations, foreign investment has been criticised for crowding out domestic entrepreneurship. Suu Kyi’s government is well placed to avoid this, as long as it is careful to encourage a steady, rather than sudden, growth in FDI. Private businesses also have a role to play. As Cesenni noted, foreign investment can leave a country as quickly as it arrives, so organisations should support domestic talent as much as possible, employing locally and partnering with existing firms where relevant. For Cesenni, one area the current government should be looking to target is the use of financial incentives. Not only could this help create a more favourable climate for foreign investment, it could also be deployed in a targeted fashion, driving businesses and individuals to focus on strategic industry sectors. Whether the government has the motivation to implement these business-friendly measures, however, is another matter. In the 2015 elections, Suu Kyi’s party received 86 percent of seats in the national assembly; since that win, though, the once-feted leader has disappointed many observers. The 1991 Nobel Peace Prize winner failed to react swiftly to the Rohingya crisis, either because she is not the champion of human rights that many thought her to be or because she is simply unable to stand up to the Myanmar Army, which still holds considerable sway over the country’s political climate. The coming national elections are scheduled for November and, should they go smoothly, they will help cement democracy as a normal part of life in the country. The potential for political change could also provide the impetus politicians need to boost an investment climate that has remained underutilised for far too long. As individuals and corporate entities look for their next big opportunity, they could do a lot worse than investigating what Myanmar has to offer. They’ll need to consider carefully, though, what parts of the existing political regime their money is helping to support. n
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wor l d f i na nce
David Orrell AUTHOR AND ECONOMIST
The path of least resistance Like earthquakes, financial crises often involve a breakdown in friction. Economists are only just getting to grips with this fact The field of economics has long modelled itself after Newtonian physics. When physicists analyse a complex problem, they usually begin with the simplest version and neglect any complicating effects, such as friction. These can always be added later if the model is not sufficiently accurate. In economics, the term ‘friction’ is used in a similar way: to represent sand in the gears of the perfect market. For example, when the American economist John Bates Clark developed the theory of marginal productivity in his 1899 work The Distribution of Wealth, he wrote: “The distribution of income to society is controlled by a natural law… This law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates.” In other words, markets lead to an optimal distribution of wealth – if friction is ignored. Similarly, since inflation only changes nominal prices, as opposed to ‘real’ prices, it should have no effect on economic activity – again, if friction is ignored. Here, friction is caused by things like the inconvenience of stores having to update their prices, which leads to a loss of efficiency. Following the 2008 financial crisis, a basic criticism of mainstream models was that they did not account for the financial sector. This triggered a debate about the role of financial friction. In 2010, during a US House of Representatives hearing on the promise and limits of modern macroeconomic theory in light of the economic crisis, V V Chari from the Federal Reserve Bank of Minneapolis insisted that “mainstream macroeconomic models do have crises driven by financial frictions. Any assertion to the contrary is false”. By 2018, these frictions were still a work in progress. One of the conclusions of a report on the Rebuilding Macroeconomic Theory Project in 2018 was that a focus should be put on “incorporating financial frictions rather than assuming that financial intermediation is costless”. Elsewhere in the report, Paul 178
Krugman stated that, while there have “been many calls for making the financial sector and financial frictions much more integral to our models”, their absence “wasn’t the source of any major predictive failures”. Many economic theories assume that friction is actually zero. For example, the efficient market hypothesis posits that market prices adjust instantaneously to new information. Not only is there no role for friction, but even inertia doesn’t appear. A broader question would be, is friction even the right way to think about this?
Losing grip For most people, the financial crisis did not feel like a sudden outbreak of friction. It was the opposite – a complete loss of it, as prices made huge swings with little, if any, resistance. Financial crashes are often compared to another event that involves a breakdown in friction: earthquakes. The time scales are different, but a plot of price changes for the S&P 500 over the course of 2008-9 closely resembles a minute of seismographic data recorded during an earthquake. So, when one of the traders at Lehman Brothers told a BBC reporter in September 2008 that it felt “like a massive earthquake”, she was accurate. The correspondence goes even deeper than that. It turns out that the frequency of both phenomena is described by the same kind of mathematical law. If you double the size of an earthquake, it becomes about four times rarer. This is called a power law, because the probability depends on the size multiplied by some power – in this case, two. Studies have shown that the distribution of price changes for major international indices follows a power-law distribution with a power of approximately three. This power-law distribution is an indicator of a state that complexity scientists call ‘selforganised criticality’. The classic example is a conical sandpile with sloping sides. If the slope is shallow, adding a few extra grains to the top of the pile won’t cause much disturbance. In
this state, the system is stable and dominated by friction between sand particles. Standard economic models assume the existence of an underlying equilibrium. However, if you continue to add grains of sand, the sandpile will eventually converge – or self-organise – to a critical state. In a sense, this state is maximally efficient because it has the steepest sides and reaches as high as possible without becoming fully unstable and chaotic. But it is not very robust: adding grains of sand will create avalanches that range in size and follow a power-law, scale-free distribution. The system is not chaotic or stable, but on the border between the two.
On the brink of chaos Viewed this way, it becomes clear that the way to improve standard economic models is not to add friction, but to do the opposite, considering how the system breaks free from friction as it traverses the fine line between order and chaos. How would such models differ from existing ones? One clue is that financial systems already have a feature that is free from friction – namely, the creation and transfer of money. As noted in a 2015 Bank of England article: “Banks that create purchasing power can technically do so instantaneously and discontinuously, because the process does not involve physical goods, but rather the creation of digital money through the simultaneous expansion of both sides of banks’ balance sheets.” It is an on-and-off process, not a smooth, mechanical one. The same holds for events such as credit default or bankruptcy, and the flow of information in general. To incorporate such effects, the first step is for economists to break away from the old Newtonian view of the economy and embrace a new kind of economics based on information – in particular, the flow of money – rather than machines. But to do that will require overcoming a different kind of friction: the resistance to new ideas. ■
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The Winter 2020 edition of World Finance magazine