Rumble in the jungle

Moses Singo is an African exception. A black farmer with green fingers, he has probably had to overcome more obstacles than faced by most entrepreneurs anywhere else in the world to get his family business off the ground.

A little more than a decade since launching the Singoflora Nursery in Tswane (Pretoria), he now exports some four tonnes of lilies, agapanthus, strelitza, ruscus and snake grass to Europe, the Middle East and Asia every week.

From its origins as a humble plant farm the nursery has since expanded in size and scope, and now has its own export packing division and delivery trucks. It employees more than forty people. Today Mosses Singo is hailed as a pioneering black businessman and is celebrated as one of the most successful exporters of flowers and foliage in South Africa.

Success for this so-called small and medium enterprise (SME) has not come easily. Along with proving to a sceptical white audience that black people can indeed farm, he has had to prize every cent of the funding needed to grow his business from a largely aloof banking system which for decades neglected small black businesses in favour of the more comfortable and lucrative role of servicing governments, wealthy white corporates or high net worth individuals.

But South Africa at least has electricity, a national road network, functioning ports and airports, legally enforceable property rights, and a government bureaucracy which – while cumbersome by the standards of more developed economies – is nonetheless capable of running a reasonably efficient taxation system, an export-import sector and a commercial court dispute procedure on which a vibrant private sector depends. This is not the case in much of the rest of Africa.


“Host multinational corporations are under mounting political pressure to make a contribution towards promoting African economic development


The importance of being modest

Africa is, in this respect, a continent without a middle. SMEs are the backbone of the world economy and the primary engine of its economic growth. In high income countries, SMEs account for almost 50 percent of gross domestic product. In low income countries, the proportion is about 20 percent. But in impoverished Africa, it is less than 10 percent. Africa is host to most of the world’s multinational corporations at one end of the spectrum of economic activity, and a vast profusion of micro-enterprises at the other. Very little exists in between.

Dirk Willem te Velde, Programme Director of the London-based International Economic Development Group, an arm of Britain’s Overseas Development Institute which seeks to promote economic growth in developing countries, told World Finance: “African SMEs have not performed as well as SMEs in other parts of the world for a host of reasons.”

“Chief among these has been the difficulty they face accessing capital. The African financial sector is not developed enough to cater for the SME sector’s needs. Formal links between the banking sector and SMEs are few. The banks have traditionally prefered to lend to bigger firms. It’s more costly and riskier to lend to smaller ones.”

Lack of capital is compounded by other obstacles. “The business legal framework and administrative procedures have also been much weaker in Africa than say in Latin America or Asia,” Mr te Velde said. “It takes longer to start up a business, and longer to export and import in Africa than in other parts of the world. Then there are infrastructure constraints, roads and ports, and of course electricity. In some countries, power provision often covers less than 10 percent of the population. Add to this the widespread skill shortages. All of this has hampered the development of SMEs in the private sector hugely.”

But while the SME sector in sub-Saharan Africa remains small, it still accounts for the majority of private enterprises on the continent. Growing and developing African SMEs, many of which are family-run businesses struggling against seemingly insurmountable odds, is now increasingly being seen by governments, international donor countries, the multilateral development banks, the international commercial banks and other foreign investors as the key to Africa’s future economic development, and the only real chance of lifting the continent out of the poverty in which it has been trapped for decades.

Finally waking up

African governments have in recent years been seeking to alleviate poverty by reforming their legal structures to promote their own private sectors, and directing their financial and technical assistance towards SMEs. Host multinational corporations are under mounting political pressure to make a contribution towards promoting African economic development by including SMEs in their value chains, while African and international financial sectors are beginning to wake up to the huge potential market for credit among Africa’s small and medium enterprises.

According to the World Bank, 24 African countries – half the number on the continent – have embarked on far-reaching macro-economic and administrative reform programmes during the past decade, fostering a more pro-business climate for the private sector, thereby making it easier to start a business, strengthening property rights, improving investor protection, boosting access to credit and reducing the tax burden.

The Africa of today is not the Africa of thirty years ago – even if President Robert Mugabe of Zimbabwe appears to be one of the few people left on the continent not to have understood this. Things have moved on. The love affair with the Soviet-style command economy of the post-colonial era is dead in most African countries, and dying out in most of those that remain. Growing the private sector, especially SMEs, is now at the heart of many African governments economic development programmes.

Along with most other multilateral development banks, the International Finance Corporation, the private sector lending arm of the World Bank, has put nurturing SMEs at the centre of its strategy for promoting growth of the private sector in Africa. “Doing business in Africa was once seen as difficult and complex undertaking,” the Washington-based organisation says. “Red tape, a fragile investment climate, inadequate infrastructure, all contributed to this. But with fewer conflicts, more democratic elections, rising growth rates, that is all changing.”

The IFC has helped scores of family businesses across Africa gain access to the credit needed to make their businesses grow, an area in which an excessively risk-averse African banking sector has been hesitant to tread. Ten years ago the IFC’s Small and Medium Enterprises Solution Centre, through its SME Risk Capital Fund, provided Eddy Kimemia and his wife Diana Ndungu, the owners of a small Kenyan family construction firm, with a $6.6m loan needed to bid for a road construction project, putting the family business on the road to long-term commercial viability.

The IFC has also helped to finance Madagascar’s first commercial laundry company in Nosy Be, the country’s main tourist centre, which caters for the flourishing hotel and restaurant trade. In Uganda, it backed Samuel and Margaret Rugambwa’s soap and cleaning material business, helping it to expand from a $400 initial investment in 1990 to a $250,000 a year business – a one thousand fold increase – today. Success stories like these were few and far between three decades ago. Now they are increasing in frequency.
The reform impulse, fostered by the creation of the New Partnership for Africa’s Development, Africa’s home-grown blueprint for economic revival, has largely come from within. But it is being assisted by the world’s developed economies, partly out of guilt that Africa remains the least developed continent on Earth, but also out of a growing realisation that Africa’s population is fast approaching one billion people – which represents a vast, untapped, market of the future.

The Investment Climate Facility, the public-private sector partnership which came out of former British Prime Minister Tony Blair’s Commission for Africa, has been in the forefront of trying to improve Africa’s business climate to enable African SMEs to prosper and grow. In Rwanda, it has helped to establish a commercial court and an online business registration mechanism, the lack of which proved to be the single biggest obstacle inhibiting banks from lending to SMEs.

In Lesotho, it has helped to streamline and simplify the value added tax regime, which was drowning SMEs in red tape. In Liberia, where a staggering 90 percent of economic activity takes place in the informal sector, it has been helping SMEs to move into the formal economy, thereby providing the state with the beginnings of the tax base needed to fund public services. While in Tanzania, it is helping to computerise the judiciary – and the commercial courts – creating the legal environment within which property rights can be protected.

Some African banks and financial institutions have not been slow to capitalise on these emerging opportunities. Ecobank Transnational, the West African banking group, has long outgrown its modest roots in Togo, and now runs 500 branches in 26 countries, employing 10,000 people, with an asset base at the end of 2007 of more than $7bn. It was among the first to recognise that the sprawling cities scattered along West Africa’s Atlantic coast – one of the most vibrant commercial zones in the continent – offered tremendous potential for banking services.

Most of the trade on West Africa’s Atlantic seaboard is informal. But by servicing SMEs – mostly traders and manufacturers – as well as large corporations and wealthy individuals, Ecobank has been gradually luring the informal economy into its branch network by showing the owners and managers of SMEs that they can make a deposit in Monrovia or Freetown and withdraw it – for a fee – in Lagos or Accra.


“The love affair with the Soviet-style command economy of the post-colonial era is dead in most African countries”


An example to follow

Ecobank’s success in drawing SMEs into the formal sector has helped boost the company’s profits year after year, making it one of the most dynamic banking groups on the continent – a record other African and international banking groups are now seeking to emulate – while at the same time helping to fuel growth throughout the west African region and beyond.

But if Ecobank has demonstrated that there are serious profits to be made in providing African SMEs with financial services, the full potential of the sector is still only dimly appreciated. An estimated 600 million of Africa’s 900 million people are engaged in subsistence agriculture – by far the biggest and most neglected sector of the continent’s economy. As images of starving African children constantly remind us, Africa can barely feed itself. Yet it has the potential to triple or quadruple agricultural output, feeding itself, and helping to feed the rest of the world in the process.

Last year’s record rise in global food prices triggered renewed investor interest in African agriculture. The Alliance for a Green Revolution for Africa (AGRA), with start-up funding from the Rockefeller and Gates foundations, and chaired by Kofi Annan, the former UN Secretary-General, is building a continental network of 10,000 agricultural SMEs – small and medium-scale dealers to sell seeds, fertiliser, pesticides and other imputs such as farm machinery and irrigation systems to Africa’s vast army of agricultural workers – in an attempt to breath new life into Africa’s most important economic sector.

Investors across the world, from China to America, the Middle East and India, have taken note of AGRA’s initiative. Serious money is now starting to flow into African land assets, food processing, refining and distribution systems, in the expectation that African food production could finally be on the threshold of a revolution in output.

Africa’s agricultural SMEs, most of them small family interests which have barely kept their heads above water for decades, could now be about to experience an unprecedented expansion. For while global food prices have fallen from earlier peaks, few doubt that as the world’s population races towards seven billion and beyond, high prices will return. African banks were largely unaffected by the subprime contagion, due to tight exchange controls. But African economies are now being hit hard by the freezing of international credit markets and the dramatic fall in commodities. Most analysts expect lending to African SMEs to decline as a result.

But not for long. The sector, starved of cash for decades, is well placed to weather the storm. When the upturn comes, investors are likely to return to a long-neglected prospective growth sector, which had only just begun to tap its potential.

Investigating fraud at Satyam

Oh the irony. “Satyam” means “truth” in Sanskrit, a fitting name then for the fourth largest company in India’s booming information technology sector – a company that named the World Bank and a series of international blue chip businesses among its clients. But not anymore.

The company, it now turns out, was a scam. Its chairman and founder, Ramalinga Raju, resigned in January after sending a letter of confession to his board. Some $1.5bn of the company’s funds were “non existent”, Mr Raju said, as was 95 percent of the revenue it reported in its last financial statements.

Naturally, this was bad news for Satyam’s investors: they were wiped out in a stroke. But it is bad news for India too. The chairman of the country’s financial regulator, the Securities and Exchange Board of India, said it was an event of “horrifying magnitude.” If the November terrorist attacks in Mumbai gave this emerging world power its 9/11, now it had its very own Enron.

The fear now among India’s business and political elite is that the Satyam scandal will scare off foreign investors and – more specifically – cripple its IT sector. Outsourcing is a massive business for India, but it relies on the trust of foreign companies. They will not let Indian companies handle their sensitive data or take responsibility for business processes if they cannot trust their probity. Satyam looked like a safe pair of hands. It was listed on the New York Stock Exchange, had business operations in 66 countries, and counted 185 companies in the Fortune 500 among its clients. It won awards for its standards of corporate governance.

Perhaps the most alarming aspect of the fraud is that it seems to have been going on for a long time. Mr Raju confessed that he had been fiddling the company’s financial records for the “last several years” – all under the noses of Satyam auditor, PricewaterhouseCoopers. In his contrite letter he argued that he had not benefited financially from the fraud, and was simply trying to keep the business going. Once he had started to cook the books, “It was like riding a tiger, not knowing how to get off without being eaten.”

That tiger started to nip Mr Raju’s ankles in December, when Satyam launched a $1.6bn offer to buy two property companies largely owned by Mr Raju and his family and run by his sons. Analysts said the bids massively overvalued the target businesses and would have used up all of Satyam’s cash reserves. Its shares started to fall, and within hours the company announced that it had scrapped the idea. Institutional investors were angry that Satyam’s nine-member board had approved the deal in the first place. It just didn’t seem to make sense: why would a leading IT company want to start investing in property?

Logical conclusion

Mr Raju’s resignation letter revealed the true logic behind the aborted deal. It was a final desperate effort to cover up the accounting fraud by bringing some real assets into the business, he said. When it failed, Satyam started to unravel. Within days, the World Bank said it had barred Satyam from offering it computer services for eight years, citing concerns about corruption, data theft and bribery. Other customers started to voice their concerns about fraud and accounting irregularities. Satyam directors started to resign. And then Mr Raju confessed.

In his letter, Mr Raju tried to take full responsibility for the fraud. Investigators will test the credibility of that claim. The government has already replaced all of Satyam’s board directors, and, at time of writing, Mr Raju was pondering the consequences of his actions from the comfort of a Hyderabad jail cell.

What are the consequences for corporate India? “If there were one or two more such accounting scandals in the next six months, it would make international investors more wary,” says Michael Useem, professor of management at Wharton, the business school. “One example would put people on guard; several examples would be enough to tell big investment money managers that they have to be especially careful working in that environment. [but] Don’t assume other firms are guilty,” he says.

Unrelated events

Mr Useem’s colleague, Mauro Guillen, a Wharton management professor who has studied corporate governance in emerging economies, says that India has good grounds to argue that Satyam’s problems are not systemic. “India is not perceived like Russia – it is neither everyone’s darling nor the plague,” he says. “This works to the country’s advantage because it deflects the blame of such occurrences to the way governance works in emerging economies rather than to India. What regulators in India need to do in response to Satyam is to find out quickly if other companies have been doing similar things. The proper response is to deal with and defuse the problem as soon as possible.” However, the fact that Satyam had a listing in the US but still had such serious governance problems “makes this case particularly disturbing, says Mr Guillen.

Corporate India has tried to contain the damage so far. Rajeev Chandrasekhar, president of the Federation of Indian Chambers of Commerce and Industry, has called upon regulators “to move quickly to demonstrate that this is an exceptional case among corporations, and that investors need not worry about Indian corporate governance and accounting standards.”

But the scandal is bound to put Indian companies under the spotlight. The Satyam affair is “a major eye opener and will bring into renewed and critical focus the role of independent directors, auditors, company management, [the] CFO and other key persons involved,” said Suresh Surana of Astute Consulting. Richard Rekhy, chief operating officer of the global consultancy firm KPMG in New Delhi, has espoused similar views. “The Satyam crisis is not only a wake-up call that has shocked us all, but it is also a great opportunity for everybody to look at the quality of corporate governance more seriously,” he said. For a long time, “many found the subject boring, but that has changed now. We were busy pursuing a high-growth economy and neglected important things like instituting an ethical corporate governance mechanism.” Mr Rekhy said that as yet unpublished KPMG research shows that “integrity and ethical values are not given enough attention” in Indian companies.

The Asian Corporate Governance Association (ACGA) 2007 ranking of corporate governance placed India third out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, in ninth place. India’s financial-reporting standards are high and the SEBI is independent of the government. But regulatory enforcement is weak, the rules contain large loopholes, and shareholders tend not to make their views known. The Confederation of Indian Industry, has demanded that the loopholes in regulation, accounting, audit and governance that allowed such lapses be addressed with urgency. The government has introduced a new companies bill, which would allow shareholders to pursue class-action lawsuits, but it isn’t certain to make it onto the statute book – elections have to be called in the first half of this year.

True, shareholders protested about Satyam’s planned December acquisitions, but that was a rarity, and by then it was too late. Often, Indian shareholders don’t understand governance rules and corporate legislation anyway, observers say. Until they stand up and complain, what incentive is there for companies to change?

Compounding the problem of ineffectual shareholders is the fact that India’s corporate landscape is still dominated by family-owned businesses. According to a survey on Indian corporate governance by Moody’s Investors Service, such firms have specific characteristics compared to companies with more widespread share ownership. The survey looked at corporate governance practices of 32 Indian companies in 16 prominent family groups, covering a broad cross-section of Indian industry. There are benefits to being family controlled: a lack of outside influence makes it easier to take a long-term view and to act quickly. That is one reason why Indian companies have been able to take advantage of the opportunities created by a fast growing and rapidly liberalising economy.

Problems underfoot

But family control also brings governance problems – not least of which are a lack of checks and balances over executive decision-making and behaviour, and a lack of transparent reporting to the outside world. “Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding ‘checks and balances’ such as composition of the board of directors and the operations of audit committees,” said Chetan Modi, co-author of the report. “The lack of board nomination sub-committees in many companies suggests that succession planning is not fully deliberated with independent directors. There is often insufficient transparency on ownership/control, related-party transactions and the group’s overall financial position. Also, the prospect remains of higher leverage as families try to maintain control while implementing their often aggressive growth plans,” said co-author Anjan Ghosh.

More regulation won’t necessarily do anything to help. Satyam – so far it seems – is a scandal of flawed leadership and human failure at the very top of the business. When the chairman himself is cooking the books, the best corporate governance in the world will do nothing to stop him. Having said that, Satyam’s supposedly independent directors – all of whom resigned just before the fraud was announced, but who claim no knowledge of it – could have done more. What questions, for example, did they ask about the quality of internal control over the company’s financial reporting (which, by Mr Raju’s admission, had been fraudulent for years) or about the scope and extent of the work done by its external auditors, who seem not to have spotted the fraud?

It’s hard to know what goes on inside a boardroom once the doors are closed. However, it’s often the case in India that the independent directors who are supposed to provide an objective voice are linked to the executives or their family. There is also an attitude in some Indian companies that the board members – executive and independent – work for the people who have brought them onto the board, and not for the interests of shareholders. This is wrong, but hard to fix in the short term.

How badly does Indian corporate governance need to improve? Here’s an interesting example. As Satyam fell apart, Puneet Kumar, a top manager at Wipro, India’s third-biggest IT business, said the company was “an aberration”. Mr Kumar told reporters: “After what happened there is bound to better self-regulation among Indian IT companies. The fact is that the IT industry thrives on good reputation and every major in the business lays great emphasis on maintaining global standards of corporate governance.” Sounds laudable, but within days the World Bank announced that, like Satyam, it had banned Wipro from providing it with IT services. The reason: corruption. Actually, the company was banned in July 2007 – for four years – a fact that, at the time, it didn’t bother to tell its shareholders.

Do we need the IMF?

“We were all Keynesians now,” said Richard Nixon, back in 1969. If it was true then, it didn’t stay true for long. The rise of monetarism and neo-liberalism in the 1970s sidelined the once-dominant theories of British economist John Maynard Keynes

Nowhere was the decline of Keynes’ ideas, and their replacement with the ideology of neo-liberals like Ronald Reagan and Margaret Thatcher, more apparent than at the global financial institution created after the second World War to implement his style of economic management on a global stage: the International Monetary Fund.

Now the wheel has turned again. In our new financial crisis, Keynes has become fashionable. Politicians across the developed world – Gordon Brown and Barack Obama among them – are implementing massive borrow and spend programmes, as a way of replacing vanishing consumer demand and steering their economies out of recession.

This is exactly the kind of economic management that the IMF was created to enable. The Bretton Woods conference of 1944 established the IMF as a way of lending countries the money they needed to finance deficit spending, so long as it was aimed at stimulating economic recovery. Without this support, the argument went, countries would compete with each other in a slump – for example, by devaluing their currency to boost exports and deter imports. The IMF, it was believed, would ensure global financial stability.

That was the theory. But as neo-liberal politicians – and economists – rose to power, the IMF’s agenda gradually changed. Instead of lending money to finance spending and stimulate economic recoveries, its loans came with draconian strings attached. These “structural adjustments” forced recipient countries to adopt neo-liberal economics: governments were told to privatise states assets, such as power and telecommunications utilities, to implement austerity budgets, and reduce domestic subsidies for basics such as food.

Thomas Gangale of Alaska and San Francisco State University described a typical outcome of IMF assistance: “Government workers are laid off, creating unemployment. Government services are reduced, adversely affecting the poorest members of society. Government assets are sold off at fire sale prices to raise money to pay off debts. Often the private investors who take advantage of these opportunities cut services and raise prices in order to operate these formerly government-owned assets at a profit. Interest rates are driven up in order to attract foreign investment; however, doing so drives domestic companies out of business, creating even more unemployment.” The IMF, wrote Mr Gangale, became “a twisted child.”

The importance of adaptability

With Keynesianism back in the ascendancy, what future does the IMF have? At an event organised by the Per Jacobsson Foundation to debate the IMF’s future, Andrew Crockett, President of JP Morgan Chase International, said the fund, in the course of its 64-year history, had shown itself to be adaptable as the world economy changed. But this time, he said, according to a report of the event published by the IMF, “the transformation of the IMF’s role in the international financial system will need to be more wide-ranging than in the past.”

Speaking at the same event, Stanley Fischer, a former IMF First Deputy Managing Director and now Governor of the Bank of Israel, said there were good reasons why the IMF had not been successful in addressing the build-up in global imbalances that had preceded the crisis. “The fund’s role in patrolling the exchange rate system didn’t work – something we already know,” he said. “But we also know why it didn’t work. For the fund to have succeeded, it would have had to mediate between the country with the largest population in the world and the country with the largest GDP in the world, and get them to reach an agreement that they were incapable of reaching bilaterally. China was not willing to change its strategy of operating with an undervalued exchange rate, which has been an extremely successful one from the viewpoint of growth.”

The IMF wasn’t solely to blame for its lack of influence, said Jean Pisani-Ferry, Director of the Brussels-based think tank Bruegel. The IMF’s Spring 2007 Global Financial Stability Report had accurately described the first phases of the crisis, he told the event, and its Spring 2008 report had also been much more accurate than analysis provided by other international institutions and national governments. “The IMF has gained – or regained – intellectual credibility,” he claimed.

But does the world still need an IMF? Most speakers at the event said that it did, but the fund faced significant challenges in fulfilling its mandate in the world of today. As Mr Fischer put it: “How should the fund operate in the modern world in which financial markets are a much more important source of financing than they were 60 years ago, in which governments are less inclined to think in terms of what’s good for the international system as a whole, and in which there are many more international economic organisations? This is really at the heart of many of the dilemmas currently facing the fund.”

Dominique Strauss-Kahn, IMF Managing Director, tried to address that question in a recent speech on the future of the IMF – a future that he said “seems fluid and uncertain.” Mr Strauss-Kahn pointed to the fund’s founding Articles of Agreement, which stated the need to promote global financial stability and to help members to adjust their balance of payments “without resorting to measures destructive of national or international prosperity.” These objectives remain valid today, he said, as the fund tries to manage another chaotic period in the global economy: “The question is how to do it, in a global economy which is very different from that of the 1940s.”

Seasoning stability

The answer is twofold, argued Mr Strauss-Kahn: first, restore stability; second, “we must look ahead and design a financial architecture to make the global economy calmer and less prone to economic and financial instability.”

On the first point, the outlook is grim. The global economy is continuing to deteriorate, with 2009 set to be a very difficult year and no expectation of any recovery before the beginning of 2010 at the earliest. To prevent a global depression, there must be action in three areas, said Mr Strauss-Kahn: “We need financial market measures, in order to get credit flowing again. We need fiscal measures, to offset the abrupt fall in private demand. We need liquidity support for emerging market countries, to reduce the adverse effects of the widespread capital outflows triggered by the financial crisis.”

Governments around the world have endorsed this agenda, as has the G-20. Some have started to implement it, “But the actions taken so far are not enough. We need more,” said Mr Strauss-Kahn. The fund would help by monitoring risks at the global level and providing timely technical advice on financial market issues; deploying its expertise and experience on fiscal issues to help finance ministries find the best ways of calibrating and implementing fiscal stimulus; and by helping emerging economies design good economic programs, and by providing sufficient finance to support them, “with conditionality tailored to the goals of containing the crisis.”

One way of achieving these aims, said Mr Strauss-Kahn, is to help support aggregate demand – that’s good old fashioned Keynesianism. “Fiscal stimulus is now essential to restore global growth,” he said. However, the fund is still telling some countries to reign-in their budgets. Isn’t this a contradiction?

Mr Strauss-Kahn says not. Fiscal stimulus should be undertaken widely, and the more countries that engage in stimulus, the smaller will be the actions that any individual country will need. But not every country is in a position to join in. “There are some emerging market countries that have financing constraints – either high costs or inability to finance deficits at all – which mean that they need to contract their budgets rather than expand them. Others are constrained from fiscal stimulus by high levels of debt,” said Mr Strauss-Kahn. “It is cases like these that explain why in some of the programmes the fund is supporting at the moment, we are calling for some fiscal retrenchment, despite our call for global fiscal stimulus. If there was fiscal room for manoeuvre in these programme countries, we would say ‘use it’. But often there is no room for manoeuvre. In fact, in the absence of fund support, countries would have to contract even more, because financing is so tight.”

The need for this stimulus is urgent, said Mr Strauss-Kahn, as spending and investment dries up. “Every day brings additional indications that the psychology of individuals, households and firms has changed sharply in the past year,” he said. “The more profound that change, the greater the fiscal effort that will be needed to offset it and to restore confidence.” The world economy is facing “an unprecedented decline in output.” Substantial uncertainty is limiting the effectiveness of some fiscal policy measures, said Mr Strauss-Kahn, and the IMF anticipates that the negative growth effects will last for some time.

What do we need?

Bottom line: the global fiscal stimulus should be about two percent of world GDP – or $1.2trn, he said. “This may make a sizable difference to global growth prospects and substantially reduce the risks of a damaging global recession. But these two percent are an average, while some countries can’t do anything, others have to do more.”

So far, Keynes would approve. Mr Strauss-Kahn also said spending should be focused on troubled sectors like housing and finance and transfers to low-income households, because they are most likely to face credit constraints and because they would be most likely to raise their spending. Good examples would be greater higher unemployment benefits, increased tax benefits for low-wage earners, and expansion of in-kind benefits covering basic needs such as food, he said. He talked about the “multiplier effect”, whereby spending in certain areas is thought to give a higher bang for the buck. He also pointed to the value of investment spending, on areas such as state-funded capital projects. “Since the slowdown is expected to be long lasting, investment spending, which typically has a longer gestation period than many other measures, becomes a more appropriate policy tool in the current circumstances,” he said. “Investment projects that are already in the works and can be implemented quickly, and those with good long-run justification and likely positive effects on expectations of future growth, like President-elect Obama’s Manhattan Project for energy saving, are good ideas.” Again, all very Keynesian.

Temporary reductions in personal income and sales taxes “could also be envisaged,” he continued. “But we would not recommend reduction in corporate tax rates, dividends and capital gains taxes or special incentives for businesses. These are likely to be ineffective and difficult to reverse.” Not very neoliberal.

So perhaps the IMF has returned to its roots after all? “Good brakes are important too,” Mr Strauss-Kahn cautioned, and even advanced economies need to keep an eye on fiscal sustainability, in case their spending provokes an adverse reaction from the financial markets. But “At present, the most urgent need is for a strong foot on the accelerator of fiscal spending,” he said.

In a sense, it doesn’t really matter what the IMF’s exact role is. “What matters is that we make a useful contribution,” said Mr Strauss-Kahn. “We have the tools to do that. If we deploy them well, and help our members, then the IMF will have a good future. More importantly, it will be doing its job, and therefore give the world a better future. All around the planet, the people of the world have reacted to the crisis with feelings going from surprise to anger and from anger to fear. It is our responsibility to help building a world based more on humanity and cooperation than on opacity and greed.” Keynes would certainly approve of that.

Increased financial regulation

When the leaders of the G20 nations met in Washington in November to discuss the impact of the credit crunch, they made it clear that financial firms will face much tougher regulation in future. “We must lay the foundation for reform to help to ensure that a global crisis, such as this one, does not happen again,” their end of summit communiqué said. There was little detail about how they would actually achieve this; more plans are promised for the end of March. But the general point was clear: there had been a systematic failure, so “the system” needs to be fixed

Perhaps surprisingly, the G20 had very little to say about standards of corporate governance in the financial sector (see sidebar). There was much talk about the need for banks to improve their modelling and their risk management practices, to re-examine their internal controls, and to disclose more about risks. But there was only a fleeting mention of the need to improve governance. This is despite the fact that all of these specific criticisms of banking behaviour can be traced back to a failure of board-level corporate governance. Doesn’t that mean that the system of corporate governance has failed too, and therefore needs to be fixed?

The Financial Reporting Council, which is responsible for the UK’s Combined Code on Corporate Governance, the leading international benchmark, says not. Its chief executive, Paul Boyle, argued in a recent speech that “the primary questions should not be about the standards of corporate governance in these institutions but rather the practice of it. The focus should be on whether the existing standards have been observed in practice.”

The Code, for example, says that a company’s board should “provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed.” It goes on to say that non-executive directors “should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.” Bank boards have failed to meet either of those principles. But that doesn’t mean the principles are wrong, Mr Boyle argued.

Asking the right questions

If it is the practice, rather than the code, of corporate governance that is at fault, what should be done? The governance consultancy Independent Audit recently convened a meeting of 120 chairmen, chief executives and directors from FTSE 100 and 250 companies to discuss that question. “There has been a failure of governance, and that really centres on non-executives,” concluded Ken Olisa, Chairman of Independent Audit. The UK government’s new City minister, Lord Myners, said that boards were “part of the problem” and need to be strengthened. Lord Myners called on investor groups, such as the Association of British Insurers and the National Association of Pension Funds, to provide better training and guidance for non-executives.

The UK’s corporate governance system is hinged on their effectiveness. They are meant to perform the role that Walter Bagehot described for the monarchy: to be consulted, to encourage and to warn. But too often, they ask the difficult questions only when things have started to go badly. Delegates at the Independent Audit event wanted to see the performance of non-executives improve. They called for clearer selection criteria, so that better directors are appointed in the first place. They wanted them to get more training. And they suggested some quick fixes, such as holding informal meetings outside the confines of the traditional boardroom – to make it easier for non-executives to raise a challenge – and a ban on PowerPoint presentations, so that people had to actually engage with each other.

But perhaps the corporate governance model asks too much of non-executives? They are on a hiding to nothing. If the business thrives, the executives make more money – in salaries, bonuses and on their share options. But the non-executives don’t. Yet if the business falters, they catch as much flack as the executive directors, sometimes even more. They get none of the upside and all of the downside. This wasn’t such a problem when holding a non-executive role at a bank or FTSE company was a cushy number. But increased regulation and corporate governance reform has massively increased the workload and responsibility burden of the typical non-executive. No wonder companies say it is becoming more difficult to find good candidates – a problem that the current crisis will only make worse.

Institutional shareholders also have a crucial role to play in corporate governance, yet their engagement with companies on governance issues tends to be poor. With a few notable exceptions, they have been unwilling to invest in developing their ability to monitor and challenge governance practices, lapsing instead into mindless box-ticking.

Remaining on radar

And what of senior executive and management performance? A recent report from an all-party parliamentary committee, established “to develop and enhance the understanding of corporate governance”, pointed to a “surprising lack of board level contact between senior managers and directors.” It argued that over the last decade, the proportion of the board composed of hands-on, executive directors had declined to the point where they now account for less than a third of all board members in the FTSE 350. Yet over the same period, many of these companies have witnessed a significant increase in the size and complexity of their businesses.

These two trends have increased the responsibilities of the senior managers who are just below board level, such as the directors responsible for human resources and information technology and the chief risk officer. In a typical FTSE 100 company, the members of parliament found, nearly half the executive committee is not represented on the main board. HR directors, for example, had a board seat at only six percent of FTSE 350 companies. The report concluded that these people, who slip below the governance radar, are the ones who really run UK plc. Non-executives needed to “get beneath the skin of the board”, said Philip Dunne, the Tory MP who chairs the all-party group, and companies need to “provide shareholders with more confidence in the capabilities and skills of key executives below board level.”

There is another reason why these executives need to be more involved in corporate governance. The Senior Supervisors Group, which represents financial sector regulators in France, Germany, Switzerland, the UK and the US, warned recently about the risk of companies fracturing into “organisational silos” based on highly technical management functions. Poorly run companies often “lacked an effective forum in which senior business managers and risk managers could meet to discuss emerging issues frequently; some lacked even the commitment to open such dialogue,” it said. The financial firms that had the best control over their balance sheet growth and liquidity needs were those that: “demonstrated a comprehensive approach to viewing firm-wide exposures and risk, sharing quantitative and qualitative information more effectively across the firm and engaging in more effective dialogue.” There was a risk of disconnect, the group said, between the people effectively running the company and the board-level directors to whom governance principles apply.

Jaap Winter, the Dutch law professor whose ideas are behind much of the European Union’s approach to corporate governance, has talked recently about the need to make senior managers – indeed, all employees – more accountable and responsible, rather than creating more board-level rules and regulations.

Mr Winter told the annual conference of the European Confederation of Institutes of Internal Audit (ECIIA), held recently in Berlin, that errant human behaviour caused financial crises, not flawed systems. “No system has ever generated a crisis,” he said. “The first reaction is that the system has failed so we need new rules. We ask for more rules and more enforcement, but we forget about our own behaviour: what is it in us that we continue to game the system?”

Mr Winter said increased regulation of financial firms and general corporates was leading to the “self-enforcement” of a compliance culture. There were already far too many rules for regulators to monitor and enforce, so they were outsourcing that work to companies themselves, he argued. This growth in corporate compliance was having a pernicious effect: crowding out personal responsibility. “It is not helping us, it makes things worse,” he argued. “What compliance is doing is making sure people follow rules. We forget about our own responsibility for our behaviour and replace it with responsibility for compliance.”

Never again?
Leaders of the G20 have pledged to reform the global financial system

The G20 leading nations met in Washington on November 15, 2008, amid serious challenges to the world economy and financial markets. The group said it was determined to enhance its cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.

The powerful club of nations said that in the months it would lay the foundation for reform to help to ensure that a similar global crisis does not happen again. Specifically, there would be action to stabilise financial markets and support economic growth.

Regulation is high on the agenda. The G20 said first and foremost this is the responsibility of national regulators, who constitute the first line of defence against market instability. However, financial markets are global in scope, so “intensified international cooperation among regulators and strengthening of international standards” was necessary.

The group’s end of summit communiqué said that regulators must ensure that their actions “support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace.”

Financial institutions must also “bear their responsibility for the turmoil” and should do their part to overcome it, the G20 said. This included recognising losses, improving disclosure and strengthening their governance and risk management practices.

The group committed itself to strengthening financial market transparency, including by enhancing required disclosures on complex financial products and ensuring complete and accurate disclosures by firms of their financial conditions. It also wants clearer alignment between incentives and risk-taking.

Crunch costs

After the crisis, comes the litigation – and the regulation. The financial turmoil of 2008 will lead to tougher regulatory action, and a wave of law suits, this year, as governments and market authorities try to plug the gaps exposed by the market meltdown, and investors try to get at least some of their money back.

Life is going to get tougher from the boardroom down, with experts saying financial companies will come under tougher scrutiny across their operations: from the way the business is governed, to the way it archives its email.

Starting with the tone at the top, the depth of the current global economic crisis, and the fact that governments around the world have had to step in and use taxpayers’ money to limit the damage, has made corporate governance an incendiary issue. “The public, investors, shareholders and regulators will no longer tolerate corporate governance failures in 2009,” says Peter Giblin, visiting professor of corporate governance at CASS Business School, London, and president of Integrity Europe, a corporate governance advisory firm.

“Whereas a few years ago a company could ride out a corporate governance scandal, now the impact could be potentially catastrophic, with many companies going into administration. Tougher and more detailed regulations will be introduced, resulting in an inevitable increase in scrutiny,” Mr Giblin predicts. “In 2009 we will see a trend towards all senior management being judged more aggressively on their knowledge of and adherence to proper corporate governance standards and statutes.”

“Another area that will continue to grow in importance is the accountability of companies in monitoring the entire supply-chain. No longer will it be acceptable to plead ignorance to corporate governance failures at any point in the supply chain, for example, whether it be knowledge of the supplier of raw materials in Asia, the vendor of your product or the final customer’s intended use of the product.”

Regulation everywhere
Executive remuneration is one area where more regulation is likely, says Mr Giblin, pointing to growing pressure in the UK and Europe for companies to link rewards more closely to executive behaviour. Activist shareholders are already organising pay revolts, with large votes against remuneration policies likely at some companies. In the UK, City minister Lord Myners has said investors were too soft on pay and benefits before the credit crunch. Corporate governance lobby group PIRC has been calling on investors to vote down “excessive” remuneration at several businesses.

 “I have no hesitation in calling the developing situation a regulatory minefield – and this is not an exaggeration,” says Neil Gerrard, head of the regulatory and litigation practice at DLA Piper. “We are operating in an unprecedented time of financial pressures and market volatility and the authorities are more determined than ever that everyone will play by the rules.”

For the financial sector, Simon Rawling, group managing director of London-based management consultancy PIPC, says the credit crisis has exposed global regulatory problems that need global solutions. “The last 12-months have proved that we lack any sort of joined-up global governance or regulatory structure,” he argues. “All we’ve seen to date is knee-jerk reactions from corporates to effectively shut-up shop” – by not lending to each other.

Mr Rawling predicts regulatory action on information and record storage, operational risk, and general corporate governance. “However, what we’re yet to understand, and what is needed more than ever before, is a set of compliance and regulation initiatives that are integrated across governments to effectively manage risk across global economies and global businesses,” he says.

Such a framework could emerge this year, and will be on the agenda when the G-20 leading nations meet in London in April. US and European banking chiefs are already working behind the scenes with central bankers and regulators to hammer out what that framework should look like. A private January meeting organised by the Bank for International Settlements was attended by banking luminaries such as Morgan Stanley chief executive John Mack, Citigroup chairman Sir Win Bischoff and Crédit Suisse chief Brady Dougan. Clearly, the finance industry is desperate to get its views across now, fearing that left to their own devices the G-20 diplomats will come up with something that they believe to be too onerous.
Reserving liquidity

The Basel Committee for Banking Supervision, which sets world banking regulations and measures of banks’ capital, has already indicated that it plans to changes its rules, forcing banks to hold a greater proportion of capital reserves in future, and to make higher provisions against bad debts. It also wants banks to hold more liquidity reserves.

Looking more widely, one trend to watch this year will be the extent to which new regulations and governance requirements directed at the financial sector spill over to affect general corporates. In the UK, for example, the Financial Reporting Council has cautioned against post-crunch changes to the Combined Code on Corporate Governance because they would apply to all listed companies, not just financial ones. FRC Chief Executive Paul Boyle used a recent speech to argue that the regulatory focus should be on whether financial firms had observed the existing standards, rather than whether those standards needed to change.

While organisations watch anxiously to see whether the credit crunch will hit them with a further wave regulation, 2009 is a year in which many will finally get to grips with reforms aimed at fixing the last international financial scandal: the raft of corporate fraud and accounting scams that were exposed in 2002 and 2003, such as Enron, WorldCom, Parmalat and Ahold.

In Europe, for example, the combined EuroSox directives will finally start to take effect in 2009. This set of regulations brings together disparate directives already in place and harmonises them: the aim is to build trust in European auditing, financial reporting and corporate governance. Among the big changes: companies have to disclose their risk management activities in their annual report, including the principle elements of their risk management and internal control systems, and describe their approach to corporate governance. Management is also legally responsible for making sure that financial statements provide a “true picture” of the company’s situation.

“EuroSox places greater demand on an enterprise’s financial reporting – meaning more information must be stored, tracked, modelled and made available to relevant authorities as and when required,” says Lynn Collier, Solutions Director at Hitachi Data Systems. “The strain on the business will not only be the additional information being stored but also making sure it is secure and easily accessible so it can be reported on and audited as and when necessary.”

In Japan, listed companies will face their national version of such reforms in 2009, as J-Sox (the tag used to describe the country’s Financial Institution and Exchange Laws) takes hold. These regulations require the same sort of internal controls over financial reporting as the US Sarbanes-Oxley Act. Practice Standards set by the Japanese Business Accounting Council require companies to produce an audited assessment and report on their internal control over financial reporting. The rules apply to all Japanese public companies – and their overseas affiliates – from April 2008 and many are still in a rush to comply with and then embed the requirements. “Much of the impact in terms of effort to get compliant has been completed, but the integration of control to make it efficient as well as effective is still in progress in many organisations,” says ISACA International President Lynn Lawton.

Regulation isn’t always driven by crisis: in 2009, companies will also have to respond to significant compliance challenges that have been in the pipeline for a while. In Europe, insurers will have to monitor the developing Solvency II accord and 2009 will see the introduction of the EU’s controversial data retention directive for telecommunications and internet companies. In India, the government is introducing a new Companies Act in 2009, aimed at bringing the country’s business law and corporate governance rules up to international standards. In Hong Kong, important changes to the stock market’s listing rules took effect on January 1.

More regulation will not be the only consequence of the turmoil – litigation is expected to increase rapidly. “As the credit crunch bites all the chickens will come home to roost,” says Professor Alan Riley of The City Law School, London. “Flawed business models which may look fine in climbing markets are exposed in harsher economic times, and as a result all sides head to the courts or arbitrators.”

Ready to litigate
In the US, investors filed 210 federal securities class-action lawsuits in 2008, up 19 percent from 176 in 2007, according to figures compiled by Stanford Law School and Cornerstone Research. The total amount claimed was $856bn, up 27 percent from 2007 and the highest in six years. Nearly half of the year’s litigation was connected with investors’ losses from the credit meltdown. The Stanford figures show that a third of the finance companies in the Standard & Poor’s 500 index are targeted in new lawsuits. A record 12 complaints claim losses of $5bn or more.

“Given the financial crisis, litigation is, for some, an increasingly necessary option and all companies need to be prepared in order to meet obligations in terms of data disclosure,” says Tracey Stretton, legal consultant at Kroll Ontrack. “The next wave of litigation, which we’re likely to see a lot of in this year, is likely to be securities litigation – everyone is waiting for this ‘credit crunch litigation’.” Ms Stretton pointed to a policy shift in Europe away from public enforcement (such as formal investigations launched by bodies such as the European Commission) towards private enforcement, where parties sue each other for redress. There may therefore be an increase in anti-trust litigation as more follow on actions post-investigation and private stand-alone actions may be launched in future, she added.

One issue that will be under the spotlight is electronic communications and the electronic storage of information (ESI), such as emails and documents, Ms Stretton predicts. “The issues surrounding ESI have assumed a higher priority on the business agenda as the financial crisis threatens to trigger legal actions. With litigation and the amount of electronic data requested in discovery on the rise, and coupled with tightening corporate budgets and regulation, corporations cannot afford an ESI misstep,” she says.

 Of course, all this regulatory activity will take place against a backdrop of global economic recession, when management would rather focus on corporate survival than corporate compliance. Just staying in business will be the biggest challenge many organisations face over the next twelve months.

Charting a new map

Managers say the focus this year will be on restructuring and shopping for value assets. As heads of investment banking survey a new year, some of the most crucial documents in their possession are the detailed lists kept by their subordinates of the expected dealflow. These extensive lists, referred to as the pipeline, are kept rigorously up to date by all investment banking teams, but in 2009 they are looking thinner than in previous years.

Some managers say they might well be virtually useless in providing them with a guide to what activity to expect in the next 12 months.

Two years ago, in what must seem like another age, managers could leaf through page upon page of upcoming deals showing a record level of pent-up activity across their mergers and acquisitions and capital markets businesses, but in January 2009 the situation bears little comparison.

But despite the backdrop of a deteriorating world economy and a financial sector wrecked by more than $1trn of writedowns in 12 months, investment banks can continue to point to a small pipeline of mandates.

However, most companies are focusing their attention on the likely deluge of work from distressed corporate clients as the financial crisis ravages the real economy.

David Fass, Head of Global Banking Europe at Deutsche Bank, said: “This year is going to require the most complex and thoughtful approach we have seen in recent memory. As the world approaches the 24th month of the credit crunch, we are going to need to invent new solutions to work through the stresses and strains in the markets. For bankers, this means the amount of time we are going to spend thinking about how to help our clients will be many multiples of what it has been in recent years.”

Mr Fass mentions the increasing frequency of meetings between his teams of coverage bankers with their corporate clients, and says chief executives are eager for updates on the state of the financing markets and their options should they need to tap them.

Behind the scenes many companies have hired investment banks to examine their strategic options, from simple financing requirements to full-scale balance sheet restructuring and asset disposals.

One of the most obvious examples of this was German automotive components maker Schaeffler Group’s hire of JP Morgan late last year to examine its strategic options as its creditor banks pushed the company to provide them with more detail on how it would pay back the billions of euros they lent to support the acquisition of Continental.

Mark Aedy, head of Merrill Lynch and Bank of America’s combined European corporate investment banking operation, said: “In the past quarter, corporates have adjusted to market conditions and realised that this is a new world and they need to take action. Many of our clients have asked for full nuts and bolts reviews of their businesses and actionable business is coming out of this.”

For those companies prepared to be first movers the signs appear to be good. Bankers say the capital markets appear willing and able to buy new issues for those prepared to accept the new valuations on offer.

John Winter, head of investment banking for Europe, the Middle East and Africa at Barclays Capital, said: “The financing markets feel good at the moment. The bond market is clearly open for business, equity capital raising will be active and we think there are likely to be a lot of disposals related to corporate restructurings.”

The worry is that those that do not act swiftly to tap the markets and wait until the last minute might find the markets unforgiving and emergency capital raisings, forced asset disposals and even full-scale enforced takeovers are considered likely to be a major part of the market this year.

Mr Fass said: “There will be good companies out there that haven’t managed their balance sheet properly over the last couple of years and are going to find themselves in distressed situations. They are going to be unable to refinance and therefore they will have to take action quite quickly.”

Mr Aedy said his firm would be focusing on winning restructuring mandates in 2009, which the bank has identified as one of the biggest sources of investment banking fees over the next 12 months.

He said: “The focus will be on restructuring opportunities, but with a heavy emphasis on the capital markets and within that on equity capital raisings.”
Fishing for shares

The issue of how to position their businesses to capture the largest possible share of the fees on offer will be one of the biggest headaches for managers this year, particularly given that some are predicting a further 20 percent drop in the overall fee level in Europe this year.

Mr Winter said: “We are going to selectively reflect the market. We aren’t, for example, currently bringing issues for emerging market corporates but we will be when that market reopens. Meanwhile there are plenty of other areas where we are already very active.”

Geographically, the focus is likely to return to the large markets of the UK, France and Germany. Aside from the hundreds of billions of dollars of debt issued by the governments of each country, corporates in the developed markets are expected to provide the most business.

In the UK, which is regarded as the developed economy most exposed to the financial crisis, restructuring mandates will be the order of the day, while France and Germany may be relatively better off and able to take advantage of the opportunities the stressed markets are likely to provide.
 Charles Packshaw, head of UK corporate finance at HSBC, said: “Well-capitalised companies are likely to see opportunities to pick up undervalued assets in the UK. We generally expect UK deal activity to be pretty patchy, but there will be some strong sectors, such as consumer, resources and energy.”

ECM
Rights issues:
The busiest area by volume of the equity markets last year were capital increases and this shows no signs of changing this year, though the type of issues will be rather different.

If the past 12 months were dominated by multi-billion dollar capital raisings by distressed financial institutions, 2009 will be the year of corporate capital increases as a range of businesses tap the equity markets.

Emmanuel Gueroult, head of European ECM at Morgan Stanley, said: “Capital increases are likely to continue to be deeply discounted, but there is no shame attached and investors accept that the market has repriced over the last year.”

M&A
Mergers and acquisitions revenues in Europe fell by a third to $15.3bn last year as deal activity declined. Few bankers are predicting any improvement this year, but many are hopeful that things may be better than they seem.

Gordon Dyal, Global Head of M&A at Goldman Sachs, said: “The 2009 M&A market will most likely be a reflection of the global market dynamics; a balance between attractive valuations relative to historical levels and restricted liquidity. We expect 2009 M&A themes to be stock-for-stock transactions, fill-in acquisitions by large, well-capitalised corporates as well as emergency sellsides to address capital structure issues.”

Winning restructuring mandates is likely to be one of the keys to success this year, with many disposals being linked to working as an adviser on these types of transactions. The financial services sector is also expected to be another source of dealflow. A report published recently by US advisory firm Freeman & Co highlighted the continued need for consolidation among broker-dealers as well as the pressure on asset managers to merge.

Mr Freeman also predicts that stock exchanges will be active buyers of credit data-focused firms this year as they prepare for the advent of centralised clearing in the credit default swaps market.

Jumbo private equity deals may be dead, but with billions of dollars at their disposal bankers have not written financial sponsors out of their calculations for the next 12 months. Mr Freeman expects private equity firms to be active in the financial institutions sector as they use 2007 and 2008 vintage funds to buy assets on the cheap.

Convertible bonds
Equity-linked paper was one of the worst performers last year and convertible bond funds endured a torrid 2008. Analysts at Barclays Capital expect the convertible bond market to continue to shrink over the next 12 months as new supply continues to be exceeded by maturing issues.

Despite this, convertible bonds may continue to be one of the more active areas of the new issue market in 2009, as investors look for their combination of downside protection with the potential to profit from share price rises.

Several banks last year, including Barclays and UniCredit issued convertible bonds as part of their capital raising and bankers expect corporates to follow their lead.

Mr Gueroult said: “Though the equity-linked market has been very quiet, we think it could come back this year.”

Initial public offerings
Falling valuations and record volatility brought the new issues market to a virtual standstill last year and few expect an improvement any time soon.
Large issues such as the stock market listing of Deutsche Bahn have been postponed, with no date set for when they might return.

Thomas Gottstein, co-head of ECM for Europe, the Middle East and Africa at Credit Suisse, said: “There will need to be continued improvement in volatility, which has come down to below 40 percent, before the return of initial public offerings and there will need to be a clearer consensus about the length of the recession.

There is a lack of confidence in earnings or price to earnings valuations. A sustained recovery in equity markets isn’t likely until credit spreads have narrowed.”

A pipeline of issues is building from the Middle East with Dubai property developer Nakheel reported to be considering up to a $15bn flotation and several other smaller deals are in the pipeline.

Blocks
With bankers talking about a new-found realism among chief executives, expectations are growing that companies may be more prepared this year to accept the new valuations attached to their own shares and equity holdings.

UK utility Scottish and Southern recently accepted almost a 10 percent discount when selling a block of new shares to raise £479m and others are likely to follow as they attempt to finance ahead of the crowd.

Large block sales could also be back on the cards, sooner rather than later. UBS in a report published in January estimated that of the $1.5trn of European equities held by businesses, more than $160bn could be considered “loose” or under review for a possible sale.

Of this total, about 50 percent are held by corporates and, with many companies’ balance sheets under greater pressure than at any point in recent years, sales of these stakes this year are now considered more likely than they were last year, despite the fall in equity valuations.

Mr Gueroult said: “Sellers are now prepared to accept discounts on block trades. There is an acceptance that the market has repriced and that higher-valuation discounts may be required to complete trades.”

European government bond market
Analysts estimate a record €185bn was issued by the US and European governments in January, with up to €736bn expected to be issued by the end of the year from €576bn last year, according to calculations by Nordea analyst Jan von Gerich.

The four largest Eurozone economies will represent the biggest issuance, with Germany issuing up to €149bn of bonds, up by €8bn from last year, France issuing €145bn, up by €30bn, Italy €220bn, up by €20bn, and Spain €75bn, up by €15bn, according to analysts.

Germany and France are the main pillars of Eurozone issuance, rated triple A by rating agencies. Bankers said the recent failure of a €6bn auction by the German Government was not too serious. Less than a day later, a French issue was subscribed by investors.

Of France’s total financing need this year, €79.3bn results from the projected budget deficit for 2009 and €110.8bn from medium-term and long-term bond redemptions falling due in 2009. Other state commitments will amount to €1.6bn.

Germany’s financing plans this year give greater weight to short-term instruments as it faces rising financing needs in the economic downturn. Aside from capital market issuance of €149bn, its treasury bill, or Bubill issuance, is set to rise to €174bn from this year’s target of €72bn.

Several governments in Europe, including Germany, have moved to cover their rising financing needs in 2009 with higher issuance of treasury bills.

However, analysts warn it may prove problematic if governments rely on treasury bills and then have to return to market to continue financing in six or 12 months’ time, when yields could rise.

Corporate bond market
The European investment grade corporate bond market has reopened on stronger sentiment this year, but corporate treasurers, bond bankers and investors have their work cut out to navigate still treacherous new issue conditions.

Suki Mann, credit strategist at Société Générale in London, forecasts a possible low of €80bn – versus €133bn in 2008 – for investment grade non-financial bond supply this year.

Mr Mann said should the new issue window be open for longer, €120bn is reachable.

Top of investors’ wish lists for new issues are bonds from well-rated, well-known companies in non-cyclical industry sectors, with riskier credits rarely getting a look-in.

For industrials, bankers warn if conditions prove too onerous, companies may use free cashflow and/or draw on their bank lines instead of issuing bonds.
For utilities, forecasts are between €25bn and €40bn for supply due to redemptions and large M&A refinancing needs. Analysts believe E.ON and Enel have around €5bn available for funding. EDF, Iberdrola, Gas Natural and Vattenfall have €2bn to €3bn each to refinance and Nuon and EDP Group around €1bn to €1.5bn each. GDF Suez has another €1bn and EnBW around €500m.

Technology, media and telecoms issuance could reach €28bn, of which €22bn will come from telecoms groups, led by France Télécom, Deutsche Telekom and Vodafone.

In the motor vehicle sector, €18bn of potential supply is forecast, while €15bn is expected from the consumer and services sector this year.

Financial institution bond market

Issuance this year from the insurance sector may be a “difficult number to predict”, according to Barclays Capital, but issuance from the damaged banking sector could fill that void, as banks exploit government debt guarantees to raise capital.

Fritz Engelhard, head of European fixed-income strategy at Barclays Capital in Frankfurt, said: “It is not only a matter of how expensive the funding is, it is about accessing term funding and managing liquidity.”

European banks issued €40bn of government-backed bonds last November and December. This year, that could be €250bn, according to estimates from Frank Will, frequent borrower strategist at Royal Bank of Scotland. Other houses have forecast up to €500bn of supply.

In senior funding, the supply outlook is made more difficult by the prospect of government-guaranteed issues. However, Barclays said there was €270bn of senior redemptions this year, which indicates new supply.

For subordinated supply, Société Générale forecasts €13bn of lower tier two capital bonds, and €2bn – down from €6bn last year – of tier-one capital bonds.

Securitisation market
Securitisation was linked to the sub-prime crisis in the US and was a cause of wider economic malaise. As a result, the market was the hardest hit and has been at a standstill since the middle of 2007.

Bank issuance, however, has been hitting highs. Deutsche Bank research said €50bn of asset-backed securities were issued in the week starting November 9, an 18-month high. The reason for the spike is increasing use of central bank lending facilities, which now accept these securities as collateral for loans.
Merrill Lynch research published last week estimated 97.5 percent of securitisations in 2008, totalling €600bn, were retained by banks. Germany, Spain and Italy have announced specific funds aimed at purchasing ABS with a combined maximum total of €170bn. The UK is expected to follow.

Stuart Jennings, Structured Finance Risk Officer for Europe, Middle East and Africa at Fitch, said in a statement on January 7: “This is an apparent recognition that banks will have to continue to tap central bank funding for the foreseeable future.”

© eFinancial News, 2009. www.efinancialnews.com

Buyside and sellside must learn to pull together

There has traditionally been tension between the sellside and buyside but as a prolonged dearth of liquidity is turning the capital markets into deserts, the mutual dependence of investment bankers and asset managers is becoming more apparent and their future success will depend on how well they adapt to each others’ needs.

Bankers have earned four times as much money from taking trades from asset managers as they have from underwriting new issues of securities, according to financial data published by US trade body, the Securities Industry Association. The asset managers benefit from being able to trade when they want. The cost of all the trading is ultimately borne by the investors in asset managers’ funds.

Bankers have done well over the past five years from the rise of hedge funds, some of which traded far more frequently than traditional asset managers. The banks also made a lot of money from lending money to hedge funds.

But this arrangement has been upset since July, because investors, desperate for liquidity, began withdrawing their money from hedge funds. Redemptions are wreaking havoc in the hedge fund industry, with bankers and investors estimating that its assets under management will soon have shrunk from about $2trn to $1trn.

The massive reduction in hedge funds has already resulted in substantial job cuts in the investment banks’ prime broking divisions, the units responsible for lending to hedge funds. Their client trading departments are trying to shift their focus back to the traditional end of the asset management industry, which itself has struggled as market liquidity has dried up. But the traditional asset managers, which are trying to pare back all the costs they can, are ready for them.

Jim Connor, a partner at Morse, a management consultant to the asset management industry, said: “Investment banks will redouble their efforts with traditional asset managers. But transaction costs will come under pressure. The EU’s markets in financial instruments directive, which concerns best execution, paves the way for this by putting an obligation on asset managers to ‘do right by clients’ in this respect. Moreover, asset managers have been rationalising their broker relationships and this competitive dynamic will be a catalyst for reducing costs.”

Peter Preisler, Director and Head of Europe, the Middle East and Africa at US asset manager T Rowe Price, said: “Any kind of cost is a negative, so anything we can do to minimise the cost of trading we will do. That doesn’t always mean trading cheaply, because settlement is a discipline itself these days.

“We have benefited enormously in the past three to six months by having in-house traders. In a market with less liquidity, the ability to read the market and place transactions where there is liquidity is highly valuable. Liquidity has often dried up in the past six months, for example in high yield bonds, and you need to know who is in the market and have good relationships.

“But the obvious way to minimise trading costs is to trade as little as possible. In most strategies we turn over our portfolios only once every one to five years.”

Research the key
Investment banks will try to use their in-house research, in particular equity analysts’ reports and stock recommendations, to resist the pressure on trading commissions. The bankers reckon asset managers using their research will accept higher transaction costs. An investment banker said: “We have begun holding back the details of our research for our best clients – in accordance with regulations, we are disseminating our views and the bones of our arguments to everyone, but keeping the colour and depth for those who give us a call or who are our highest-paying clients. This has become general practice in the industry in the past couple of months. In any other business in the world you would treat your best clients better.”

The bankers’ negotiating hand has been strengthened by cost-cutting among the asset managers. Job cuts so far have mostly been restricted to marketing staff, but the prospect of continued falls in the value of assets under management, and hence annual management fee income, means some chief executives of asset management companies are reconsidering whether they want to employ as many research analysts as they have done, particularly when compensation for a senior analyst can reach £500,000. Those asset managers that cut back on their in-house research operations will be asking investment banks for more research.

In addition, the discrediting of the ratings agencies over the course of the credit crisis has led investment bankers to anticipate greater demand from asset managers for research on bonds. Demand for analysis of sovereign risk, pertaining to countries, is also expected to rise.
However, asset managers will resist the temptation to use more of the banks’ research. Mr Preisler said: “The market environment will lead certain asset management firms to rely more on sellside analysts. This won’t be the case at T Rowe Price and our competitive advantage will become even stronger.
“Sellside analysts have a sales role and their compensation is dependent on asset managers turning over their portfolios. From their point of view, the best recommendation should be a Buy and the second best should be a Sell; no one can do anything with a Hold. If a sellside analyst does a serious piece of research and comes up with a Hold recommendation, it’s really a problem. It looks as if they’ve wasted their time relative to generating business. So only a minority of sellside recommendations are Hold.

Sticking to the Hold
“By contrast, the majority of stocks rated by our in-house analysts have a Hold rating. Part of our analysts’ compensation is by the quality of their recommendations and having their recommendations used by the portfolio managers, and the pattern of our recommendations seems to be a lot more balanced than the pattern of sellside analysts’ recommendations – which it should be.”

Martin Gilbert, Chief Executive of UK-quoted Aberdeen Asset Management, said: “We have long been an advocate of in-house research, so we won’t be asking for more research from the banks. We just look for access to company management, but there also we find that most companies know we are long-term investors and are happy to talk to us.”

Aberdeen is another asset manager that trades rarely, often holding on to its investments for a decade.

This has led to stiff competition for limited resources. But there may be a way forward that will benefit both sellside and buyside. Asset managers will be making greater use of derivatives, according to surveys by Morse and risk management consultant Protiviti, and this could be a significant source of revenue growth for investment banks.

Protiviti said in a report toward the end of last year that asset managers’ use of derivatives would rise over the next 12 to 18 months, with 79 percent of asset managers saying they would use them more. One of the strongest drivers behind this is the need to contain the risks of a portfolio on a daily basis, to obtain approval for a fund under the European Union’s Ucits III mutual fund structure, which is becoming the norm for all investors, including those outside Europe.

Rob Nieves, a director of Protiviti, said: “The asset management industry has reached an inflection point in its use of derivatives. In many cases, it would appear that derivatives strategies helped firms remove at least some downside risk and our survey suggests that derivatives will play an increasingly important role in asset management.”

Huw van Steenis, Financials Equity Analyst at Morgan Stanley, said: “We believe derivatives will be an area of growth for investment banks. There will be much more demand for derivatives offering downside protection – it will be a paradigm shift, though there may be less for taking more risk.

“Absolute-return funds will have a place in investors’ portfolios and some will be distributed using the Ucits III mutual fund structure, which will become more broadly used because distrust of non-regulated funds has grown and because investors are confident of the liquidity they offer. These funds will be buying market protection using derivatives. It is expensive now, but volatility will go down and it will become more and more common.”

If derivatives trading is to come to the rescue, the bankers will need to reassure asset managers on counterparty risks, which have taken on alarming proportions since Lehman Brothers filed for bankruptcy protection in September. Bankers will also need to soothe the managers’ perennial concerns about conflicts of interest, particularly front-running – using knowledge of a client’s intentions to make a profitable trade just ahead of it.

The codification of good practice embodied by Mifid has imposed a strict discipline on investment banks in this regard, and that should help. Better still will be the reassurance that arises from feeling that regulators have their eye on the ball.

© eFinancial News, 2009, www.efinancialnews.com

Fixing the bankıng system

What element of the crisis has most surprised you?
The scale of leverage and underpriced risk on banks’ balance sheets. I was more conscious of household and government debt in thinking about possible problems, and not aware how vulnerable the banks were. Simply put, the world got lazy about balance sheets and more attention was being paid two years ago to hedge funds and private equity. There was an assumption that banks and investment banks must know what they were doing. I don’t think I was aware how their leverage was creeping up. Did I say creeping? – racing up, and I don’t think I was aware how they were juicing their returns through leverage.

What is most likely to happen to the US economy over the next five years?
The most probable scenario is a fairly bleak 2009, with unemployment reaching double digits and a full year of recession. This is likely to be followed by four years of slow growth as deleveraging works itself through the economy. But this scenario assumes the US can continue to finance a substantial part of its expanding deficits with the help of foreign investors.

If Chinese or Middle Eastern investors balk at increasing their purchases of treasury bonds, we could end up with a much more serious trough. This could lead to my worst-case scenario involving the rapid decline of the dollar and rising long-term interest rates necessary to attract foreign capital. Higher rates are likely to choke off recovery.

At the same time, deflationary worries could then be replaced by inflationary fears, as the Fed’s expansionary policies exceed its ability to contract credit.
Unfortunately, in either scenario, there is still the risk of a complete seizure of the banking system, suspension of new credit creation, an increase in corporate failures, rising unemployment and fresh waves of financial panic spreading across global markets.

But on a positive note, a big difference between the 1930s and today lies in policy, especially in the US where monetary and fiscal policies are aggressively expansionary. This wasn’t the case in the 1930s.

Is inflation inevitable given the exploding monetary base?
It’s not likely over the near term because the banking system is essentially absorbing this expansion, not widening the broader money supply, since there isn’t much new credit being created. And there is a strong deflationary pressure coming from the recession.

Can we expect lower employment?
I certainly anticipate unemployment above 10 percent over the year ahead. And if growth starting in 2010 is only about one percent for the next five years, it’s hard to imagine how the US economy can create jobs the way it did in the past.

So we can certainly expect average unemployment over the next five years to be substantially higher than what we’re been used to, something closer to European levels of around eight percent.

Does the potential scale of a stimulus package concern you?
Yes. The current size of the federal deficit is at wartime levels. Without passage of any additional spending packages, Morgan Stanley estimates it to be about 12.5 percent of GDP. Under normal circumstances, such as the years leading up to the crisis, the US shouldn’t have been running much of a deficit. This would’ve provided the fiscal space to better accommodate expansionary policies that wouldn’t have threatened the overall integrity of the federal budget.

But now we must be mindful of how this deficit is perceived by foreign investors buying treasuries. We are running the risk that one day soon these folks may conclude, “hey, wait a second, the US Government is behaving like Argentina or Mexico, and the dollar is looking like some kind of peso”.

If you get to that kind of sentiment, it can begin to eat away at your status as the world’s reserve currency. Then your government bonds lose the perception of risk-free assets, and the cost of funding your deficits is likely to grow much larger.

Where should one be investing in this kind of market?
Broadly speaking, I like Baron Rothschild’s model portfolio weighting: one third securities, one third real estate, and one third art (personally, I’m nowhere near that allocation). But effective asset allocation is getting harder because it’s difficult to find assets that are uncorrelated, which is the key to better portfolio and risk management.

Therefore, especially in today’s challenging market, it’s more essential than ever to be thinking at least a bit outside the box to achieve real diversification.

For a more specific look, it may be easier to start off by saying where I would not invest. It may seem counter-intuitive, but the prudent investor doesn’t want to be too exposed to longer-term US Government bonds. At some point, there’s going to be a shift in sentiment against these securities, and it could be that right now we are very close to the top in demand and price for the 10-year treasuries, which are yielding less than three percent.

I’m also bearish about European government bonds because I believe there is going to be a widening of spreads, especially in the euro area.

Real estate will continue being a minefield, especially commercial property, which is just starting to get hit. This is not going to be a period in which I buy my Manhattan apartment. And I don’t expect US real estate to bottom out much before the middle of the year.

As for commodities, I would be short rather than long. And longer term I believe the dollar is a horror show with a lot of currency volatility next year as US bond prices and currencies are repriced.

This in part makes a case for foreign exposure. The most compelling segments of the global economy at this moment are some of the emerging equity markets where valuations appear to be very cheap.

If there is going to be any meaningful growth at all over the next four or five years, it will be in China, its neighbours, and certain Latin American economies such as Chile and Brazil. I like these markets now. But I would avoid eastern Europe, along with markets that are exposed to above average political risk.

I also like some corporate bonds in fiscally prudent markets.

But whether it’s stocks or debt, investors need to differentiate between various submarkets. Don’t expect broad-based index exposure to work.

Why is interbank lending still troubled?
If the Bank of England estimates global toxic assets at $2.8trn and recognised writedowns are only about $500bn, everybody knows there’s a lot more trouble to come.

And this makes the banks very wary of one another. It’s as if the banks were men nursing very grave wounds, looking at one another wondering, “who’s going to be the first to die”. Not a great basis for long-term relationships or trust.

We will only see a return to healthy interbank lending when there has been a full and credible disclosure of losses. We are a long way from that. And that’s a very difficult conversation to have because such full and frank disclosure of market losses at this point is likely to destroy a very large number of institutions, I suspect. So we are in a twilight world where the full scale of the damage on balance sheets is being repressed.

Do you think extraordinary bailouts will harm our business system over the long run?
In normal circumstances, the US bankruptcy system works effectively to allow insolvent firms to restructure and get back on their feet. But now that would be very hard to do. So temporary extension of credit is understandable. You don’t want major industries to collapse on the cusp of a major recession.

But over the long term I worry about the suppression of the evolutionary process with government assistance preventing failure and consolidations from taking place to clear out the debris and pave the way to healthier markets. Intervention could delay the inevitable, protracting the suffering.

Creative destruction has its place. But if everyone but Lehman Brothers is too big to fail, then we aren’t in a good place.

I’m not happy with the terms of the Citigroup deal. It’s too open and more guarantees may be needed. Someone described it as one of the biggest option trades in history.

The Government is writing blank cheques based on the belief that bank management knows what they are doing. Unfortunately, I’m not certain of that. The conglomerate financial model Sandy Weill conceived hasn’t worked. And I would be amazed and seriously depressed if Citigroup remains in its present form 12 months from now.

We need a serious restructuring in the US financial sector. So one of the most important jobs of the incoming administration is to come up with an approach that’s different from the blank cheque model.

The good news is that there are a number of up and coming banks that are smaller and not so leveraged and which can step up and start filling in the spaces vacated by the larger, more troubled institutions. I still have some faith in the powers of the US to renew itself.

But ultimately, what we can achieve from the money being injected into the system is only the avoidance of massive bank failures and monetary implosion. Broadly speaking, we can’t breathe life back into the dinosaurs. But we are trying to make their death as painless as possible.

Should governments be thinking about a global approach to saving global companies?
That’s an interesting question. Co-ordination would be the key. And towards that end we would need a world finance organisation, something akin to the WTO, which could make independent decisions that its members had to honour.

Presently, the International Monetary Fund can only help at a country level. The big problem is that the more parties involved, the more challenging are the negotiations.

Any one nation already has to balance many interests, such as investors, bondholders and employees. Just imagine multiplying these concerns across various borders.

Look at the Lehman collapse. There was a wide perception in London that the UK operations were simply “screwed” by the firm’s US executives in the scramble to recoup what was left. Every last dollar ended up in New York, leaving London denuded.

But in early December, we saw General Motors and Ford approach Sweden for aid for their Saab and Volvo divisions, respectively. Perhaps corporations will start this globalised approach on their own.

Big picture: despite what may seem logical as a way to deal with global problems, the quickest action for the time being is likely to evolve from corporate home markets.

What benefits may come from the crisis?
The silver lining may be that we are given the opportunity to rethink the US monetary system – both monetary policy and bank supervision – along with the basis of growth. The theory that the Fed exists purely to control consumer price inflation and to prevent the stock market from cratering, which I would call the Greenspan Doctrine, has shown its limitations. So has the belief that banks are best off if left alone to do what they like.

It’s also time to reconsider if the role of the patriotic American is first and foremost to shop. I remember that was Bush’s message after 9/11, and I thought it was kind of kooky back then.

The ultimate soundness of any economy is rooted in the productivity of its human capital, not a function of citizens leveraging themselves to unsupportable levels of consumption. The age of leverage is over. The race will go to the productive, and investments in education, technology and clean energy will pay more attractive returns than endless Wal-Marts. Hopefully, the crisis will drive home this point to policymakers.

Looking ahead, what concerns you most?
The banks, the Fed and the dollar. When the discussion in the US shifted to the automobile industry, I started laughing because it was such a distraction from the main issue. We’ve got a financial crisis, and everything else that’s happening is a consequence of that. Every company in the country is going to have problems if our banking system collapses. Until we fix the banking industry, anything else we focus on are symptoms.

The balance sheets of the very biggest banks in the US and Europe have been a nightmare for a year and only recently have people woken up to that. There’s still denial about how big the problem is. And here’s what makes things surreal: we are seeing the monetary base explode, but with very little to show for it, as banks seem to be just swallowing up all this capital.

Now about the Fed. As long as global markets continue to treat the dollar as the world’s reserve currency, the Fed will have room to manoeuvre. That room, however, is not limitless.

There will come a point when the credibility of the Fed’s policies will be called into question, along with the dollar itself.

As I mentioned at the beginning of the interview, any significant move away from the dollar before this crisis is resolved could then lead to a very unpleasant scenario where foreign lenders, seeing their investments rapidly diminish in value, sharply curtail their lending.

This would force interest rates up to attract deficit financing, which in turn would choke off recovery.

Until recently, the euro seemed poised to take its place as a reserve currency. What happened, and what is the outlook for the Eurozone?
With respect to common currency, there are two issues here. The first is the euro’s strength over the past five-plus years was largely a mirror image of the dollar’s weakness, more than superior underlying fundamentals of the Eurozone.

The dollar’s recent rally has been based on technical factors. But the second factor driving the dollar is the belief that the US still retains its status as a safe haven during this crisis, hence the flight into treasuries and surging demand for dollars to pay for them.

The euro’s failure to compete with the dollar as a safe haven currency during the crisis doesn’t really surprise me because there’s no European fiscal union or common treasury.

National governments are coming up with their own stimulus packages. So it’s much harder for Europe (compared to the US) to co-ordinate a comprehensive response to problems caused by this crisis.

Regarding the outlook for Europe, I think early on Europeans were exaggerating how the crisis was primarily American. Now they are seeing a wide range of really ugly problems coming their way, and not all are being imported. Moreover, I think the banking crisis is actually worse in Europe than it is in the US. It’s just not as widely recognised yet.

But it will be. Europeans don’t have the policy levers, like those that exist in the US, to respond as rapidly or as effectively. In the long term, Europe may suffer worse than the US during this crisis.

Should we consider returning to the gold standard?
For some folks there is a certain nostalgia in considering this during a major crisis. I have trouble imagining how the world economy with $50trn could be put back into gold given the relatively modest amount of the metal available to central banks.

Gold is just a commodity. It’s good for jewellery and it’s a relatively good hedge against inflation and bank panics. But the notion we can re-engineer a gold standard is based on a naïve reading of history. The gold standard was not a Garden of Eden. Its supposed heyday, between the mid-1870s and mid-1890s, was a time of global deflation. There was an even more deflationary period during the 1929 and 1931 when the standard basically broke down.

The last thing we need during a time of high deleveraging is a deflationary global monetary system. That would be suicidal.

In broad terms, what should President Obama do?
Popular sentiment backs his huge fiscal stimulus. But there’s a danger in this strategy because the Federal Government already took on $8trn in investments, loans and guarantees issued over the past year.

It won’t be long before we are looking at the potential doubling of the federal debt. And I’m concerned that we are underestimating the international ramifications of this trend. National markets are far more open and interrelated than they were just decades ago. Therefore, we need to pursue policies that are globally co-ordinated, especially between Beijing and Washington.

As for a traditional stimulus package that involves issuing cheques to households, that may not work because I’m not sure if people will spend this additional income. They are most likely to save it. We should be mindful that there is stimulus occurring from the sharp decline in commodity prices and nominal wage growth.

Most important, we must forget about trying to restart the formerly high levels of consumer-driven growth, because so much of it over the past seven years was based on credit. If you take away mortgage-equity withdrawal from 2001 to 2006, growth would have averaged only 1 percent. Households must first improve their balance sheets, as it were, before we can expect consumer demand to again contribute substantially to economic growth.

This suggests that President Obama may be more successful if he targets government resources less on trying to stimulate consumer spending and more on infrastructure improvement that would enhance productivity and broader-based economic growth. It may be that he needs to focus more on the medium term rather than the short term.

Niall Ferguson is a professor of history at Harvard University and the William Ziegler Professor at Harvard Business School

Eric Uhlfelder, author of Investing in the New Europe (Bloomberg Press, 2001), covers global capital markets from New York

© eFinancial News, 2009, www.efinancialnews.com

More failure for the Securities and Exchange Commission

When America’s biggest banks began to collapse during the presidential election campaign, the SEC became the butt of criticism from both candidates. Then when giant insurer AIG had to be rescued, the candidates agreed on one thing: SEC Chairman Christopher Cox had to go. But the revelation that Madoff affair triggered a demand for an overhaul of regulatory structures. As President Obama observed in the wake of the Madoff shock, “there’s not a lot of adult supervision out there.”

In these circumstances the President can hardly be expected to praise regulators, but his statement begs questions. First, what exactly does he mean by “adult”? The SEC actually has 3,500 adults in its employ, all of them wired to catching fraudsters. “The SEC is first and foremost a law enforcement agency,” the agency notes unfortunately, given the latest failure.

And it’s pretty good at enforcement, as a perusal of the last ten reports shows. With its enormous resources, expertise and cheerful ruthlessness, the SEC delights in the way it goes after offenders and hauls them before courts to lay bare their deceptions, frauds and plain criminality.

It wins so many cases few miscreants could sleep at night. Like the eight former executives of AOL Time Warner nailed last year over the “round-trip transactions” trick that enabled the company to overstate advertising revenue by some $1bn.

The SEC has also been busy in the wake of the subprime crisis. Two Wall Street brokers were charged with defrauding customers by making more than $1bn in unauthorised purchases of subprime-related instruments. And two former Bear Stearns executives running the firm’s biggest hedge funds are in the dock for “fraudulently misleading investors”.

The SEC prides itself on exposing the underbelly of financial markets. In 2006, it initiated no less than 914 investigations, 218 civil proceedings, and 356 administrative proceedings covering everything from corporate fraud to compliance failures at self-regulatory organisations such as stock exchanges.

Sometimes it rounds up miscreants by the truck-load, like the 26 people facing the rigour of the law over a $428m securities scam targeting the retirement savings of senior citizens. If the agency wins this one, which it’s likely to do given its record, the ill-gotten gains will be “disgorged”. That is, returned to the victims or, failing that, deposited with the US Treasury. (The SEC doesn’t keep recovered loot.)

In recent years the agency has scored several major coups. Long before AIG’s latest crisis, it got the same firm over the improper accounting of “sham reinsurance transactions”. That resulted in $800m in disgorgement and penalties. It showed up Fannie Mae for “improper smoothing of earnings in violation of accounting rules” ($350m in penalties). Tyco International was nabbed for “utilising unlawful accounting practices in a scheme to overstate its reported financial results by $1bn. And in 2004 Royal Dutch Shell was cited for overstatement of hydrocarbon reserves ($120m in penalties) in an international cause celebre. In fact, 2004 was a bumper year that produced over $3bn in penalties and disgorgement.

And before that, there was the Enron scandal when the SEC nailed scores of firms. It was the first time, as the agency proudly reported, that any regulator had taken on a member of the Big Four and won.

So added together, there’s plenty of adult supervision out there. Every one of the last three SEC chairman has taken this thankless job, vowing to improve accountability, transparency, integrity etc, and has hired extra enforcers to do so.

And yet we still get cataclysmic frauds like that by Mr Madoff. It may be that, in the same way that Wall Street banks were deemed too big to fail, he was too big to investigate. Indeed we know the SEC ignored red lights about Madoff-managed investments, as it did with Enron whose deceptions were revealed by a journalist.

But there may be a deeper explanation why every year the SEC catches so many firms in various forms of fraud from illegal foreign payments to just plain cheating clients. As its filings reveal, a significant percent of the US financial sector is out to game the system. They see it as a set of rules ripe to finesse rather than the embodiment of a code of ethics they are obligated to observe.

In short, a decade of SEC reports suggests the real problem is a systemic failure of integrity that will rebound on the US for years. As President Obama summarised the prevailing climate: “Whatever’s good for me, I’ll do.” If that’s really the way it is, the real challenge for the SEC and other regulators is to find another way because it’s pretty obvious that enforcement doesn’t cut it. n

Coveting the Islamic finance global position

Saadiq, synonymous with “truthful” in Arabic, is the brand name for Standard Chartered’s global Islamic banking services. The sub-brand of the international bank launched in 2007 has to date garnered several accolades for leadership in Islamic finance innovations and deals. Indeed with a global network that covers 50 percent of the Muslim world, it is only natural that Standard Chartered should play a prominent role in the ever-expanding Islamic financial markets. The global Islamic market, comprising more than 1.5 billion Muslims, is currently valued at $900bn and is expected to enjoy sustained growth for the foreseeable future.

An Islamic banking player since 1993 in Malaysia, Standard Chartered Bank expanded to establish a global Islamic banking unit in 2003 with operations in Pakistan, Bangladesh, the UAE and also in Indonesia through its affiliate Permata Bank. The global headquarters of Saadiq, based in Dubai, serves as the product development hub and centre of excellence for the bank’s global Islamic operations. Currently Saadiq provides a comprehensive range of Shariah compliant international banking services and financial products across both the wholesale and consumer banking arms of business. The Saadiq team comprised of qualified professionals who design and structure the products/services and ensure that they are in line with Shariah principles on banking and finance. 

Setting the standard
In 2007, Standard Chartered was the first international bank to launch an Islamic credit card in the UAE, Pakistan and Bangladesh and has since expanded product offerings. The Saadiq product suite is purposely different in each market with the goal providing clients with tailored packages to fulfill their needs. On the consumer front, services are offered to SMEs and individuals and include personal finance, auto finance and mortgages as well as third party distribution of Islamic funds. These products and services can be conveniently accessed through specialised Islamic Banking branches as well as the existing network of conventional bank branches.

Similarly, under Wholesale Banking, Shariah principles combined with Standard Chartered’s rich banking heritage of more than 150 years provide customers with a range of products and solutions to cater for the broad spectrum of corporates and institutions. Saadiq covers a complete suite from simple cash and trade finance to complex solutions such as project finance and Islamic hedging solutions.

To ensure that Standard Chartered Saadiq products comply with the principles of Shariah, it consults an independent committee comprising three of the world’s most renowned Shariah scholars – Dr Abdul Sattar Abu Ghuddah,  Sheikh Nizam Yaquby and Dr Mohammed Ali Elgari.

Meeting the needs
Currently, Saadiq offers over 100 products across various geographies to meet the needs of customers and corporates and is leading the way in the development of Islamic treasury risk management products to provide end to end solutions.

Saadiq is also at the forefront of risk management products, such as Islamic foreign exchange and hedging solutions. It has one of the broadest range of products in this field, starting from basic FX spot and forward to more structured solutions such as profit rate and currency swaps and FX and profit rate options. Saadiq is also working with leading industry bodies to promote the standardisation of products in the Islamic industry.

Additionally Saadiq is a well respected name in the field of Sukuks, Syndications, Project Finance and Structured Finance and has won a number of awards since inception. It has played a leading role in successfully executing a number of high profile transactions including several industry-firsts and benchmark setting innovative deals. Leveraging its Islamic origination and structuring capabilities with its strong franchise in key Islamic markets and global distribution strength, Standard Chartered Saadiq has positioned itself as the preferred partner for Islamic finance. Some of the notable transactions include:

•First ever Islamic project financing deal in Djibouti for DP World sponsored port project.
•The largest ever Islamic Shipping Finance facility in Southeast Asia for Brunei Gas Carriers.
•Largest Project Finance transaction & Largest private sector Islamic Finance transaction in Pakistan for Engro Chemicals.
•First Shariah compliant local currency Sukuk programme by Government of Pakistan.
•First ever Sukuk issuance by the Tesco PLC group of companies (in Malaysia).
•First Sukuk programme to be established by a GCC sovereign and the 1st rated Dirham denominated sovereign transaction for Government of Ras Al Khaimah.
•The inaugural sukuk issues by a host of entities, including the Department of Civil Aviation (Govt of Dubai), Emirates Airlines, Dubai Islamic Bank and Emirates Islamic Bank. n

For further information tel: +971 4 508 3173; ghazanfar.naqvi@standardchartered.com; www.standardchartered.com

GCC region investment banking

Gulf One’s vision is to be a leading knowledge-based infrastructure investment bank. In turn, the bank’s mission statement emphasises the mobilisation of local and global capital to accelerate the execution of infrastructure projects and corporatisation through innovative custom-made financial solutions.

Buoyed by the enormous investment opportunities in the Gulf region, there is a step-change in the size of financing requirements, a result of the region’s booming economies, benefiting from the soaring liquidity created by more than two years of sustained high oil prices. Affluent and reformist governments pursuing industrial diversification and world-scale infrastructure developments are stimulating the private sector and simultaneously improving the operating environment. This slow-burn revolution is transforming the landscape of the region’s investment and project finance industry from both the demand and supply sides. The sizable growing demand for investment banking services has been accelerated by over $1trn projected investments in regional infrastructure and mega-initiatives.

The comparatively young Gulf Cooperation Council (GCC) countries’ markets have not been conducive to the development of a regional investment banking industry. While recent equity market activity has attracted a growing number of players, none has yet established a clear leadership position. The drive strategy of Gulf One is to support the GCC region to evolve as a strategic vital part of an increasingly competitive global economy. By embracing knowledge-based banking, Gulf One aims to be a catalyst to unleash GCC potential. With a highly experienced team, extensive network of relationships across the region, and strong links to international partners, Gulf One is dedicated to providing exceptional and advanced financial solutions, based on Islamic principles, for its clients.

Mega-initiatives
While Gulf One serves a number of selective sectors, its strategic focus of specialising in infrastructure mega-initiatives gives it an advantage over competitors with a broader investment focus. Gulf One’s activities comprise:

Specialised and infrastructure funds
Private equity
Corporate finance advisory services, and
Asset management services

Gulf One was founded by Dr Nahed Taher, a leading economist and executive banker and the first female CEO of a bank in the GCC, and CIO Mr Ziyad Omar, with over 20 years of senior banking and finance experience in Saudi Arabia and the US, both of whom serve as Executive Directors on Gulf One’s Board. Gulf One’s unique vision has attracted significant regional and international shareholders that understand the need for this initiative. It is headquartered in Bahrain and has an authorised capital of $1bn and paid up capital of $100m.

Gulf One has a distinctive high calibre investment banking team, comprising experienced dynamic individuals with established track records in industry and investment from all corners of the globe. The collective and individual strength of the Gulf One people paints a unique canvas of strength and unity and sets the bank apart from other regional players.

Gulf One CEO and Executive Director Dr Nahed Taher, is justifiably proud of the fact that her “Gulf One is the first truly independent investment bank in the region, and the region’s first institution to focus its core products and services exclusively on large scale energy-related and infrastructure development projects. The aim of the bank is to facilitate sustainable economic development and create wealth and prosperity.

She points out: “We believe that a fundamentally different approach is necessary to maximise the inherent opportunities that are currently emerging as the Gulf region uses the benefits derived from its natural resources to transform its infrastructure and establish economic stability for future generations. We are, however, more than just GCC based; we are an organisation committed to delivering knowledge and expertise to assist economic development around the globe”. The bank released its $2bn infrastructure fund, Tharawat (Arabic for all forms of wealth including knowledge). The bank started a journey of creating an exclusive pipeline of select infrastructure transactions for the Tharawat Fund.

While focused on building regional capacity, Mr Omar stresses that “Gulf One is committed to full alignment of interests with its investors.” The bank has stepped out of the prevalent regional investment approach. Creating value is a function of vision and time. The performance of investment banking has to mirror the dynamics of the underlying investments. The alignment of risk and rewards is essential to the success of all stakeholders and the longevity of the business.

Over its relatively short two years of existence, Gulf One has already executed a number of successful groundbreaking transactions. The bank received international recognition for its role as leading financial advisor to the pilgrimage airport terminal in Jeddah, Saudi Arabia. In that project, Gulf One pioneered the departure from the long established regional tradition of awarding advisory to institutions that bring along their balance sheet. The bank structured the first known Islamic BTO (Build Transfer Operate) transaction as a pure project finance with international, local, and development bank participation.

Importance of collaboration
Collaboration is another fundamental theme at Gulf One. From the outset, the founders trotted the globe searching for partners and alliances that can participate in creating a platform, a spring board, for launching concepts like Public Private Partnerships (PPP) in the region. Gulf One alliances spawn significant international and regional investment, professional services, and industrial knowledge hubs. Gulf One has a deep commitment to knowledge-based advancement. Recently, the bank teamed up with leading University of Lancaster, Dr Taher’s alma mater, to form a joint research centre focusing on economic and financial research relevant to the region and acting as a gateway for the exchange of knowledge between the MENA and the rest of the world.

Dr Taher also stresses that the bank is built and continues to function with commitment to Islamic principles and a deeply-rooted understanding of local culture and traditions, combined with our multinational intellectual capital and global experience. Gulf One is uniquely equipped to meet the region’s demand for investment banking as the engine that drives its economic growth. Noteworthy, the current global financial crisis brought to the attention that Islamic Finance presents a credible and viable antidote to the recurrence of the current global financial crisis. Mr Omar states that Islamic finance relies on three basic principles: risk and profit sharing amongst investors and financiers, the presence of real assets (asset backed finance), social participation through the distribution of the annual Zakat (2.5 percent of equity) preferably for the benefit of the immediate location of the asset. Gulf One is committed to innovation in translating these principles into effective globally beneficial financial solutions.

The boom in MENA infrastructure represents a global opportunity for growth and a chance for the MENA region to further integrate into the global economy. Gulf One, with its unrivalled credentials, constitutes a competitive advantage that positions it as a leading participant in the region’s economic progress. With exceptional leadership, and dedication, great achievements and rewarding returns will follow for shareholders and stakeholders alike.

For further information tel: +973 1710 2555;
m.cruz@gulf1bank.com; www.gulf1bank.com

Public-private partnerships

Public-private partnerships is the institutional and practical expression of the central idea: the involvement of the private sector in the provision of infrastructure and services which were previously the exclusive domain of public authorities, such as health, education, penal and other social services, and so on.

PPPs are not a form of privatisation. The state keeps all its power and authority it wants over the deliverables under a PPP. Goals of public interest and social services remain still under the public authority, but why not a private finance solution for such public goals and social services? PPPs are a means to achieve social goals set by the public authority and are organised by the same mobilisation of market forces.

Politically still debatable, although not as fanatically as some time ago, the idea behind the PPPs (and the PPPs legislation and practice) seems to be generally accepted. The differentiations among various EU countries may be differences in emphasis or in the methodology, but not a real questioning of the PPPs. Almost every single country of the EU, either governed by the socialists or the conservatives, has introduced (or reshaped previously existing) relevant legislation some time in the last five or six years. So we can find PPP Acts, Decrees, Task forces etc in Spain, in Portugal, in France, in the Netherlands, in Czech Republic, in Germany, in Ireland, relatively recently (2005) in Greece and elsewhere. So the PPPs are a stable institution; market forces can count on them. In some cases, several important private players have even reoriented their business structures to meet the needs of PPPs.

Cooperating across borders
Not defined at community level, yet under European community law, the term refers to the forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation management or maintenance of an infrastructure or the provision of a service. The PPPs are not a form to escape from European law; it is a method to exploit European law in a way better for both the public and the private sector, and more expedient for the satisfaction of the social needs.The Greek legal and institutional regime on PPPs, basically law 3389/2005 on Public Private Partnerships and Directives 2004/17/EC and 2004/18/EC, goes along the general governing matter at European level.

The public authority, in the Greek case an interministerial committee deciding on the basis of proposals by ministries and other entities of public law – such as local administration bodies, universities, public hospitals etc – sets a task of public interest, such as to build and operate a hospital or a port facility, or to build and make available to the public an educational institution, or to install and operate a waste management facility and so on, expected to be fulfilled by a PPP and opens the competitive procedure for the award of the PPP.

It is true that the initiative for a PPP comes from the public sector, but ideas for such initiatives may come from private operators as well. So if private operators are ready to finance and accomplish a task under conditions of a PPP, why shouldn’t they indicate it to the relevant public authority.

The private operator has to secure the financing of the public task, to produce the technical skills necessary for the accomplishment of the task, to proceed to the project management of the whole operation leading to the completion of the task. The idea is that there will be only one operator to adopt, combine and fulfill all these roles. It would not suffice to have, say, a bank for the money, and then a constructor for the construction, and then a consultant to consult, and also a manager to manage the project etc.An SPV – a Special Purpose Vehicle – is the form required by the Greek legislation for a private operator to enter into a PPP. It is called Special Purpose Company. Its constitution, as outlined in law 3389/2005, is designed to secure that the company will have the powers to undertake all the necessary for a PPP functions and combination of functions.

Both parties, private and public, are expected to set in their contract their mutual obligations, including the modalities of payment of the private operator (which may include the transfer of the cost to the – essentially private – users or the direct payment by the public authority to the private operator for the availability of the project). In essence the public operator sets or guarantees the institutional prerequisites for the task (such as licenses, regulations, tax regime), while private operator guarantees – undertaking the risk – the completion of the task.

Active mobility

Greek authorities seem to put a lot of emphasis on PPPs. Ministers and other high ranking officials, do not lose any occasion to underline that they take PPPs very seriously. Almost twice a year several dozens of PPP projects are opened by decision of the interministerial committee. The Special Secretariat for PPPs, an institution devoted to the implementation of PPPs projects, has been established and proves an active mobility. Greek PPP projects have started to rise international interest.

For us, PPPs are not only a Greek matter. In a working day on PPPs organised by our Sofia office early this year by Minister Granchareva have clearly highlighted the institution in relation to Education and Health as major governmental priorities, while Minister Vassiliev has expressly mentioned 66 local administration buildings and the construction or modernisation and operation of border crossing points at external borders of the EU in Bulgaria. Our office in Bucharest is actually discussing a proposal to participate in the implementation of a PPP project regarding to a major construction work.

The lesson learned? In the European environment and legal space, legal services for PPPs form a harmonised market, where flexibility, ability to cooperate and professional excellence will make the difference.

Banking in Oman

Listed on the Muscat Securities Market, NBO has a market capitalisation of $1.81bn as of July 2008. 
The diversified shareholder base includes the Commercial bank of Qatar, Suhail Bahwan Group, and government pension funds as core shareholders along with individuals and local institutional investors.

Being a leader of the private sector and second largest commercial bank in Oman in terms of total assets, shareholder equity and market capitalisation, NBO projects itself as a full-service commercial bank that offers cutting-edge solutions, designed to keep pace with businesses and tailor-made to meet every individual needs. The bank’s products and services include among many other facilities, retail banking, card services, wealth management, corporate banking, investment banking, trade finance, and corporate internet banking. Its corporate finance services include IPO management, loan syndications and business advisory services for trade and investments in Oman. Whether these requirements are within the Sultanate of Oman or beyond, the bank has the people, expertise and technology to help its clients achieve their goals in the most convenient manner.

Meanwhile, the bank maintains a network of 58 branches, including five branches in Egypt and one in the UAE, fully backed by both internet and telebanking services supported by 122 ATMs countrywide.

The bank’s strategy, which has generated a compounded annual growth rate of over 50 percent in all net profit over the last four years, is today a blend of both organic and inorganic business diversification. All core businesses have recorded consistently strong growth, along with improving asset quality and efficiency ratios, and a well diversified risk profile. Proactive investments in technology and human capital, together with a strong capital base and underwriting capabilities, provide a solid foundation for maintaining accelerated quality based growth.

Highly recommended
NBO has prime D+ (Ba1) and BBB credit ratings from Moody’s and Capital intelligence rating agencies successively. Both agencies are globally recognised in their relative fields. These ratings reflect the bank’s consistently strong financial performance and solid earnings power, good risk profile, healthy asset quality, strong capitalisation and stable efficiency indicators.

The strengths of NBO, as assessed by the above rating agencies, include a well-established and growing banking franchise in Oman, and a strong retail banking presence, coupled with an experienced management team.

A strategic alliance concluded between National Bank of Oman (NBO) and Commercialbank of Qatar (Cb) in 2005 has allowed both banks to take advantage of the dynamic changes facing the banking industry in the GCC, diversify risks and achieve economies of scale.

With a deep sense of social responsibility as the nation’s bank, NBO is committed to community support through its corporate citizenship programs.
In addition to donations and financial support to various local charities and social, health, sport, and educational organisations, the bank also regularly participates in fundraising programs and lends generous support to a range of other worthy and deserving causes in Oman.

The bank’s sustained efforts to incorporate corporate social responsibility in every aspect of business were rewarded by the Bank being selected as the ‘Best Bank in Corporate Social Responsibility in Oman for 2007’ by World Finance magazine.

The bank believes that every business decision taken has an impact on society and the environment and so it is imperative for it to consciously address the issues facing it with solutions that facilitate a process of sustainable development that envisages the pursuit of economic prosperity without harming the environment or at the expense of the members of society, including staff and communities.

Making sure of development
The bank’s Corporate Social Responsibility (CSR) involves not only responding innovatively, but proactively, by offering solutions to societal and environmental challenges. It is a process of collaboration with both internal and external stakeholders to ensure sustainable development.
NBO always strives to incorporate CSR in every aspect of its business and to have in place systems that measure, report and continuously improve its social, environmental and economic performance.

Emanating from its strong belief that any business has to give something back to the community in which it operates and from which it derives its revenues, National Bank of Oman takes its role as a corporate citizen seriously in all the three jurisdictions in which it has presence.

NBO’s contribution to the community takes different forms. It continuously supports any activity that adds to the development of young people and the nation as a whole. The list of the institutions that receive support from National Bank of Oman includes among many others Oman Charitable Organisation, Oman Association for the Disabled and Association for the Welfare of Handicapped Children. NBO also gives numerous donations to schools across the Sultanate of Oman around the year as part of the initiative.

NBO also actively participates in the various developmental projects including privatisation projects initiated by the government. A Summer Internship for Omani students graduating from various colleges in the Sultanate of Oman is another of NBO’s CSR contributions.

NBO has been actively sponsoring ministries, organisations, events and programmes such as Muscat Securities Market’s Gatherings; Blood Donations; Salalah Khareef Festival, Muscat Festival etc to mention a few. The bank maintains and promotes a very high level of ethical standards within and outside its premises.

As part of its efforts to mainstream CSR into its business strategy, the bank participates regularly in Career Fairs to identify talented Omani students for potential recruitment within the bank as well as supporting government efforts towards developing Human Resources within Oman. An example of this is the bank’s sponsorship of candidates for the ‘Intilaaqah’ program conducted by Shell Marketing to groom talented youths to undertake self-employment.
In fact, the bank was also the first bank in Oman to organise an exclusive Career Fair for young Omanis. In addition, the “NBO Management Trainee Program”, launched by the bank last year, is regarded as a unique program in the banking sector – NBO is first bank to have initiated such a programme.

The Program includes training of the participants in the different divisions of the Bank; assigning them to various projects aimed at developing and enhancing different banking services in the organisation. Trainees are able to get hands-on experience in the various areas of banking, develop their communication skills; inter-personal skills, leadership skills as well as develop overall capabilities. At the end of the Program, trainees undergo an evaluation prepared by an external body and the bank’s management.

The Management Trainee Program forms a critical part of the bank’s strategy to support Omanisation efforts and produce future leaders.

The bank is also engaged in a number of local projects handled by Omani entrepreneurs, thus acting as a catalyst for national development.

The bank is also involved in a number of sports initiatives to develop sports in Oman by sponsoring many athletes, particularly in football.

NBO is now in the process of enhancing its program of funding Small and Medium Enterprises (SME’s) so as to broaden the areas of business within the country.

Investing in Austria

The high levels of investments into Austria but also from Austria into the CEE region, for which Vienna is often seen as an ideal home base, were resulting in a steady stream of work in particular in the field of Banking and Finance and M&A. However, not only the Austrian economy but also the Austrian law market has done well which is demonstrated by law firms still expanding and having significant growth. Not for nothing Austrian firms are among the top players in the CEE region. Still, it is not only about size that counts which is why beside the large Austrian firms with own offices spread over the CEE region smaller boutique firms becoming tremendous success stories, one of which is Vienna based award winner Herbst Vavrovsky Kinsky Rechtsanwälte GmbH (HVK).

Since its establishment just over three years ago in 2005, HVK has managed to place itself among the top players in the market and to become one of Austrians leading commercial law firms. With more than 20 highly specialised lawyers and offices in Vienna and Linz, accompanied by an office in Salzburg aiming at Austria’s western regions as well as southern Germany, the firm operates in and covers all of the domestic economic hot spots. For its outbound business HVK has close contacts to major international law firms enabling it to assist its clients also in multi-national transactions.

From the very beginning HVK has put particular emphasis on its banking and finance practice to meet increasing market demands. Scope of services includes besides regulatory aspects the full spectrum of financial products including syndicated lending and leveraged and acquisition finance, asset finance, derivative products, project finance, public offerings, financial regulatory, insolvency and restructuring and structured finance. HVK’s clients cut across all types of participants in financing transactions across a wide range of industry sectors and countries.

Even flow
HVK has seen a constant deal flow in the past years and has gained a more than solid track record. Within the last two years HVK’s lawyers advised on various Debt as well as Equity Capital markets transactions with a total transaction volume of approximately two billion, including Austria’s largest IPO ever launched, Strabag SE, and Austria’s most recent corporate hybrid financing of an international packaging solution manufacturer. “We are proud of our track record which displays our strong commitment exemplified by our partners’ deep involvement in the execution process and greater attention than is the norm, thus resulting in a client service that according to Chambers’ market survey is reputed to be amongst the best,” says Philipp Kinsky, one of HVK’s founder partners.

The lawyers of HVK are also active in fund structuring where they were recently involved, inter alia, in setting up a Ä140m CEE hotel investment fund or a Ä100m private equity fund. Besides its Banking and Capital Markets work, HVK has gained strong presence in the field of Private Equity and Venture Capital where it advises industry heavy weights such as CVC Capital Partners.

Taking the lead

The crunch, however, also had an impact on HVK deals and has caused several clients to postpone or cancel investments, leading to decreased deal flow in acquisition finance and private equity transactions while increasing the clients’ demand for refinancing, rescue offerings or convertibles. Since the beginning of the crunch HVK already advised on various high level refinancing transactions.

In October 2008, HVK advised one of the lenders on the Ä460m refinancing of Oleg Deripaska’s Rasperia Limited by a consortium led by Raiffeisen Zentralbank Österreich AG to refinance Rasperia’s acquisition financing in relation to its stake in Strabag SE. Moreover, during September and October 2008, HVK advised HYPO Investmentbank AG as transaction counsel on a multi-million euro refinancing facility granted by HYPO Investmentbank AG as lead arranger to a holding company for major Austrian blue chips. This transaction turned out to be particularly challenging as numerous international syndicated lenders were involved and it was closed at the peak of the crash of the European stock markets. HVK’s work was not only focused on the re-financing facility as such, but also involved a number of transactions for the refinancing of the lead arranger itself.

One of the aspects of HVK’s success in the past is that its lawyers are known to be very solution-focused, reliable and pragmatic which is essential in handling complex transactions. They devote themselves to the highest standards and level of expertise. As Philipp Kinsky puts it: “We see our role as providing a blend of specialist knowledge and practical advice designed to achieve our clients’ objectives in a cost-effective, bankable, solution-focused and pragmatic manner. Our breadth of experience has enabled us to establish a comprehensive approach to financing transactions.”

The firm’s high-level quality is recognised among its clients and international top tier law firms alike. For partner Christoph Wildmoser this is a result also from the firm’s policy to cooperate with local tier 1 firms where needed: “We have decided not to open own offices abroad but to choose such firm among local tier 1 players which in each specific matter we deem best for our client’s needs. Over the last years we were able to tie close relations not only in the CEE region but also to leading US and UK firms which we could also convince of the quality of our work. Today we experience significantly increasing inbound business from those major players and enjoy working together with them on a regular basis.”

Another factor is seen in the combination of the in-depth know-how of the markets with the understanding of the clients businesses and needs, Philipp Kinsky is convinced: “Our goal is to create added-value for our clients which I believe may only be achieved by knowing what clients in specific situations need and what the markets offer. This requires not only market know-how, which we feel able to offer due to long-standing experience in the present markets, but also – may be even more – entrepreneurial skills.”

One of the challenges for the future which all key players in the Austrian market will have to face is getting the right staff required to further enhance their position and increase market share. For sure this means that HVK will have to recruit only the best staff available and thereby competing with the large firms. If the firm’s upturn continues, however, HVK will not have difficulties attracting qualified and dedicated lawyers joining the team.

For further information tel: +43.1.904 21 80 – 0; email: office@hvk.at

The green enterprise

Communicating a company’s social responsibility and commitment to the common good is a role not just for communications executives like myself. It is one that most appropriately must start at the boardroom level and be shared across the entire executive team. Today’s message? The Green Enterprise – a story that plays well to the public, the markets and all stakeholders, including employees and shareholders alike.

In recent years, science has started to unmask one the biggest illusions in business – that knowledge-intensive work is much “cleaner” and more “eco-friendly” than polluting smokestack industries. Fact is, the environmental impacts of office buildings as well as the energy use by employees and information technologies serving them are considerable. And so are the costs.

For example, in the US alone, the US Environmental Protection Agency (EPA) reported that in 2006 the nation’s data centers used 1.5 percent of all US energy consumption – 61bn kWh – at a cost of $4.4bon. By 2011, the EPA estimates those figures could rise to 100bn kWh and $7.4bn. Given that the US consumes about a quarter of the world’s energy each year, the global figure for powering the world’s data centres by 2011 could be as much as 400bn KWh, spewing up to 172 million metric tonnes of carbon dioxide a year into the atmosphere, according to calculations from the UK-based National Energy Foundation.

Rise of the green enterprise
This kind of research provides just one of many cost-based insights that are giving executives worldwide good business reasons to embrace so-called green enterprise initiatives. Other drivers toward the green enterprise are: regulatory pressures; customer expectations; investor influences; and market image.

In short, green enterprises can build their bottomlines in three measurable ways:

Increase business productivity and overall performance, helping to build market share and profitability
Reduce operating expenses in the face of relentless competition, helping to keep and build margins
Raise corporate brand image, helping to attract a fast-growing segment of environmentally aware – and demanding – consumers 

Green enterprise initiatives leverage the long-standing environmental precepts of Reduce, Reuse and Recycle. These were often ignored in the days before the commodisation of just about everything – even knowledge-based outputs – back when proprietary pricing power ensured profit margins, energy was cheap, and waste disposal costs were few or non-existent, because the earth’s carrying capacity was considered infinite.    

Fast-forward to today, with global competition and deregulated markets squeezing margins tight, with energy costs soaring, and with the world consensus about global warming almost unanimous. In this context, the environmental precepts of Reduce, Reuse and Recycle have become prescriptions for enterprise profitability. Corporate objectives of revenue growth, lower costs, asset efficiency, and performance excellence can now align with environment sustainability.

More effective communications and knowledge access
Over the years, companies have increased the efficient use of their monetary capital tremendously. But their big opportunity today is to improve the efficiency of their human and knowledge capital. The best way to do this? Through more effective communications, collaboration and knowledge access across their organisations.

Of course, this is much easier said than done. While the rise of ubiquitous global networks, the proliferation of end-devices and the increase in worker mobility have had productive enterprise results, they also have contributed greatly to the fragmentation of the enterprise intellectual fabric.

Classic “phone tag,” for example, has gotten worse as more and more workers must manage inter-device communications and contact management among their desktop/laptop computing environments, their personal digital assistants (PDAs), their mobile phones and their fixed-line phones. To flag an important email for attention may require a phone call or two (or a voicemail or two, if the intended recipient is not available). Another example is not having the knowledge readily available, either in some form of documentation or in a subject matter expert, to help solve a customer problem or advance a sale.

Fortunately, the advent of network-based, presence-aware communications software with a unified communications architecture based on open standards can enhance collaboration and knowledge access. It does this by giving users fixed-mobile convergence with one-number access across all their devices. It also enables them to know the availability of others who are on-network, so they can quickly convene tele- and videoconferences and share documents seamlessly.

How much can this help an enterprise? An Accenture study of a corporate pilot of this kind of presence-aware software showed that distributed, on-the-go workforces such as field technicians, sales people and logistics personnel could realise productivity gains of up to 40 percent. For a $4m annual payroll covering 1,000 people, that is equivalent to about $1.6m in productivity gains.

Further, a study conducted by the Canadian consulting firm Insignia Research concluded that companies with 1,000 employees could lose more than $12.5m a year to productivity losses and avoidable expenses without this kind of communications application.

Where “green” comes in
Unified, presence-aware communications like the above can provide a wide range of cost-savings, including environmental ones. If employees are working longer hours, they are consuming more resources, such as the energy to power and light the office infrastructure as well as the extra burden on IT infrastructure. If employees are traveling more – commuting when they could work from home, unneeded truck rolls for service, and meetings to “sync-up” – they are consuming more energy in their transportation, while losing productivity in producing results.

Consider the scenario in which XYZ Enterprise’s 250 most frequent travelers each travel six times per year. After deploying a video-conferencing software application, these travelers can instead conduct part of their remote meetings through videoconferencing, cutting their annual trips by one (or 17 percent). Prior to deploying this application, the typical XYZ employee spent an average of $1,797 x 6 = $10,782 per year on travel as a direct expense. That does not count the indirect costs of time spent on the road and travel administration.

Under a conservative assumption that traveling employees cost $50 an hour and spend 10 hours on the road on average for each trip, it means lost productivity of 10 x 50 x 6 = $3,000 per employee a year. For 250 employees, annual enterprise travel costs – both direct and indirect – were $3.45m. By replacing 17 percent of the travel with videoconferences, XYZ Enterprise is able to reduce direct travel cost to 1,797 x 5 = $8,985 per employee, and lost productivity of only $2500 per employee. Overall travel costs are now $2.87m, with annual savings of $574,250 – roughly enough to pay for a software-based communications system for 1,000 users. Carbon savings? About 73 metric tonnes a year.

Green IT savings, too
Already mentioned is the enormous power consumption of data centres worldwide. To cite a specific example, some analysts estimate that one of the world’s largest ISPs’ 2006 power requirements for an estimated 450,000 servers worldwide were 135 megawatts per day – enough to power about 33,000 homes, according to some sources. That level of consumption generates an equivalent of about 72 metric tonnes of carbon dioxide a day.
Clearly then, IT can have a substantial carbon footprint of its own, not to mention direct energy costs. These latter costs break down into 53 percent for cooling and infrastructure; 37 percent for components such as servers; 13 percent for storage; 10 percent for power supply units; and six percent for
network equipment.

In 1993, Siemens was among the first companies in the telecommunications industry to consider the environment in the design, manufacturing, deployment and recycling of its enterprise equipment. We took this approach as a matter of corporate responsibility.

Since then, the company has made great strides in lowering the capital and operating costs of its equipment. It has done so by carefully evaluating the holistic product life cycle, the total energy consumption of its solutions and components, and the business process efficiencies that its communications solutions provide. In addition, it has embraced open standards over the years to enable enterprise customers not only to mix interoperable, best-of-class components but also to interoperate with their legacy infrastructure. This latter capability helps customers get the most out of their legacy investments that, in effect, means reusing and recycling the older equipment.

To illustrate, here are just three ways that green engineering of your company’s communications infrastructure can help save energy and overhead costs, while reducing your carbon footprint:
Power consumption of IP phones can be reduced as much as 50 percent by using advanced circuitry and features like power “standby.” Software-based IP phones that operate via PDAs, laptops and desktop PCs can reduce power consumption even more. Projected across the full base of Siemens end devices, this efficiency can cut power consumption by 32 gigawatt hours, about the same amount of electricity it takes to power some 8,000 households a year. It also equals about a 20,000-tonne reduction in annual CO2 output.

Wireless technologies can help reduce both energy and cabling costs, while offering much greater mobility for employees that can help improve their productivity. The new Power-over-Ethernet (PoE) standards can eliminate the use and cost of copper metal needed in separate electrical wiring to power wireless access points. The industry’s most energy-efficient wireless access points, for example, require just 13 watts of power – less than half the energy demands of other wireless access points – and well within the PoE standards, so no external power supplies are required.

Power demands of large IP switching system may be reduced dramatically by using software-based VoIP solutions. For example, a carrier-grade, enterprise-class IP communications platform can run centrally on off-the-shelf, energy-saving servers in an IT data centre. Just two servers can provide richly featured communications services to as many as 100,000 subscribers. Classic distributed VoIP systems can require as many as 70 servers for the same number of users. In fact, a recent study showed that centralizing and running communications as a pure software application can cut power consumption by 25 percent compared to first-generation distributed Voice-over-IP (VoIP) systems. And compared to a 15-year-old Private Branch Exchange (PBXs) telephone system? Power can be cut up to 90 percent.

Why now and not before? For reasons mentioned earlier, the demand for green technologies did not exist as long as regulated markets and customer lock-in by proprietary vendor solutions guaranteed fat profit margins. At the same time, cheap energy and little or no waste disposal costs meant accounting could pay little heed to the cost of those inputs. Of course, few if any of these conditions exist today. Fortunately, technologies have progressed considerably to help offset tighter margins and higher energy and carbon costs.

While eco-friendly, IP-based communications can help “green-up” a company’s IT and corporate-responsibility profile, it also may help an enterprise to attract and retain customers and employees in the longer run. Meanwhile, it is important to carefully consider the underlying architecture, power consumption and environmental regulatory compliance of any prospective platform. A lot of vendors say their solutions are green but many are merely “green-washing” existing technology without making the considerable investment in engineering that truly green technology requires.

Ultimately, green enterprises stand to reap tremendous benefits of greater efficiencies, more productivity and a better corporate image going forward. Why commit to doing it now? Not only are green approaches to business the right thing to do, but – similar to the quality control movements of the 1980s and 90s – being a green enterprise today can be an effective competitive advantage. And tomorrow, it will be a competitive imperative, so companies should get started now.

Fredy Osterberger has more than 20 years of international marketing experience from arious industries, companies and agencies. He spent 10 years with Apple in Europe, following two years with Intel. In 2006 he joined Siemens Enterprise Communications to lead all of its corporate and marketing communication activities globally

Key points
1. “Green Enterprises” can build market share and profitability through greater energy efficiency and a lower carbon footprint.
2. New IT technologies can improve business performance via better communications, collaboration and knowledge access, while helping improve energy efficiencies and lowering the company’s carbon footprint.
3. Companies have improved their financial capital efficiencies tremendously in recent years… but today’s big opportunity is to improve the efficiency of their enterprise human and knowledge capital, which the green enterprise can help do.

For further information tel: +49 (0)89 722 24849;
email: jeremyw@connectpr.com; www.siemens.com/open