Jaime Polit describes Pluris’ litmus test for sustainable investments, its collaboration with the World Bank in Nicaragua, and the major trends in the world’s population that will form the focus of sustainable investment in the future.
Year: 2010
Greek PM requests activation of EU/IMF aid package
Greek Prime Minister George Papandreou asked for the activation of an EU/IMF aid package on April 23 aimed at pulling the nation out of a debt crisis.
“It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created,” Papandreou said in statements broadcast live from the remote, tiny Aegean island of Kastellorizo.
Greece is negotiating with EU and IMF officials the terms of a €40-45bn package aimed at helping Greece deal with its debt mountain as borrowing costs ballooned.
Papandreou said markets did not give Greece the time it needed to turn its economy around and spiralling lending rates were threatening to negate the effect of painful austerity measures.
“We will not allow it,” he said, speaking against the backdrop of the picturesque port of Greece’s easternmost island. “Our partners will decisively contribute to provide Greece the safe harbour that will allow us to rebuild our ship.”
Papandreou said the EU would send markets a strong message that it can protect common interests and the common currency.
Kiwis: Economy picking up, fiscal pressures remain
New Zealand is growing more strongly than expected but the recovery is still patchy and the government will face high deficits and borrowing for several years yet, Finance Minister Bill English said in a speech recently.
He said the economy had emerged from the global slowdown and domestic recession in better shape than many other economies, helped by strong growth in trade partners Australia and China.
“It’s clear that the economy is recovering slightly more strongly than the Treasury forecast in December and that growth is predicted to strengthen further in the year ahead,” English said in a speech to a business group.
He said the cap on new spending in the coming 2010/11 fiscal year would remain within the previously promised NZ$1.1bn ($780m) limit.
He also repeated that changes to the tax system in its May 20 budget would be cost neutral and fair, with the bulk of taxpayers being better off.
The package is expected to include a rise in the indirect value-added goods and sales tax (GST) to pay for cuts in personal tax rates.
“The prime minister has said that any tax switch involving cutting personal taxes across the board and raising GST to 15 percent would leave the vast bulk of New Zealanders better off. That will definitely be the case,” English said.
The NZ government is expected to post large budget deficits and need hefty borrowing at least until 2016. In March, the IMF called on the New Zealand government to make further efforts to cut spending to return to budget surpluses earlier than forecast, which would ease the pressure on the exchange rate and interest rates.
The government’s fiscal position has been closely tracked by ratings agencies because of the size of its external liabilities.
Fitch Ratings put New Zealand’s AA-plus rating on a negative outlook in July last year on worries about its huge current account deficit and rising external debt.
But both Standard and Poor’s and Moody’s have New Zealand at stable, saying they were satisfied by the government’s plans to return to surpluses and keep borrowing under control.
Fitch told reporters that New Zealand needs sustainable improvement in its fiscal position and debt levels to secure an upgrade in its credit rating outlook.
GM repays US, Canada $5.8bn
General Motors Co has completed repayments totaling $5.8bn to the US and Canadian governments for loans that helped fund the US automaker’s bailout last year, the company has announced.
GM, which emerged from bankruptcy in July 2009, had pledged to repay the balance of loans from the US Treasury and Export Development Canada “in full by June at the latest.”
“Our ability to pay back these loans less than a year after emerging from bankruptcy is a sign that our plan for building a new GM is working,” GM Chief Executive Ed Whitacre said in an opinion piece posted on the Wall Street Journal website.
The loans had outstanding balances of about $4.7bn to the US and $1.1bn to Canada after accounting for exchange rates.
“It is also an important step toward eventually reducing the amount of equity the governments of the US, Canada and Ontario hold in our company,” Whitacre said.
GM received about $50bn of US government support in its bailout, much of which was converted to common and preferred stock in GM unaffected by the loan repayments.
The US Treasury holds a 60.8 percent stake in the common stock of GM, Export Development Canada 11.7 percent, the United Auto Workers healthcare trust 17.5 percent and old GM, now known as Motors Liquidation, holds 10 percent.
The automaker has been preparing for an eventual public offering that would allow the governments to reduce their stakes in GM and earlier in April released the first full accounting of its balance sheet as a restructured company.
GM reported a net loss of $4.3bn for the period from its emergence from bankruptcy in July through the end of 2009, including a $3.4bn net loss for the fourth quarter.
India central bank lifts rates, signals tightening
India’s central bank has raised key interest rates by 25 basis points and said further rises are likely as it moves to return monetary policy towards pre-crisis settings and battles near double-digit inflation.
The Reserve Bank of India’s move was in line with expectations, but some investors had bet on a bigger rise and central bank watchers said the measured tightening increased the likelihood of another hike before the next quarterly review in July.
Government officials, however, keen to keep the economy on track to exceed eight percent growth this year, said inflationary pressures were waning and downplayed the need for aggressive tightening.
“The policy statement is not hawkish enough to address the concerns on the inflation front,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai. The central bank said price pressures were spreading beyond food costs and there was evidence that companies were regaining their pricing power after a slow patch during the global economic crisis. March inflation reached 9.9 percent year-on-year, its fastest pace in 17 months.
However, the central bank is under pressure from the government not to raise rates aggressively, with New Delhi worried it could dent economic growth and complicate its borrowing, which will reach a record $100bn this year.
“RBI at this juncture is more constrained by the management of the government’s record borrowing programme,” Nitsure said.
More tightening ahead
The central bank is expected to raise rates by a further 100 basis points over the next 12 months, according to the one-year overnight indexed swap (OIS) rate at 4.95 percent and economists polled by Reuters poll ahead of the review, forecast similar tightening.
“At this point it looks like we have to move many times,” RBI Governor Duvvuri Subbarao told reporters, adding that an off-cycle policy move was unlikely but could not be ruled out.
“Everything need not be done in one step and we believe that moving in several baby steps towards normalisation is better for the economy to adjust to pre-crisis growth levels,” he said.
The rise follows a surprise quarter-point hike in mid-March when India became the second Group of 20 country after Australia to lift interest rates as the global economy recovers from its worst downturn in generations.
“If incoming inflation data over the interim period show price pressures continuing to build, there is a good chance that the RBI will deliver another off-schedule rate hike,” said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.
Inflation optimism
Some economists said the RBI’s prediction that inflation will ease to 5.5 percent by the end of March 2011 was too optimistic.
Finance Minister Pranab Mukherjee said inflation had peaked and was on its way down even as the economy was powering ahead, a hint for the central bank that it did not need to tighten aggressively despite rising protests over high food prices.
“I believe that it is time to move back towards ‘neutral’ policy rates, that is, rates that should prevail when an economy is stable and on track,” Mukherjee said, predicting fiscal year-end inflation closer to four percent.
Only China is growing faster among major economies.
Montek Singh Ahluwalia, deputy chairman of India’s planning commission, said that if inflation returned to a “reasonable path” further tightening might not be necessary. “Small adjustments that are well within the range of probability do not disrupt the market and they serve a useful purpose,” he said.
The RBI lifted the reverse repo rate, at which it absorbs excess cash from the banking system to 3.75 percent and the repo rate, at which it lends to banks, to 5.25 percent.
A successful summer monsoon would help ease the pressure from high food prices following last year’s drought, although it might also add to demand-driven inflation. A move towards market-based fuel prices, which the government has put on hold amid opposition attacks over rising prices, would also add to headline inflation.
Ukraine seeks $12bn in new IMF programme
“We will present a Ukrainian draft programme for cooperation with the IMF over the next two an a half years. It’s a new programme aimed at supporting economic growth”, Tigipko told reporters.
“I think such a programme might hover around $12bn,” he said.
The ex-Soviet republic of 46 million people, which needs fresh IMF credit to help its struggling economy recover from the global downturn, has been on a $16.4bn bailout programme from the fund.
But that programme was suspended late last year, after $10.5 worth of credit had been disbursed, because the previous Ukrainian administration reneged on promises of fiscal restraint.
The new leadership of President Viktor Yanukovich has promised the IMF it will put together a 2010 state budget with a relatively tight deficit of six percent of GDP in exchange for the credit.
That, however, also depends on Ukraine striking a deal with Russia on a new price for huge imports of natural gas which Ukraine needs to fuel its energy-hungry export industries of steel and chemicals.
“I am optimistic in this matter,” Tigipko said, referring to his forthcoming talks with the IMF. “We will do everything to secure an agreed programme with the IMF at the beginning of May. In June perhaps financing will start coming…” he said.
Tigipko said GDP growth in 2010 may exceed the government’s “conservative” forecast of 3.7 percent for the year. In 2009, the economy shrank by an estimated 15.1 percent.
Tigipko said the government had to solve the problem of not only the state budget but also that of Naftogaz, the troubled Ukrainian energy giant which is kept financially afloat by state subsidies.
He said if Ukraine and Russia managed to reach an agreement on cutting the gas price this would help significantly to balance the Naftogaz budget.
Goldman Sachs profit tops forecast, UK opens probe
Goldman’s results came four days after the firm was accused of fraud by the US SEC in the structuring and marketing of a debt product tied to subprime mortgages.
“On the face of it, Goldman’s numbers are pretty good, which they do time and time again,” said David Morrison, market strategist for GFT Global Markets in London. “Investors will want to focus on the blow-out numbers, but the news the FSA is also probing the firm takes some of the shine off.”
Goldman said net income rose to $3.29bn, or $5.59 per share, from $1.66bn, or $3.39 per share, a year earlier.
Analysts on average had forecast $4.01 per share, according to Thomson Reuters.
Goldman emerged as Wall Street’s most influential bank after the financial crisis but has faced a backlash over its pay and business practices.
The bank’s co-general counsel, Greg Palm, launched a rebuttal of the SEC charges during the bank’s earnings conference call.
Palm said the firm was “very disappointed” that the SEC had brought charges and insisted that Goldman “would never mislead anyone.”
He also said investors who lost money on the subprime mortgage product that is the focus of the SEC suit had a wealth of experience and background in such deals.
‘Recklessness and greed’
Goldman’s forecast-beating earnings came as Britain’s FSA said it had started a formal investigation into Goldman Sachs International in relation to the SEC allegations. The FSA said it would work closely with its US counterpart.
UK Business Secretary Peter Mandelson said on BBC Radio, “We have got to look at the whole system of constituting and regulating banks. We need a system of regulation, a system of levying banks, which is internationally applied.”
Nick Clegg, leader of the Liberal Democrats, the UK’s third-largest party, said the allegations against Goldman “are a reminder, if we needed one, of the recklessness and greed that disfigured the banking industry as a whole.”
In the US, political tensions were heightened by reports that the five SEC commissioners split along political lines in a vote on whether to file suit against Goldman. The three Democrats voted in favor of the legal action, while the two Republicans opposed it, according to press reports.
“I have my doubts about this attack on Goldman Sachs, for the simple reason that with two members of the SEC clearly against the indictment, it doesn’t make (SEC Chairman) Mary Schapiro’s job any easier,” said David Buik, senior partner with BGC Partners in London.
Ghosts of past shackle Bosnia’s economic future
The conflict between Serbs, Muslims and Croats may no longer be waged with heavy artillery and ethnic cleansing, but a toxic combination of de facto partition, obstruction and graft by politicians in each group keeps a stranglehold on the economy.
“What sort of investment can we expect when our political leaders are sending such very bad messages to the world and to each other?” asks Svetlana Cenic, an economist and former finance minister of the Bosnian Serb Republic.
Fallout from the global financial crisis has deepened economic stagnation wrought by the rival Bosnian communities’ inability to reform dysfunctional institutions created by the 1995 Dayton peace accords that ended the 1992-95 war.
A staggering 42 percent of the workforce is officially unemployed. Taking into account the informal grey economy, the jobless rate is reckoned to be nearly 25 percent.
While the country has a single market on paper, with free circulation of goods and the same rates of customs and value added tax, businesses often have to bribe or obey politicians in the two main entities to be able to operate, Cenic told reporters.
“Foreign companies… have to struggle to get all kinds of permissions and guarantees that no one will disturb them, that they will not be racketeered,” she said in an interview.
Hardline Bosnian Serb Prime Minister Milorad Dodik has a tight grip on economic activity in his fiefdom, but things are messier in the Muslim-Croat Federation, where several layers of administration have to be greased.
“The perception of this country is still so bad that serious investors don’t want to risk anything,” former Foreign Minister Mladen Ivanic told reporters. “The main problem is the political system, not the economic system.”
For local private companies, the key to survival is often to stay close to the governments in both Bosnian entities to ensure a share of contracts dependent on the state budget.
Bosnia’s home market of an estimated 3.8 million citizens with just $4,600 in GDP per capita is too poor to attract much investment. Access to the larger neighbouring markets of Croatia and Serbia is vital, but there are many non-tariff barriers.
A trade forum in the central Bosnian town of Mostar recently illustrated how politics continue to trump economics. Serbian President Boris Tadic came to promote business cooperation between the neighbouring former Yugoslav republics.
But he walked into a political lecture from Bosnian presidency chairman Haris Silajdzic, a Muslim, who warned “we must not push the problems of the past under the carpet.” Bosnian Serb companies and executives mostly stayed away.
The main potential for investment in the mountainous country, still patrolled by European peacekeepers, lies in energy and infrastructure, but political feuding and self-enrichment continue to thwart big projects.
Austrian construction giant Strabag was chosen by the Bosnian Serb government in 2006 to build a three billion euro motorway from Banja Luka, the autonomous region’s capital, to the town of Doboj. But the company ran into financing problems because there was no competitive tender for the contract. The European Bank for Reconstruction and Development refused to participate, and road building has still not started.
Energy investments are held up because Bosnia still lacks a functioning national electricity grid, despite repeated promises to remove political obstacles.
The prime ministers of the two entities agreed in November to enable the Elektroprenos company to operate normally, but little has moved. The dispute may also endanger a potentially lucrative power deal with Italy and Montenegro.
Italian Prime Minister Silvio Berlusconi has courted Dodik for joint energy projects, including the Bosian Serb Republic’s participation in the Russian South Stream gas pipeline, a rival to the European Union-backed Nabucco pipeline from central Asia.
Another brake on economic growth is land ownership. While other former Yugoslav republics have reformed their laws, Bosnia still labours under a system whereby the government owns the land, and companies buy only the right to build on or use it.
This gives politicians a huge source of patronage, often requiring several layers of bribery to complete a building or run a business. Furtheremore, the lack of freehold ownership limits the amount companies can borrow and stifles growth, according to a senior international official in Sarajevo.
Add to that the 400 state enterprises in the Muslim-Croat federation alone, whose board members and top management are all political appointees, and it’s easy to see how politics continues to shackle the economy.
While many Bosnians seem unhappy at this state of affairs, nationalist politicians have so far succeeded in fanning ethnic fears at election time to drown out economic discontent. Don’t count on this year being any different.
An arabesque perspective
Agriculture accounts for 25 percent of the country’s GDP and 42 percent of the total work force. Of Syria’s 72,000 square miles, roughly one-third is arable land, with 80 percent of cultivated areas dependent on rainfall for water.
Since 1990 the government has redirected its economic development priorities from industrial expansion into the agricultural sectors in order to achieve food self-sufficiency, enhance exports, and curb rural migration. Thanks to sustained capital investment, infrastructure development, subsidies of inputs, and price supports, Syria has transformed itself from an importer of many agricultural products to an exporter of cotton, fruit and vegetables.
One of the major reasons for this turnaround has been the government’s investment in a huge irrigation systems in Northern and North Eastern Syria.
Today, the best farmland is located along the coast and in the Jabal al-Nusayriyah, around Aleppo, in the region between Hama and Homs, in the Damascus area, and in the land between the Euphrates and Khabur rivers, which is known as Al Jazira or The Island. The principal crops include wheat, barley, cotton, lentils, chickpeas, olives, and sugar beets. Large numbers of poultry, cattle, and sheep are raised, and dairy products are also important.
Most agricultural land is privately owned, a crucial factor behind the sector’s success. About 28 percent of Syria’s land area is cultivated, and 21 percent of that total is irrigated. Most irrigated land is designated ‘strategic’, meaning that it encounters significant state intervention in terms of pricing, subsidies, and marketing controls.
Strategic products such as wheat, barley, and sugar beets, must be sold to state marketing boards at fixed prices, often above world prices in order to support farmers, but at a significant cost to the state budget. The most widely grown arable crop is wheat, but the most important cash crop is cotton, which was the largest single export before the development of the oil sector.
As part of it’s ongoing strategy, the government’s aim is to increase irrigated farmland by 38 percent over the next decade.
Oil & gas
Syria has produced heavy-grade crude from fields in its North East region since the late 1960s. In the early 1980s, light-grade, low-sulphur oil was discovered near Dayr az Zawr in Eastern Syria. This discovery relieved Syria of the need to import light oil to mix with domestic heavy crude in refineries.
In 2005 Syria exported roughly 200,000 bbl/d (32,000 m3/d) and oil still accounts for a majority of the country’s export income. More recently, Syrian oil production has been about 530,000 barrels per day. Although its oil reserves are small compared to those of many other Arab states, Syria’s petroleum industry accounts for a majority of the country’s export income.
The government has successfully begun to work with international energy companies to develop Syria’s promising natural gas reserves, both for domestic use and export. US energy firm, ConocoPhillips, completed a large natural gas gathering and production facility for Syria in late 2000, and will continued to serve as operator of the plant until December 2005.
Syria has historically enjoyed some success in securing partnership agreements with overseas Petroleum companies. In 2003 it signed an exploration deal with partners Devon Energy and Gulf Sands and a seismic survey contract with Veritas.
In addition to oil, Syria also produces 22 million cubic metres of gas per day, with estimated reserves around 8.5 trillion cubic feet (240 km3). While the government has begun to work with international energy companies in the hopes of eventually becoming a gas exporter, all gas currently produced is consumed domestically.
Going forward the government is working to attract new investment in the tourism, natural gas, and service sectors to diversify its economy and reduce its dependence on these two key sectors.
Government and economy
During the 1960s, under its socialist ideology, the Syrian government nationalised most major enterprises and adopted economic policies designed to address regional and class disparities. This policy of state intervention and price, trade, and foreign exchange still hampers economic growth, although the government has begun to reconsider many of these policies, especially in the financial sector and the country’s trade regime.
Taken as a whole, Syrian economic reform thus far has been incremental and gradual. The government has begun to address structural deficiencies in the economy such as the lack of a modern financial sector through changes to the legal and regulatory environment. In 2001, Syria legalised private banking and accordingly, in the same year, four private banks began operations.
Hot on the heels of these developments, in August 2004, a committee was formed to supervise the establishment of a stock market. Beyond the financial sector, the Syrian government has implemented major changes to rental and tax laws and is considering similar changes to the commercial code and to other laws, which currently impact property rights.
Trade and commerce has always been important to the Syrian economy, which benefited from the country’s location along major East-West trade routes. Syrian cities boast both traditional industries such as weaving and dried-fruit packing and modern heavy industry. However, in light of the policies adopted from the 1960s through to the late 1980s, Syria was unable to join an increasingly interconnected global economy.
In late 2001, however, Syria submitted a request to the World Trade Organisation to begin the accession process. Syria had been an original contracting party of the former General Agreement on Tariffs and Trade but withdrew in 1951 because of Israel’s membership. Major elements of current Syrian trade rules would have to change in order to be consistent with the WTO. Syria also continues to discuss a possible Association Agreement with the European Union that would entail significant trade liberalisation.
Ongoing commercial liberalisation measures have filtered down to Syria’s private sector. In 1990, the government established an official parallel exchange rate (neighbouring country rate) to provide incentives for remittances and exports through official channels. This action improved the supply of basic commodities and contained inflation by removing risk premiums on smuggled commodities.
The bulk of Syrian imports have been raw materials essential for industry, agriculture, equipment, and machinery.
Major exports include crude oil, refined products, raw cotton, clothing, fruits, and grains. Earnings from oil exports are one of the government’s most important sources of foreign exchange.
Although economic reform measures have been implemented slowly, earlier reforms have stimulated the private sector. The simplification of trading procedures, the expansion of a wider range of industry projects available to private companies, the easing of foreign exchange dealings, and the reduction of state intervention has helped to encourage private sector development. In addition, investment law has enabled the new projects to be initiated, particularly in small-scale manufacturing and service sectors. The tourism sector holds great potential and many new joint ventures between the public and private sectors have become more common in recent years.
The Syrian private sector has much to offer that the public sector cannot, a higher degree of efficiency, work incentives, and better training and salaries. This may lead those in the public sector to transfer to the private sector, which in turn will help make public sector enterprises more efficient. In addition, due to a wide range of regional and international contacts, the private sector also has greater access to international capital markets in order to finance new projects.
Going forward, the return of the younger generation of foreign-educated Syrian nationals will help to improve Syria’s economic management. Many young Syrian businessmen are seeing new potential for economic growth as reform measures are initiated. Influenced by the experiences in market-oriented societies, this generation may change how business is conducted.
The Syrian economy is in the beginning stages of a transformation period. While still highly centralised, recent economic liberalisation measures have led to a revitalisation of entrepreneurial activities in the private sector.
This, built on a strong foundations of agriculture and oil, will galvanise the country and help it achieve success on a global stage.
Saudi investor appetite recovers
Saudi Arabia is discussing extending development loans to Syria as ties between the two countries improve but there will not be direct cash assistance, the Saudi central bank governor said.
Diplomatic activity between Damascus and Riyadh has picked up in the last few months after they agreed to set aside their political differences and lower tension between their allies in Lebanon, which is a recipient of large Saudi cash injections.
Ties deteriorated after the 2005 assassination of Rafik al-Hariri, a Saudi-backed Lebanese member of parliament and former prime minister, resulting in the waning of Saudi investment appetite and aid to Syria.
“Syria is one of the most important Arab economies. It’s a promising market to whoever has money to invest,” Muhammad al-Jasser, head of the Saudi Arabian Monetary Agency, said after attending a banking conference in the Syrian capital.
“The Saudi finance minister was in Damascus and talked about this and what the Saudi Fund for Development is doing along with other Saudi government institutions,” he added.
Syria needs billions of dollars in investment to overhaul its infrastructure, resuscitate its drought hit east, lower unemployment and deal with a 2.5 percent annual population growth.
Most of the investment has been by and among others Syrian expatriates and from the Gulf into banking and real estate. Economic growth fell to three percent last year compared with 5.2 percent in 2008, according to the World Bank.
Asked whether Saudi Arabia could deposit cash directly into the Syrian central bank, as it did with Lebanon, Jasser said such a move “will not be considered”.
But he said that the Saudi Fund for Development signed a memorandum of understanding with the Syrian finance ministry in March to lend $140m to raise output at a power station in Syria.
Investor mood
If extended, the loan will be the first since the Hariri assassination, which Saudi-backed politicians in Lebanon blame on Syria. Damascus denied any involvement.
Syria, which is under US sanctions for its support of militant groups, has opened several sectors of the economy to private investment, especially banking and insurance, since President Bashar al-Assad succeeded his late father, Hafez al-Assad, in 2000.
The ruling Baath Party, which Bashar controls, nationalised large parts of the economy and enacted bans on private enterprise when it took power in 1963. It also imposed emergency law which is still in force and banned any opposition.
In a sign of changing investor mood, Saleh Kamel, a leading Saudi businessmen, addressed an investment forum in Damascus in March.
He said Syria was underperforming compared to Lebanon, its much smaller neighbour, because of what he described as antiquated laws, corruption and a lack of pro-investment culture.
Syria supports the Lebanese opposition led by the armed Shi’ite movement Hezbollah, which is also backed by Iran. Saudi Arabia is the political patron of Lebanese Prime Minister Saad al-Hariri, son of the late Rafik al-Hariri.
Transforming energy
The origins of Acciona date back to the 19th century with the development of a railway line connecting the main Northwest cities in Spain. Today, the original civil construction company has turned into a global developer and service provider, specially focused in providing solutions to society to face energy, infrastructure and water challenges.
Acciona’s success story has been achieved over more than 100 years and the future looks bright for a multinational company that now operates in 32 countries with a 35,000 workforce. The company ranks number three in terms of installed renewable capacity worldwide with 7.5 GW at year end. It is the global renewable operator with presence in more technologies (6) and more countries (18) than any other player.
With over Ä7bn worth of projects in the pipeline, the infrastructure division is at the forefront of technological innovation. Its global reach and integrated model provide a solid platform to capture future growth in its key strategic markets, benefiting from the increasing formulas of PPP worldwide.
Acciona is a “total solution provider” in the water sector, specialising in the design, construction and management of drinking water and sewage treatment plants, providing tertiary treatment for reuse and reverse osmosis desalination plants. It currently has an order book worth Ä4.4bn and provides water to 50 million people on
five continents.
With a market capitalisation of over Ä5.3bn, its consolidated revenues and EBITDA in 2009 reached Ä6.5bn and Ä1bn, respectively. The group invested Ä4.2bn throughout the year. The market recognises that the business model represents a strategic position with great potential and the total annual compounded shareholder return since Acciona started trading back in 1997 stands at 20 percent, ranking number 2 in IBEX35 index for the period.
Acciona’s history is a history of adaptation. Its management has not lost sight of the fact that many of the most important opportunities and successes of the company came about during challenging and changing environments.
The company has proven its ability to adapt its own structure and to meet rapidly shifting market conditions, constantly identifying new business opportunities from a pioneer perspective.
The company played a large part in building the Spanish energy industry and transport infrastructure of the 60’s & 70’s. Throughout the 80’s, Acciona started its diversification strategy, shifting its focus from its construction origins to enable its positioning in businesses of a diverse nature, and cyclicality, with accelerated growth. During this period, Acciona entered into the urban services and real estate industries. In the 90’s, it founded in consortium Airtel, the first independent mobile telecom operator, today Vodafone Spain. During the decade, Acciona was the first non-utility company to undertake a renewable energy strategy. Later in the 90’s it was the first mover in the consolidation of the Spanish construction sector through a reverse merger of Entrecanales & Tavora with Cubiertas & MZOV, which together formed the current Acciona.
The decade of the 00’s was the turning point in the transforming process of the company. José Manuel Entrecanales was appointed chairman in 2004, focusing the company into its three pillars for future growth: infrastructure, energy and water together with its international expansion.
Sustainability, innovation
Acciona’s constant evolution from private to public, from the domestic to the global market and from the civil construction to the global developer and service provider, has not changed its values and DNA: sustainability and innovation. Sustainability is at the heart of Acciona’s strategy.
Acciona exercises its entire activity based on index values of sustainability, contributing to the wellbeing of society and environmental balance, across the range of its lines of business: infrastructures, renewable energies, real estate, logistics and transport, water and environmental services.
The company’s business model is none other than to lead the transition towards sustainable development from the front and by innovating. Acciona contributes to building a development model that does not threaten the ecological limits of the planet and which promotes social cohesion. It gives a sustainable solution to some of the most difficult challenges faced by humanity: the creation of infrastructure for economic development and social organisation, the definition of a new global energy architecture and to extend and improve the availability of water. As a matter of fact, it has been at the DNA of its activity since its foundation.
Looking ahead
Global challenges will become the key strategic drivers for Acciona’s business and its innovation strategy.
With the population growing by 50 percent, up to 9.2 billion people by 2050, and a well deserved aspiration to better living standards in the developing world and hence, an untenable increase in demand of new goods and services per capita is to be expected. The developed world needs to hugely reduce its social footprint to make room for the developing world’s ever-increasing demand for resources.
One of the main challenges the world faces in this context is the fact that our current energy model is not viable in the long term. Multiple factors are challenging the global energy outlook, fuelling a trend towards renewable energy. A model essentially based on fossil fuels and insecurity of supply, coupled with a growing demand, ambitious energy policies and growing climate change concerns, is unsustainable.
But urban concentration, expected to absorb two-thirds of the world’s population by 2050, will also require new infrastructures for transport, waste, housing, health, education, water sanitation and others. More than 1.3 billion people today lack access to clean drinking water. By 2025, according to UN projections, more than one-third of humanity (2.8 billion people) will be suffering from water stress. Acciona’s future growth will also focus on developing the necessary infrastructure for good living standards and on providing solutions to the water problem.
The globalisation of the combined offer of energy, infrastructure and water is the natural path of expansion in the immediate future. These basic needs to which Acciona provides the solutions and to which it seeks alternatives are global.
Acciona is in a privileged position for providing solutions to many of the most urgent world challenges. However, Acciona’s plans for growth and to contribute to sustainability go beyond the field of energy, infrastructure and water. José Manuel Entrecanales, in the recent Investor Day held in March of this year, asked “not to categorise Acciona exclusively within the energy, the infrastructure or the water sectors and to see the company as a global unit aiming to provide society with solutions to its more daunting challenges while maximising growth and returns.”
After an incredible story of adaptation and success, Acciona’s track record and experience endorses optimism over its future.
While it is impossible to predict how the operating environment will unfold, the company remains confident that it will “adapt in a sustainable way” to new global challenges.
KKR flotation takes it back to the future
An analysis of the firm’s listing documents underlines the way the industry has changed in the years since it was forced to withdraw its 2007 listing as the financial crisis set in.
A comparison of the two documents also shows the changes to the firm’s ambitions and the way it does its business as it adjusts to the post-crisis world.
At the time of its first attempt, in July 2007, it was flexing its muscles as the world’s largest buyout house. It had just signed the largest buyouts in Europe and the US: in the year to August 2007 it was to deploy more than $20bn (Ä14.7bn) of equity in private equity deals according to research by Private Equity News.
Its prospectus promised access to a firm with “a history of landmark achievements in private equity”.
KKR is returning to New York a second time, yet it is not raising extra capital, unlike the $1.25bn it intended to raise then.
With an eye on current market hostility, the company’s historic private equity achievements are relatively downplayed and the firm instead highlights its greater diversification and growing capital markets and public markets’ businesses.
This apparent strategic shift and its relocation to New York takes the firm directly head to head with its bigger rival, Blackstone Group.
Its rivals believe KKR may be laying the ground for an attempt to create an opportunity for the founders to exit from some or all of their stake should the company’s shares perform well and market appetite for a rights issue increase.
One rival said: “That’s something they missed at the top, which Blackstone pulled off.” However, a person close to the listing played down an exit by the founders as the motivation for the float, instead saying it was an attempt to provide capital to grow the firm and incentivise staff.
How the firm has changed since 2007:
Ambition
KKR has scaled back its capital-raising ambitions since its last tilt at a listing. Three years ago, the firm planned to raise $1.25bn (Ä922m) of new capital by listing its management company, according to an SEC filing dated July 3, 2007. This time, it will not raise any additional capital, but rather transfer its Euronext-listed vehicle, KKR & Co, to New York, valuing it at $2.2bn.
KKR expects its New York-listed shares to be traded more frequently than its Euronext-listed stock because there are many similar listed management companies in the US, according to a source close to the matter.
The flotation could also help address the low price of its Euronext-listed shares, which trade below book value, the source said. By improving its stock’s liquidity and price, KKR will provide founders Henry Kravis and George Roberts with a possible improved exit route.
Unlike last time, the latest plan will not allow the founders to sell stakes at the time of the float. By contrast, Blackstone co-founder Stephen Schwarzman reaped $309m in cash from his firm’s IPO and retained 22 percent of its stock. A source close to the matter said the founders’ ability to exit was not the primary motivation for the flotation. Rather, the source said, the wish to incentivise staff and provide capital to grow the business.
Strategy
KKR has emerged from the financial crisis bigger and more diversified. Compared with 2007, the firm’s assets under management have increased 10 percent to $52.2bn from $47.2bn following a decline in 2008, while its focus has shifted away from mega-buyouts.
The new prospectus suggests the firm is making greater play of its other business lines. Back in the glory days of 2007, as deal sizes hit new highs almost weekly, the firm’s prospectus used the words “private equity” 638 times and “buyout” 52 times.
The latest prospectus tones down the emphasis on its core private equity business, with just 436 mentions of “private equity” and 12 of “buyout”. In an economic environment where diversified strategies and other business lines are arguably more highly valued by investors, KKR mentions its now flourishing “capital markets” 118 times in its 2010 document, three times more than in 2007.
Meanwhile, the share of KKR’s portfolio accounted for by core private equity fell to 74.3 percent from 77.3 percent between 2007 and 2009, despite a $2.3bn increase in its private equity assets, to $38.8bn. Instead, the firm is focusing more on its nascent capital markets division, which analysts say should generate strong revenues, and its public markets unit, which invests in debt and has assets of about $13.4bn under management.
Structure
The latest prospectus envisages a more complex listed structure than that outlined three years ago. Then, the firm planned to list its management company in New York and a separate funds vehicle on Euronext in Amsterdam. This time, the New York flotation will include exposure to the group’s underlying funds as well as its management company.
That means three years ago investors would largely have acquired links to the firm’s fee revenues. This time they will get a mix of revenues, including fees from the management company and returns on investments from the portfolio if its companies increase in value.
The volatility of private equity company fees make the hybrid business model potentially more attractive to public market investors. The new strategy will create a listed firm with a bigger balance sheet than was previously envisaged, according to a source close to the listing. It will also leave the listed company and KKR’s executives as the biggest investors in the firm’s funds.
Fees
The latest prospectus would appear to raise questions around the viability of KKR’s large buyout model. As dealmaking has dried up, fees earned by the firm – including more stable management fees and more volatile transaction fees, have slumped 62 percent from the market peak, to $331m last year, compared with $862m in 2007. Transaction fees alone fell 87 percent to $91.8m last year from $683.1m in 2007, although management fees have increased.
The firm’s efforts to diversify may help stymie that decline. According to Sandler O’Neill analyst Michael Kim, the firm’s capital markets division might fill the gap. The division’s star has risen of late, particularly since it emerged as an underwriter of football club Manchester United’s bond issuer earlier this year.
Portfolio companies
The firm’s biggest challenge will be to prove it can generate returns from its high spending levels at the top of the market.
KKR was the only private equity firm to deploy more than $20bn in equity in the year to August 2007, according to research by Private Equity News. The firm’s 2007 prospectus claimed that it had closed “the largest leveraged buyouts completed or announced in each of the US, the Netherlands, Denmark, India, Australia, Singapore and France”.
New records followed after the firm published its prospectus: its £12.4bn acquisition of UK pharmacy group Alliance Boots was the largest European and UK buyout, while its $45bn purchase of US energy company TXU remains the largest buyout globally. This time the firm is still one of the biggest private equity participants, but its largest deal since the collapse of Lehman Brothers in 2008 is the under-$2bn buyout of Korean company Oriental Brewery, less than a twentieth of the size of TXU.
The firm has since taken markdowns on Alliance Boots and TXU. But a source close to the listing said the firm expected to do better from its boom-time acquisitions than market sentiment might suggest.
Management
Henry Kravis and George Roberts remain the driving force behind KKR. But as top private equity executives begin to make way for the next generation – including Tom Attwood, who stepped down as chief executive of debt specialist Intermediate Capital Group last week – many observers wonder how long the cousins’ dominance will last.
The firm has long sought to move towards a more normal corporate structure, giving different executives responsibility for operations in individual countries and sectors. The flotation could simplify that transition by providing the founders with a simple exit route.
But a person close to the company said Kravis and Roberts could be expected to remain at the top for some time. Investors will focus on how KKR manages its succession.
Ownership structure
KKR’s ownership has changed since 2007. Once having a reputation for secrecy, the firm is now majority-owned by its staff and public shareholders.
Public investors acquired a 30 percent stake in the firm last year, after KKR merged its management company with Euronext-listed KKR Private Equity Investors to create KKR & Co.
That publicly-held stake is likely to increase after the firm lists in New York.
It is unclear when the firm’s partners, who hold the remaining 70 percent of the management company, might sell their stakes, but a person close to the listing said they would look to raise more capital from the public markets over time.
International expansion
Overseas expansion has continued apace since 2007 despite the financial crisis. The firm has doubled its international offices from seven to 14 over the period, according to the latest prospectus. That expansion helped the group seal the $1.8bn acquisition of Oriental Brewery last year.
The overseas drive was made possible by aggressive hiring. The firm boosted its workforce by 50 percent since 2007, to 600 from 399, during a period in which many rivals pared their staff.
© 1996-2009 eFinancialNews Ltd
The regulatory legacy of Lehman Brothers
It is obvious that there should be an intense discussion about which policy or policies might have provoked the collapse.
Most commentators assumed that the US authorities had made a mistake in allowing Lehman to fail. It was not as if the failure was a surprise; it was a slow-motion collapse that was regarded as increasingly likely in the week before September 15. Since the financial markets seemed to be already recovering in the summer of 2008 from the turbulence surrounding the rescue of Bear Stearns, it was plausible to think that then-Treasury Secretary Hank Paulson wanted to make a dramatic illustration of the unwillingness of the authorities to enlarge moral hazard.
The alternative view was that the Treasury and the Federal Reserve knew that the banking system was deeply problematical, and contained a plethora of unknown risks. It threatened to explode sooner or later, and would require a massive restructuring involving a large amount of public money.
But such money would only be made available by Congress after a dramatic crisis. Allowing Lehman to collapse was just the easiest way of making the politicians aware of the seriousness of the situation.
The exposure of Lehman’s accounting practices in the court-ordered report by Anton Valukas makes it clear that both the previous prevailing interpretations of the Lehman collapse are mistaken.
The Lehman problem was in reality a much simpler and rather old-fashioned one. Lehman had adopted accounting practices (the use of Repo 105 to shift property exposure off the balance sheet) that New York law firms had been unwilling to endorse.
If the Lehman crisis had been recognised at the time as the result of such accounting, it could have been allowed to collapse without implicating the banking system. The strategy of containing moral hazard might have worked.
In a similar way, the collapse of Enron after fraudulent accounting strengthened rather than weakened American corporate life. No one assumed that all American business simply replicated Enron.
The problem of 2008 was that there was no mechanism to work out what had gone wrong with Lehman, or to recognise the extent to which the Lehman problem was an idiosyncratic one rather than a generic issue.
The Lehman problem would have been avoided by a common set of accounting practices and international regulation of banking.
The problem looks exactly like the collapse in 1991 of the Bank of Credit and Commerce International. BCCI had been legally based in Luxembourg and in the Cayman Islands, but had extensive operations in Africa, the Middle East and the Far East that were managed out of London. The Bank of England had not concerned itself with BCCI, as it did not appear to be a London institution.
But the systemic consequences of BCCI were never enunciated. In the early 1990s, BCCI was seen as a unique case that did not require the institution of a genuinely international system of regulation and supervision.
By the 2000s, however, the international banking system was full of opacity, largely because of the extent of a globalisation of finance that took place at the same time as banks evolved their own trading platforms.
Megabanks had internalised activities that were once performed by individuals and institutions in large part legally independent of one another, or of public markets.
Nearly all of these new mega-institutions were public companies, which are better placed than separate institutions, especially those conducting business on public markets, to keep their transactions off the radar screens of regulators.
Banking is inherently competitive, but is not an industry where competition ever worked very well. Banks essentially depend on information (about the quality of their lending) that is not available to their depositors.
When banking was stable and regulated in a national setting, three or four leading banks tended to form an oligopoly in each country: Barclays, Lloyds, Midland and National Westminster in the UK, Bayerische Vereinsbank, Commerzbank, Deutsche, and Dresdner in Germany; Credit Suisse, SBC, and UBS in Switzerland.
There were always suspicions of either a formal or an informal cartel. Regulators generally turned a blind eye to these suspicions, but there was an obvious framework for regulation.
Over the last 20 years, the oligopoly became international rather than national. In the 1990s and 2000s internationalisation promised a new landscape in which a handful of banks would divide up not national markets, but a single global market.
Banks manoeuvred to take advantage of financial globalisation. That usually meant locating themselves in the most lax and least restrictive regulatory regime.
From the point of view of regulators, there was an unwillingness to take on the potential systemic consequences of regulatory arbitrage. The US assumes that it can regulate banks on its own. It negotiated the Basel II agreement, but was unwilling to implement it. The UK also assumed that it could provide the framework for a more effectively competitive financial industry.
Coming as it does at a moment when the discussion about banking regulation looks as if it is stymied by the clashes of national champions, the Lehman report is a valuable reminder. Unless regulators are in a position quickly to work out whether a failed institution is an example of particular misconduct or of a systemic risk, banking regulation will not be able to produce more stable financial markets.
Harold James is professor of history and international affairs at Princeton University
© 1996-2009 eFinancialNews Ltd
Strength in innovation
ING Funds Berhad (ING Funds) is the Malaysian affiliate of ING Investment Management, the investment arm of ING Group. The Company commenced business in 2004 and has since established itself as a leading player in the local fund management industry especially in the shariah investment space. ING Funds offers a comprehensive range of investment solutions for retail, corporate and institutional markets. As at December 2009, it has a total assets under management (AUM) of RM3.5bn – of which more than half are Shariah-compliant assets.
ING Funds’ strength to develop innovative products and services has been a core competitive edge, which has differentiated the company from other players in the fund management industry. ING Funds is known to be the first to introduce many of the award-winning products in the fund management industry. The latest of which is the ING Annual Income Climate Structured Fund; the first Shariah-based close-ended fund that offers five percent annual income distribution for three years plus potential capital upside returns with 100 percent capital preservation in Australian Dollars at maturity. This Fund has demonstrated superior performance since inception.
Government support
The Malaysian Government, in its effort to make and position the country to be a leading Islamic financial centre, launched the Malaysian International Islamic Centre (MIFC) initiative in August 2006. With that, Malaysia holds the distinction of being the first country to have a full-fledged Islamic financial system and has strong emphasis on human capital development in Islamic finance to ensure the availability of Islamic finance talent to leverage on the country’s inherent strengths, advantages and experience to tap the opportunities in Islamic finance.
Since then, there has been a steady growth of shariah investment funds in Malaysia. As quoted from the Cerulli Report 2008, “Malaysia is believed to be the home to more Islamic funds than anywhere else in the world and largest after Saudi Arabia in terms of assets”.
The Malaysian market
Under the MIFC initiatives, the liberalisation of the local Islamic fund management industry, which came along with tax advantage and other incentives, have so far attracted 12 local and international players to set up Islamic fund management outfit in Malaysia to promote shariah investment solutions locally and offshore.
According to the Lipper Hindsight, the number of shariah-compliant unit trust funds grew more than doubled in less than 3 years to 144 as at September 2009 with a total Net Asset Value (NAV) of RM21.2 billion, representing 11 percent of the total NAV of the unit trust industry. This also represents 27 percent of the total NAV of the global Islamic unit trust industry, and ING Funds holds 5 percent of the total NAV of shariah-compliant funds.
Hence, ING Funds is at the forefront in supporting the MIFC initiative and is well positioned to be the Islamic manufacturing hub for ING Investment Management. Aside from being a major shariah investment manager locally, the company launched its maiden Global Shariah Equity mandate last year, which has performed admirably over the past 9 months. ING Funds is planning to launch a full range of offshore shariah funds to tap both domestic and export markets regionally and globally.
Moving forward
Demand for Shariah-compliant investment management products is growing worldwide, with the rising affluence of Muslim investors who wish to invest surplus funds in a Shariah-compliant manner. Another contributing factor is the non-Muslim investors’ desire to diversify their investments through Shariah-compliant or ‘ethical’ funds.
A study conducted by Ernst & Young revealed that Malaysia and Saudi Arabia have emerged as the top destinations for Islamic funds due to the size of their economies and Islamic finance sectors. The development of Malaysian Islamic architecture over the last 30 years has been comprehensive and well planned to ensure that the necessary infrastructure is in place to support the development of Islamic products and services.
Future plans
ING Funds plans to cast their net further and export their expertise in Shariah investment to global markets. ING Funds has proven their capabilities in developing innovative Shariah-compliant products that appeal to local and foreign investors.
As highlighted by Dato’ Steve Ong – “Since the inception of ING Funds, we have been spearheading the development of ING’s Shariah investment capabilities both in the Malaysian and global markets. Together with the cooperation of our affiliates around the world, a global Shariah equity strategy was launched last year”.
These efforts will truly manifest the company’s tagline ‘global investment management, local presence’.
Bank acquires securities firm
Headquartered in Lisbon, Portugal, Espírito Santo Investment is the investment banking arm of Banco Espírito Santo, the biggest listed private bank by market cap and the second largest financial Group in Portugal.
Being part of a 140-year old banking group, Espírito Santo Investment business’ ethos is driven by developing long-term relationships with its clients, whose needs are serviced through multi-product platforms with sector / industry and geographic coverage. The bank is directly present in three continents, offering innovative financial solutions in Europe (Iberian Peninsula, UK and Poland), in the Americas (Brazil and US) and in Africa (namely Angola).
Nowadays Espírito Santo Investment has an unrivalled leadership reputation in the Iberian investment banking market along all product lines, namely in Corporate Finance and M&A, Project Finance and Securitisation, Acquisition Finance, Capital Markets and Private Equity activities.
Thus, unsurprisingly, Espírito Santo Investment is present in almost every transaction that occurs in Portugal.
Recently the bank acted as a lead manager for the Republic’s 10-year Ä3bn benchmark bond. The success of this transaction, which generated total demand of more than Ä13bn, was not just instrumental in shoring the confidence in the European bond market, but it also re-emphasised investors’ long-term belief in the strength of the Portuguese economy. And the M&A, Project Finance and Structured Finance Portuguese divisions are also the undisputed market leaders, participating in almost of the major transactions occurred recently.
International presence
True to its Portuguese roots, the Espírito Santo Group has always been internationally-minded, a trend that Espírito Santo Investment has furthered. Prompted by constraints on domestic growth and by the unrelenting globalisation of the Portuguese economy, the bank is building an international network able to give its clients access to capital-exporting markets. Today Espírito Santo Investment is the only truly Portuguese internationally-minded investment bank, with a presence that already spans, besides neighbouring Spain, the UK, Poland, the US, Brazil and Angola. This footprint, that largely matches the origin of the main trading partners of our core clients, is now being expanded to give added focus to investment banking activities.
Thus, recently, the bank expanded its presence in the global investment banking market and in February announced that it was acquiring a 50.1 percent holding of broker Execution Noble. Headquartered in London, Execution Noble is an EMEA securities firm focused on large and mid-cap companies, with an established distribution platform across London, New York and Hong Kong. The synergies between Espírito Santo Investment and Execution Noble in the equities business are compelling, allowing leveraging the consolidated expertise in Latin America and building a broader emerging market operation.
Equities and fixed income distribution are one part of Espírito Santo Investment’s strategy for its investment banking business. A second key growth area is M&A, where opportunities will continue to re-emerge as the global economic recovery gathers pace and where the increasing activity in cross-border M&A between Iberia, the US and Latin America is becoming a reality, and Espírito Santo Investment is prepared to be a prominent player in this area.
Leveraging expertise
Project and acquisition finance are also two areas where Espírito Santo Investment credentials are global, and our expertise in infrastructure, renewable energy and transportation finance is unrivalled. Thus, in recent years the Bank has consistently been awarded with the best annual deals winnings for projects that cover the whole world.
This is a trend that will only increase, because there are a growing number of financing opportunities related with public-private partnerships for key infrastructure projects less dependent on global growth, and to which our strong emerging markets presence gives the bank full access to what we believe will be a very strong deal flow. A case in point is Angola, a country that has been enjoying a strong economic renaissance since the end of the war in 2002.
Supported by a very successful commercial banking operation in Angola, the process of Espírito Santo Investment setting in Luanda a direct presence is already under way, and it this will be a key instrument in channelling specialised finance African projects.
