February | 2011 | World Finance

Looking after your future

Posted on February 22, 2011 by

Porvenir is a leading provider of pension and severance pay fund management services in Colombia, South America’s second most populous country after Brazil. The company has 33 offices and 10 service modules located in Colombia’s largest cities, as well as a strong nationwide sales force that rivals most of its competitors. Additionally, as part of Grupo Aval, one of the largest multinational financial companies operating in Colombia, customers have access to an additional 1,000 contact points through its branch network. This strong positioning means that in August 2010 the firm managing the mandatory pension savings funds of 2.9 million people (roughly six percent of the population) and the severance funds of 1.6 million affiliates.

The organisation currently manages voluntary pension funds, mandatory pension funds, the severance fund and trust assets. Each of these areas are overseen by collegiate decision making bodies and approving bodies made up of experienced asset managers well versed in best practice. Indeed, one of the aspects of its business that Porvenir takes greatest pride in is the professionalism of its continuously trained staff.

In order to ensure that its staff are equipped with the latest skills and knowledge, the company put in place an education project known as Universidad Porvenir. The purpose of this programme is to guide the performance of the team towards the achievement of the individual and organisational goals. The objective of the university is to develop company leaders in order to have high performance teams that will lead the administrating company to occupy the first places in the market. During the first semester of 2010, 1,492 employees participated in different education and training courses, totalling 629 hours of training. The main focus was a series of workshops concentrated on training about multifunds, called “Workshops with the Legal Office.” As well as receiving up-to-date skills and knowledge needed in order to provide exceptional advisory service, through this programme staff have been tutored in the use of a simulator that helps to calculate which type of fund is better for the person being advised, taking into consideration age, work stage and aversion to risk.

Indeed, risk management is a key feature of Porvenir’s business model. The idea that risk management can no longer be seen only as a response to regulatory requirements but also as a competitive advantage is deeply embedded in the organisational philosophy of the company. In order to realise this vision, a comprehensive risk management architecture has been put in place. The risk management process itself involves detection, measurement, monitoring and reporting of risk on a constant basis; each risk profile must always be adjusted according to the customer’s appetite for risk; risk management infrastructure should be settled according to the complexity of the markets and managed products; finally, staff members involved in the area of risk management must be able to demonstrate their knowledge and skills by obtaining a market standardised certification in the area.

The risk management structure can be separated into two levels. The first is comprised of the board of directors, which oversees the approval of the risk management policies and provides strategic direction during the investment process, and the Risk Committee, which monitors the adjustment of the investment portfolio according to the company’s risk appetite as well as monitoring compliance with established policies. The second level is the Risk Unit, which acts independently and reports directly to the CEO. It in turn is divided up into many sub-divisions specialised in market, credit and operational risks and has developed several tools and support systems to aid in the identification of risks in these areas, placing a strong emphasis on a methodological approach.

Porvenir has developed different methods for measuring several dimensions of financial risk and performance. On market risk, three different approaches have been implemented: The first is an absolute VaR model, which measures the worst probable loss within a 95 percent confidence level. The second is a relative VaR measurement or the worst underperformance (compared with benchmarks or with an optimal asset allocation) within a 95 percent confidence level, which is obtained through historical simulation using data collected on a monthly basis. The third is a relative VaR model, which is implemented through delta-normal methodology on a daily target horizon. In a joint basis a return attribution procedure is implemented, which permits to evaluate the performance on a daily, monthly and annual basis. This procedure is being detailed in order to attribute the return performance to several elements, such as asset allocation, security selection and risk factors. In terms of credit risk, measurement has been conducted by a master issuer scorecard, which allows controlling the current default probability of all relevant issuers. This scorecard is supported by in-house rating methods that capture the current risk status of the issuers depending on elements associated to the qualitative and quantitative variables settled by economic sector. These methods undergo a process of constant evaluation through the implementation of back-tests. Moreover, the Risk Unit has implemented stress tests with the aim of assessing the performance of the different portfolios under unusual conditions.

Other strategies put in place by the Risk Unit are related to the measurement and management of liquidity risk based on the statistical analysis of the investments and funding sources. Finally operational risk management involves the definition of clear procedures, quality control schemes and monitoring of the action plans established for the appropriate mitigation of losses derived from operating errors.

In order to achieve a better level of risk management, during the last year Porvenir acquired superior market risk software and developed a Corporate Debt Internal Rating System (IRS). The first will improve the system infrastructure of the organisation, increasing the accuracy of information and reducing time taken to generate risk reports. The IRS has three competitive advantages – a credit risk early warning system, different levels of credit risk aggregation, and a complete supervision of corporate bond issuers.

When approaching a new customer, the firm takes the approach not only of seeking to manage their resources but also to educate them in good financial management along the way. The “Aprendiendo Juntos por un Mejor Porvenir” (Learning Together for a Better Future) programme shows clients and potential clients what the pension system is and how it works – it makes them aware of the fact that they are saving up for the benefit of their future. As stated on the initiative’s website, “This project has been created so that people can take the best decisions for their future, showing again that the principal concern of Porvenir is the wellbeing of Colombians.” In addition to encouraging citizens to make their own plans for the future, it also helps them to understand how pension funds are regulated and what mandatory contributions they should be making. This is particularly helpful since the regulations surrounding pension and severance pay funds were changed as recently as August 2009. Porvenir has also provided training to over 1,500 companies regarding multifunds under this same framework.

Additionally, customers who are approaching retirement are provided with a customised advisory service so that this change in lifestyle will not take them by surprise or overwhelm them. While this advisory service provides good customer service at the point when an associate is preparing to draw on their pension fund, Porvenir also seeks to maintain good relations throughout a person or employer’s time with the company. The firm segments all its clients, not just according to whether they are an employer, individual contributor or a pensioner, but also according to their needs and expectations. In this way, the organisation is able to design a differential value offer that will suit the desires of the members of each segment.

Of course, if customer satisfaction is going to be managed correctly, it is also important to monitor customer feedback effectively. The Operations and Services Vice-Presidency of the company has implemented a new service model for handling claims and concerns that involves preventive action plans and timely assistance.

Porvenir has traditional channels such as offices and a telephone line where customers can get help with any concerns they may have, as well as an informative website. Additionally, the company sends out customer satisfaction questionnaires and, to ensure that these systems are working as smoothly as they should be, makes use of mystery shoppers to provide accurate feedback of the service they receive on the phone or in branch.

The organisation doesn’t just look after its own, however, having undertaken various plans to help in the growth of Colombia socially. Among these initiatives are sponsorship of the Bogotá Half Marathon and the Bogotá Ciclovía cycle path, supporting children from low-income families through the charity “Aldeas Infantiles SOS Colombia,” and a blood donation campaign. It also takes on over 100 young people annually to work as trainees through the SENA national traineeship scheme.

When we look at all these factors in context, from meticulous risk management strategies to staff training and care for customers as well as the community, it is clear that Porvenir is more than just a provider of financial services. The company acts as a guide to its customers, helping them to learn about how their money is being managed, as a mentor to its staff, giving them skills and knowledge to excel in their career, and as a leader in the community, giving back to the Colombian people in many different ways each year. With a continuing emphasis on excellent products and customer service, Porvenir is set to continue as a leader in its field over the years that come.

Lebanon-based bank enters new markets

Posted on February 22, 2011 by

Bank Audi sal- Audi Saradar Group (Bank Audi) is a private joint stock company operating in Lebanon, Europe and the Middle East and North Africa (MENA) region. It provides a full range of products and services, including commercial and corporate banking, retail banking, private banking, investment banking and insurance activities.

Bank Audi has a long heritage, tracing its roots back to 1830. It was incorporated in its current form as a privately-held Lebanese company in 1962. At the time of its incorporation the shareholders base comprised members of the Audi family in addition to Kuwait-based family investors, the Sabbah and the Homaizi families. It has expanded gradually since then and now comprises more than 1,500 shareholders.

The bank grew steadily since the early 1990s, until becoming the largest Lebanese bank. Most recently, over the past seven years, Bank Audi embarked upon a geographical expansion strategy, and now ranks among the top 20 Arab banking institutions in terms of regional coverage, with operations in 11 countries. In total, it has a network of 157 branches, principally in the MENA region. It is also now a public company, listed on both the Beirut and the London Stock Exchanges. Bank Audi has more than half a million customers and holds more than 850,000 accounts. It has approximately 4,600 employees across all its entities.

Corporate governance and internal control
Over the past 10 years Bank Audi’s diversification, growth, and regional expansion have been accompanied by the development of a rigorous set of internal control systems and processes. As a result, today Bank Audi has a robust governance system and internal control framework.

The importance of sound governance systems is now widely recognised, not only within the banking community but also among regulators, investors and other key bodies such as rating agencies, researchers and insurance companies. Furthermore, depositors and other customers are becoming increasingly aware of its importance. Corporate governance, together with a strong internal control framework, has become a key feature of the bank’s value proposition in today’s highly competitive market.

Bank Audi’s board of directors consists of 12 members, elected by the general assembly of shareholders for a term of three years. Four of these are independent non-executive members. The overall responsibility of the board is to provide strategic direction, management supervision and control. At its heart is the ultimate goal of increasing the bank’s long-term value.

Governance structure
In addition to the board of directors, the bank has several board committees:
i) Audit Committee
The role of this committee is assisting the board in assessing the adequacy of accounting and financial reporting policies, internal control and the compliance system. It also has a duty to verify the integrity of all financial statements and the reliability of public disclosures. Other responsibilities include the appointment, remuneration, qualifications, independence, and effectiveness of external auditors and the independence and effectiveness of the internal auditors.
ii) Corporate Governance and Remuneration Committee
This committee’s responsibility is assisting the board in maintaining an effective institutional governance framework for the group, an optimal board composition, effective board process and structure, and a set of values and incentives for executives and employees that are focused on performance and promote integrity, fairness, loyalty and meritocracy.
iii) Board Group Risk Committee
The role of this committee is assisting the board in providing an oversight of the senior management’s activities in managing risk – in terms of credit, market, liquidity, operational, compliance, reputational and other risks – in line with the recommendations of the Basel Committee for enhancing corporate governance.
iv) Group Executive Committee
This committee’s role is developing and implementing business policies and to issue guidance for the group within the strategy as approved by the board. It also supports the Group CEO in the day-to-day running of the bank.
v) Disclosure Committee
This committee’s remit is ensuring information that may be subject to certain laws and regulations, or which is required by relevant listing authorities, or whose discolsure might contribute to investors confidence, is recorded, processed, summarised and reported in a clear, fair and accurate format, within specified time periods.

Further, and in line with appropriate good governance practice, the bank has also created a number of standing management committees, notably to handle credit, assets and liabilities management, business development, anti-money laundering, and IT among others.

Policies of the governance structure
In 2006 the board adopted a set of corporate governance guidelines, which has led to the gradual adoption of a number of policies, charters, and terms of reference that shape the bank’s governance framework. Such documents cover most areas of the board’s functions and are continuously revised and enhanced. They cover a wide range of issues, including risk supervision, compliance, audit, remuneration, evaluation, succession planning, ethics and conduct, budgeting, and capital management.

In addition, clear lines of responsibility and accountability have been established throughout the organisation with a continuous chain of supervision for the group as a whole, including effective channels of communication of the Executive Committee’s guidance and core group strategy. Strategic objectives to guide corporate values and promote high standards of conduct have been established and widely communicated throughout the group, providing appropriate incentives to ensure professional behaviour.

The objectives of corporate governance
Good corporate governance has been proven to create long-term value and is a key contributing factor to the success of the bank as a whole. Bank Audi’s high-level corporate governance objectives are to:
– Enhance transparency, efficiency and consistency in the decision making process
– Ensure appropriate objective and unbiased risk monitoring and adequacy of internal control and reporting
– Ensure a high level of protection of the bank’s assets and business from any abuse or oversight;
– Enhance the responsibility and accountability of officers and the board towards the shareholders and ensure acceptable executive and employee compensation
– Enable the adoption of a reasoned strategy and the development and implementation of successful business policies
– Plan and ensure succession and corporate perpetuation

Challenges to corporate governance
International best practice is constantly evolving. Historical corporate failures regularly revealed limitations in what were once believed to be sound practices. These limitations occurred in the areas of risk management supervision, audit supervision and financial reporting. In some instances, inappropriate qualifications and insufficient engagement of independent board members were also identified as key elements leading to these failures.

As a result, banks need to constantly review and enhance their governance practices. New regulations and recommendations, that are increasingly complex and demanding, are also constantly being issued by the regulators and government bodies. In order to follow these, banks need to dedicate time and effort adapting to these changes.

Board membership, in particular, is becoming increasingly demanding. The time and effort that should be allocated by board members – including independent and non-executive members – has reached unprecedented levels. Board agendas are expanding in scope and complexity, giving rise to the need for specialised directors and committees. Comprehensive and rigorous processes are also needed to enable the decision-making bodies to discharge their responsibilities efficiently.

The difference
Bank Audi pioneered the introduction of governance reform in the MENA region in 2006 when, with the assistance of the International Finance Corporation and Nestor Advisors (a leading London based governance consultancy firm) it embarked on an 18-month long enhancement programme. Today, the board is satisfied that the bank’s governance structure is adapted to its needs and meets the high expectations of depositors, regulators, investors and the markets in general.

Since then a large number of banks in the MENA region have embarked on similar paths. Across most countries in the region, regulators are actively updating their governance-related directives, placing further pressure on standards of governance. Bank Audi believes that good governance practice should be collectively embraced to promote the banking system rather than exercised severally by individual institutions and looked at as a competitive advantage. Indeed, a governance-related failure by a player in the market is likely to reflect badly on the whole industry.

In future years the global economy and the international banking system is likely to face new and unexpected challenges. The ability of individual banks to stand up to these challenges and emerge intact will largely depend on the pro-activeness and effectiveness of their individual boards, as well as on the skills of their individual directors and their ability to complement those of the chairman and the CEO.

Recent successes
Bank Audi has performed consistently well in recent years, even during the global financial crisis. Its consolidated net earnings reached $352m for the year 2010, representing a 21.9 percent increase over 2009. Furthermore, the figures for 2009 also represented a 21.4 percent growth over the previous year. This strong performance has been achieved while maintaining a high level of liquidity and capital adequacy. As testament to this, the primary liquidity-to-customer-deposits ratio stands at 49 percent and the capital adequacy ratio is 11.7 percent (both as at 31 December 2010).

The bank is also well-positioned as the largest bank in Lebanon and among the top 20 Arab banking groups, with consolidated assets reaching $28.7bn as at December 2010, with consolidated customers’ deposits of $24.8bn – an increase of $1.86bn compared to 2009. Over the 21 month period ending September 2010 (the most recent available data), Bank Audi was ranked second in terms of deposit growth among Arab banks with $7bn of additional deposits.

The economic crisis
Thanks to its risk-averse strategy, the bank was not directly exposed to the toxic assets that were at the root of global economic downturn, and maintained a constantly high level of liquidity and market capitalisation. As such it stayed largely immune to the credit crisis, achieving significant growth throughout the period.

The bank’s conservative policy was also in line with the policies of the Lebanese regulator – the Central Bank of Lebanon – which placed caps on loan to deposit ratios and imposed stringent controls and limitations on speculative assets and bundled-up debts, hence largely preserving the Lebanese banking industry from the effects of the crisis.

A new strategy, a new success
Persistently low international interest rates resulted in difficult operating conditions for many Lebanese banks, which, in 2010, led Bank Audi to follow a margin-focused strategy as opposed to a growth-focused one. This new direction has met with a significant degree of success, leading to a rise in spread from 1.65 percent per annum in the first quarter of 2010 to 1.8 percent in the fourth quarter. This was also coupled with an improvement in net operating margin, whereby the bank’s return on average assets reached 1.28 percent per annum in 2010 and its return on average common equity reached 16 percent, with a target of approximately 20 percent for 2011.

Going forward, the bank’s main challenge is to achieve its regional expansion and diversification objectives, becoming a top level regional player with each of its divisions a leading player in its field and country of presence.

Chilean fund bucks the downturn

Posted on February 22, 2011 by

The 1980 introduction of what was referred to as ‘Decree 3500’ paved the way for a new Chilean pension system managed by competing private firms. This meant that the previous benefit system was replaced by a schedule whereby pensions are financed by contributions during a person’s working life, which in turn are deposited into the individual’s account.

This new law enabled the development of the Chilean pension system, founded the following year. This model is based on four principles:

– The capitalisation of social security savings in individual accounts
– The professional management of the resources by the private pension fund administrators
– Individual ownership of the contributions
– The strict regulation and supervision of the processes of collection, investment and payment

The main attributes of the Chilean pension system have been the strong returns of both individual and collective pension funds over the last 20 years, as well as the reduction of the contribution rate to half its former level, resulting in an increase in the net salary and productivity of the Chilean workforce. The system has had a significant impact on the development of Chilean capital markets and also on the country’s levels of savings, investment and overall growth.

Since its foundation, the Chilean model has been adopted by more than 30 countries worldwide, so that today approximately 120 million workers have their own pension saving account.

AFP Cuprum SA was launched in 1981 for the benefit of the employees of Codelco Chile, who belonged to the National Professional Association of Copper Supervisors (ANSCO). Although the fund has always been closely linked with the copper mining industry, over the years it has expanded its remit to include other sectors, most notably property.

Today it has partnership agreements and alliances with companies and funds operating in a range of sectors. One of the more prominent of these businesses is Empresas Penta SA, which since 1988 has played an important role in the overall growth of AFP Cuprum.

The business today
Today, AFP Cuprum has more than $28.5bn in assets under management, and has recorded a 27.5 percent growth in market share over the last eight years. It operates as a multi-active fund manager, with a diversified portfolio. 55 percent of its investments are in domestic assets, with the remainder invested internationally. In terms of type of instrument, 51 percent is invested in fixed income and 49 percent in equities.

Cuprum believes that a diversified portfolio is important in order to maximise profitability and returns, and as such maintains a policy of diversification across asset class, investment instruments, currency, country, issuers and fund managers.

Cuprum also has different strategies for each type of investment. Its local strategy mainly involves making direct investment, both in terms of equity and fixed income. Cuprum’s local investment team performs both top-down and bottom-up analysis in selecting both issuers and, in the case of fixed income assets, the stage in the curve it wishes to invest.

For foreign assets, Cuprum performs mainly top-down analysis, with decisions leading directly down to region or country allocation in the case of equities; and segment, currency and region in the case of bonds. In order to be consistent with its overall goal of maintaining a diversified portfolio, for foreign assets it uses external fund managers, chosen via a rigorous selection methodology.

Performance
Cuprum has consistently out-performed both the market and its own benchmark. This is demonstrated by the Administrator Pension Funds Service Client Index indicator (ICSA). Created in 2006, the ICSA is a public index that allows pension funds to see the quality of service it provides to its clients. The index is calculated every four months and allocates pension funds an overall ranking in terms of service quality. Since the creation of the index, Cuprum has achieved the top ranking 12 consecutive times.

In spite of the economic crisis Cuprum’s funds have continued to meet their targets. This is largely a result of two counterbalancing factors. On the one hand, Cuprum’s more conservative funds have protected investors from the big downturns; however, the more aggressive funds were well-positioned to reap rewards when the market began to recover. Thanks to this strategy, Cuprum has already managed to recover the losses it suffered when the crisis hit.

Client service
Cuprum is heavily committed to customer services, believing that consumers benefit from a correct decision making process whereby they can choose the right fund based on their own risk profile. As an example of this philosophy, Cuprum was the first pension fund in Chile to propose that individuals use a Fund Guide, which allows consumers to choose the most suitable fund for them based on a set of key requirements such as investment horizon and risk tolerance.

Furthermore, Cuprum’s website contains several support tools, which help clients choose the best option for them. These tools include:

– Tax savings procedures simulation software
– Pension planner simulation software
– Financial environment advisory services

As such, Cuprum’s clients are able to access many services online for which they normally would have to visit a branch.

Cuprum has also developed a three-tier customer service programme that provides clients with solutions to their pension, financial and tax information requests. Specifically, the programme gives professional guidance on tax benefits associated with their investments, portfolio analysis, saving plans and pension projections. Response time is quick, with all customers guaranteed a maximum 48-hour response period, depending on their level. The top-level programme also offers two face-to-face meetings per year in order to help clients with personal financial analysis. Additionally, Cuprum runs a series of seminars at hotels throughout the country, providing a forum in which to discuss different topics such as economic outlook, pension and saving products and tax exposure.

Cuprum’s customer service programme is focused on providing individuals with the necessary information that enables them to take out the best pension possible for them. This includes the selection of the most suitable investment fund according to their own time frame and level of risk, structuring the savings plan required to meet their own personal goal, keeping the client up to date in terms of tax benefits available and constantly helping their pension plan work better for them.

Competitive advantage
Cuprum has a small market share (seven percent), yet personally administrates more than 20 percent of the total pension fund money, giving it a unique position in the pension funds market. This niche allows the fund to offer clients a tailor-made yet cost-effective product. In order to provide a bespoke service, the firm has developed expert sales and advisory teams, which are kept at the top of their game thanks to an ongoing series of unique training programmes.

Another important asset is Cuprum’s policy of ongoing innovation. As a result, it manages the most complete and updated pension fund simulator, allowing clients to review their global investment portfolios as well as to keep track of the specific tax benefit 57bis. In this field, Cuprum is the only company in the whole of the Chilean finance industry that can offer this invaluable tool to their clients in order to help them plan their savings.

Decision-making
Since 2007, Cuprum has been certified as ISO 9001, meaning that its quality management systems have reached the highest international standards, specifically within the trading desk, the compliance office and the treasury department. This ISO 9001 also ensures that Cuprum’s main suppliers – which include many overseas asset managers – are constantly evaluated.

Cuprum’s core aim is to maximise long-term return while at the same time complying with the regulations established by the group’s Investment Policy Statement and the Chilean Regulatory Requirements. In order to achieve these objectives, it follows the investment process systematically and rigorously.

There are several key elements within this process, including the portfolio managers, the research team, trading desk and execution, and risk management. The investment process may operate a top-down approach for asset allocation, and bottom-up for security selection.

Risk Management: As a pension fund manager, Cuprum sees financial risk at the core of its business. The general framework it uses to achieve its strategic goals involves the systematic understanding, identification, measurement and control of the exposure to sources of uncertainty, both within specific functional units and at the top level management. As a group, Cuprum preaches the importance of due diligence and accountability, acknowledging the hard reconciliation needed with proper innovation.

Compliance with local regulations: Analysis of investment ideas and strategy must comply with local regulatory norms stated by the Chilean Pensions Supervisor regulations, based on Decree 3500.

AFP Cuprum Investment Policy Statement: this is where Cuprum sets out the general principles used both for the
analysis and selection of the investment alternatives.

Investment committees: these meet on a regular basis, with the aim of supporting the investment process. There are committees for each of the following divisions: asset allocation, regional equities and fixed income selection, fixed income and currencies, local equities and third-party manager selection. Each committee has the task of analysing all the relevant variables that have influenced the behaviour of the different asset classes and securities, in order to identify the best alternatives for portfolio framework. Each committee looks at both quantitative and qualitative aspects of their individual division, using models developed internally by the company.

Portfolio managers and CIO: These decide and review the best allocation of funds across different asset classes and securities.

AFP Cuprum believes that its success in achieving positive returns against the backdrop of a depressed Chilean market has been the result of implementing innovative systems and following the investment process to the letter.

Furthermore, in the eyes of its clients, this policy has allowed the group to rise to the top of the market, demonstrate superior returns to its competitors, gain recognition by its affiliates as the best Chilean AFP as well as a reputation for profitability and reliability.

Re-thinking the flat world

Posted on February 22, 2011 by

In popular discussion, both proponents and opponents of economic globalisation tend to see it as an ‘all or nothing’ package, implying that there must be either uniform liberalisation across flows of goods, services, labour and finance – or uniform restriction. Certainly, because cross-border integration in different matters stems from the same basic factors, it tends to be correlated across them. The ultimate drivers of globalisation are technological – improvements in communication and transportation that ‘make the world smaller.’ As a consequence, aspects of the economy have tended to globalise in parallel.

But policy and politics can make a difference; they can bring about variations in the degree of integration across different sectors of the economy. Capital markets, for instance, were highly integrated before 1914 (using the telegraph and mail as means of communication); less integrated from 1914 to the 1970s because of war and interventionist policies, and more integrated since as deregulationism took hold. Likewise, comparing across geographies, we see that China today permits flows of goods to cross its borders but imposes tight restrictions on capital flows – clearly a different situation from the more uniformly liberalised West. Australia, meanwhile, restricts labour flows but is open to goods, services and capital. Globalisation, in other words, is not an all or nothing package and we can look separately at the merits of integration for different aspects of the economy.

Integration of markets in goods and non-financial services – free trade – seems largely beneficial, especially for small countries. It permits access to resources not available at home. It increases the variety of goods and services available. It transmits ideas and binds nations together. And it allows countries to specialise in particular goods and services, achieving economies of scale and clustering.

There are drawbacks to free trade, but these are either outweighed by its advantages or can be addressed relatively easily. For example, very poor countries may lose a nascent industrial base, vital to their development, if they are suddenly hammered by foreign competition – but this can be addressed through gradualism in the process of integration, measures to support exports (such as an undervalued currency) and efforts to import capital and expertise into domestic firms. Poor countries that are dependent on exporting primary commodities may be exposed to volatility and corruption – but these can be dealt with by efforts to develop manufacturing and other sectors and, if governments are disciplined, through a national fund to buffer the impact of commodity price swings.

Likewise, international competition may effectively transfer wages from manual workers in developed countries to those in poor ones – but it must be right that workers in poor countries get a fairer share and any excess inequality generated in rich societies can be addressed through a mixture of redistribution, up-skilling and a focus on advanced industries. Finally, trade integration, by increasing complexity, may make it harder for central banks to see what is coming, hindering their efforts at stabilisation – but the increase in complexity is not so great and it is the complexity of finance that is the real issue.

Evidence shows that opening to trade usually boosts trend rates of GDP growth, with cumulative additions to GDP of up to 15-20 percent occurring over several decades in smaller countries, and up to seven to 10 percent in large ones. The impoverishment of small countries that close themselves off from the world proves the same point.

Integration in labour markets, meanwhile, allows the poor of the world to join developed economies, where they have more opportunities. It also permits firms to find the best staff regardless of nationality and permits growing industries in any country access to skills that may be scarce at home but are abundant elsewhere. On the other hand, labour market integration can deprive poor countries of skilled workers and put pressure on essential services in rich countries when the influx of users outnumbers the influx of people to provide such services – a situation that will take at least a generation to unwind itself. Worker migration can also cause tension when divergent cultures and religions are brought together. It seems clear that moderate regulation must be imposed on migration between countries that diverge economically and that measures to facilitate cultural assimilation are needed.

Finance, as usual, presents the most complex challenges. Cross-border investment is clearly necessary – countries that are small or poor can develop a lot faster if they receive inflows of foreign capital to establish new industries. When one sees FDI by multinationals bringing new activities, new skills and higher-paying jobs to previously impoverished places, it is hard to see it as anything but good. There are problems: big businesses sometimes engage in abusive behaviour in weak legal jurisdictions; behavioural economists have found evidence that managers tend to be less kind when workers are of a different nationality; foreign executives may have less concern for the national interest than domestic ones. But emerging economies are still better with multinationals than without.

The case for short-term investment in shares, bonds and other financial instruments freely crossing national borders is less clear-cut. Analysis from the IMF shows no increase whatsoever in trend rates of GDP growth following capital account liberalisation. Meanwhile, over the past 30 years, volumes traded in currency exchange markets, quantities of funds crossing national borders daily and the balance sheets of financial institutions have all grown many times faster than GDP, while trend rates of GDP growth themselves have barely shifted – showing that all this extra activity is adding little to the real world.

This doesn’t mean that flows of portfolio capital have no value. Deep financial markets make it easier for firms to raise capital and reduce the risk that actions by a few investors will inappropriately distort the pricing of financial instruments. It may be just that these services were adequately provided by capital markets as they existed in, say, 1980 – and that further integration has added nothing.

Financial globalisation also has undesirable consequences. Allocating millions of workers to finance prevents from them doing other things. Ownership of firms by remote and short-termist shareholders harms long-term business development. Flows of hot money into and out of small or emerging economies tend to compound the pattern of bubble and bust inherent in markets – sometimes culminating in currency collapses that decimate the ability of domestic firms to meet foreign obligations and purchase supplies, leading to mass unemployment.

Volatile capital flows can disrupt trade by moving exchange rates irrationally. And financiers riding asset price bubbles and taking the premium in a hugely increased volume of trading creates unnecessary inequality and its attendant social ills.

Foreign ownership of government bonds may also put governments under pressure to shrink their role in the economy and may reduce their ability to engage in fiscal stimulus during recessions. Similarly, firms and fund managers may put capital into nations where they share the ideologies of the leadership and take it away from more interventionist states. There is thus some danger of a ‘race to the bottom,’ whereby progressive nations are starved of capital and forced to change direction. This cannot happen when capital is bottled up in the domestic economy.

In reality, however, the problem has not materialised to anything like the extent feared. A great deal of capital is not internationally mobile and an interventionist state creates advantages for business in terms of skills, infrastructure and stability that prevent much of the mobile capital from fleeing to low-tax jurisdictions. Workers have a strong affinity for their home economy and labour flows are even less likely than capital flows to be the agent of a race to the bottom.

Nevertheless, aside from FDI, a high degree of integration in capital markets is of questionable utility. We couldn’t revert integration to 1980 levels without causing chaos. But moderate controls – such as a low tax on foreign exchange transactions, or time delays on capital withdrawals from a jurisdiction (with the duration of the delay based on amount), would be helpful. With appropriate financial and legal infrastructure to prevent speculators disguising capital flows as trade flows to get them through, such measures can work.

The need for exchange controls becomes clearer when we appreciate a difficult constraint that applies to international exchange. Countries can only have two of three out of a) free cross-border capital flows, b) ability to use monetary policy to regulate the domestic economy and c) ability to stabilise their exchange rate. If they try to use monetary policy to manage both the exchange rate and domestic conditions when capital can easily cross their borders, then whenever they need to move monetary conditions in opposite directions to meet internal and exchange rate targets, the two goals will cut against one another. Thus, since the ability to manage domestic demand is valuable, and since arbitrary exchange rate fluctuations are undesirable while highly liberalised capital flows do little good, it makes sense to sacrifice some of the latter in order to dampen currency volatility.

There are two lessons in all this. One is that global integration, making use of the full resources of the world to achieve economic goals, is common sense; but delivers on its potential only in the context of a well-regulated economy. The other is that we should encourage trade globalisation more than the financial kind.

A watershed year for private equity

Posted on February 22, 2011August 6, 2019 by

Private equity in the US and elsewhere faces a turnaround as it recovers from what many predicted would be a near-death experience in the wake of the global financial crisis. The coming funding rounds in the US, Europe and elsewhere as houses pursue investment capital from the banks and other capital sources will make a profound statement about the medium-term future of private equity, predict industry players.

Among other things the capital raisings will shed a much-awaited light on:
– Those firms that emerged in the best shape from the recession;
– How the crisis has reshaped the industry, particularly in terms of the banking industry’s new norms of leverage, governments’ continuing revision of pre-2008 corporate tax rules, some target companies’ distrust of buy-outs and tougher loan documents;
– Willingness of the big banks to fund buy-out firms as they face globally mandated higher levels of capital under the Basel III rules, much closer scrutiny by regulators, and uncertainty about future sources of revenue because of the “too big to fail” debate;
– The strength of the buy-side market, both primary and secondary, as companies are put on the auction block.

Taking everything together, it’s been a long time since the industry faced as many questions as it will throughout 2011.

As Kirk Radke, senior partner in global law firm Kirkland & Ellis, a specialist in American and international private equity law, and veteran observer of the industry, points out: “The round of fund raisings will be fascinating to watch because we’ve had so little in the last few years. The $15bn raised by Blackstone was an anomaly. These capital raisings will establish the pecking order – the winners and losers, the houses that came through the fires and the ones that got burned. I believe we’ll see the emergence of three stratifications of firms – the truly international ones, the middle-tier ones that focus on a country or region, and the smaller ones.”

Deal activity is already clearly on the boil. Among numerous other deals in the pipeline, PAI Partners has put up for sale its €1-1.3bn half-share in Yoplait, the French fresh-milk giant (at least a dozen suitors are lining up including Nestlé), and Apax Partners has put $3.89bn in cash on the table to buy Smiths Medical.

Yet while big questions will be asked and answered during 2011, Mr Radke is in no doubt about the general health of the private equity industry. As far as he’s concerned, its business model, which had become increasingly controversial before the crisis hit in late 2008, weathered the storm so well that it proved itself to the many doubters and is all the more robust and credible for it.

“The private-equity structure permitted companies to work their way through a cycle of recession. Firms worked closely with companies to save jobs. Franchises were not destroyed. And the industry has come out of it all in a very strong position,” he summarises. “We saw true added value, not just financial engineering. Private equity’s model of corporate governance has been strongly validated.”

That also happens to be the view of buy-out professionals in the USA. According to a survey early in the new year, more than two thirds of respondents say the valuations of their portfolio companies have risen in the last year, which augurs well for prices in 2011.

Kirk Radke can fairly lay claim to having an inside view of the private equity industry. He’s a columnist, lawyer and deal-facilitator who sits around the table during transactions and is often called in to deal with particularly challenging legal issues, both in America and abroad. Indeed last year’s Chambers USA described him as “ahead of the pack when it comes to private equity” in its listing of America’s leading lawyers for business.

His firm, 101 year-old Kirkland & Ellis, is the 11th largest law firm in the world measured by revenue. Its clients in commercial litigation include some of the jewels of the Fortune International 500, such as Samsung Electronics, Siemens AG, General Motors and BP (which it is defending in the wake of the Deepwater Horizon disaster). And past partners include some of the finest legal minds in recent US history, such as Supreme Court nominee Robert Bork, former solicitor-general Kenneth Starr and current partner and former White House policy adviser Jay Lefkowitz.

As for the firm’s private equity practice, it’s routinely ranked number one in America. Indeed partner Jack Levin is known as the “father of private equity law”.

Two hard years
The prospects for private equity certainly didn’t look rosy in 2009. When the curtain came down on the long boom fuelled by low-cost debt – a period known as the “great moderation,” credit dried up overnight and the doomsayers greatly outnumbered the optimists. Indeed, many of the pessimists were in the industry. According to a late-2009 survey by KPMG, no less than 58 percent of professionals did not expect demand for IPOs to recover by 2011 “at the earliest.”

But that was then. The doomsayers were surprised – and so, perhaps, were some private-equity firms – at how quickly the industry adapted in almost Darwinian fashion to the downturn. As the credit in hedge funds ran out and clients exercised their right of redemption and withdrew funds in droves, the most nimble-footed firms dusted off their management skills.

“This is what I often emphasise about the very nature of the private equity market over the last four years,” Mr Radke notes: “It’s a market that changes quickly and dramatically. Indeed the rate of change is quite remarkable, and the industry has changed with it.”

Instead of bemoaning the post-2008 credit-starved environment, much of the private-equity community concentrated on working on their portfolio companies and, as the industry says, “sweating the capital” already employed in those businesses. The primary mission was simple: the companies had to survive. After all, as Mr Radke observes, “a significant amount of their own and other people’s capital was at risk.”

Also at risk were their reputations. The firms knew that when the curtain did eventually rise and credit became plentiful once again, it would be those houses that managed their portfolio companies best that would be the preferred borrowers in the new environment as well as the preferred firms for new investor commitments.
And contrary to the predictions of many critics who regarded leverage as a dirty word, debt capital helped save many a company because the free cash got them through the crisis. “It was leverage that permitted many portfolio companies to survive in 2009,” explains Mr Radke. “The loan capital acted as a stimulus.”

Similarly, much-derided easy terms of credit in the form, for example, of covenant-lite documents written in the boom days also helped keep otherwise stricken companies alive. Because they gave much greater flexibility to private-equity borrowers in terms of penalties and repayment schedules, the less rigorous fine print threw a lifeline to hard-hit businesses.

Cash in hand
As America recovers from its own recession, it looks very much as though private equity will serve as one of the main engines of economic growth. “The US will continue to be a very strong territory for the sale of portfolio companies,” predicts Mr Radke, citing the number of cashed-up houses sitting eagerly on the sidelines, itching to jump back into the markets. “There’s a number of strategic players with very significant investment funds on the balance sheet. Even if they make a modest entry into the market, they will push up prices.”

As a result, he predicts a more competitive market than we’ve seen in the last two years: “It will probably be challenging to buy companies because the market will be stronger. But I do see a very strong buy-side in America.”

Future of leverage
In early post-mortems on the crisis, private equity was singled out for blame because of the high levels of leverage commonly employed in buy-outs that ran into trouble. For instance, in the dark days the residual value of UK-based Candover group’s 10 biggest investments including energy firm Expro International fell by 13 percent in the first six months amid doubts by investors about its ability to raise cash. And Apax Partners had to refinance £1.5bn in debt in Travelex, contributing to a doubling of losses.

However, regulators largely exonerated the industry from contributing significantly, if at all, to the general mayhem in the financial industry at large. As a result, private equity has largely escaped the regulatory net now being thrown over the mainstream banking industry. For instance the Dodd-Frank laws, blueprint for the overhaul of the banking industry, did not set out to rein in private equity in the same way that it did for Wall Street. “I don’t see any material effect on the industry from Dodd-Frank,” summarises Mr Radke.

Similarly, he expects private equity will take in its stride the additional transparency required by the Securities and Exchange Commission – “the extra disclosures won’t be a burden.”

Another much-watched issue in the forthcoming fund-raisings will be what level of debt-to-equity ratios the funding sources will settle on. For the meantime, notes Mr Radke, “the finance market seems very strong and could strengthen during the year.”

In turn that augurs well for higher ratios than those that prevailed in the last two years. “I believe levels will revert to pre-2008 numbers,” suggests Mr Radke. “I don’t see a new normal of leverage because of the crisis.”

Money good
The American private-equity model has survived the crisis more or less intact, but with some important changes. Take, for example, the once-burning debate about those deals that fell through between announcement and execution. At the height of the boom, numerous transactions were not closed because lenders pulled the rug before closing, citing among other items a deterioration in a target company’s performance and its reduced viability. Left in the lurch when this happened, some private-equity houses and target advisors campaigned for the introduction of the UK’s ‘certain funds’ model that effectively guaranteed the deal would go through because the availability of the debt capital was not in doubt.

As Mr Radke recalls: “It was an open question in the US on how boards, PE firms and banks would address that funding risk. The ‘certain funds’ model could have been imported from Britain but it wasn’t. Instead, the American industry has evolved to a model that shares the risk and facilitates the transaction.”

Essentially, the American response is a streamlined version of the pre-crisis model and involves several distinct steps. First, the private equity house makes a formal acknowledgement that if the bank is willing to fund the purchase of the target company, and the other conditions of the transaction have been met, then the private equity firm will fund its equity commitments. This is ‘money good’ and equates approximately to ‘certain funds’ in this scenario.

As such, explains Mr Radke, “it makes a very powerful statement to the target board.”

Second – and the main difference today – is that a firm has to suffer a quite serious setback under “material adverse” clauses before the bank can pull the rug.

Third, a shorter period between the signing and closing of the deal acts against the company running into the kind of trouble that may give a lender a reason to walk away.

Finally, if the bank withdraws without sufficient reason, the target company must be reimbursed through a compensation fee based on its break-up value at a ratio of 1.5-2 times. “And it’s a very painful thing for anyone to have to write that cheque,” adds Mr Radke.

While this updated model will be put to the test in coming months as the private equity market gets busier, Mr Radke believes it’s robust enough to do the job. As he summarises: “The market has adopted a model that addresses risk, enables the completion of transactions, addresses the problems of 2008 and deals with differences in the UK model.”

Global outlook
There’s no doubt that private equity is on the move, hurtling across regions and borders, adapting almost effortlessly as it goes. Not all deals involve billions of dollars – indeed far from it – but the ultimate results are significant in their own way. For instance, in Brazil the Stratus Investment group recently bought into domestic recycling business Unnafibras and is working with management towards an IPO in three to five years time. By then, through acquisitions and investments, the Brazilian company will be significantly bigger than it is now.

Thus Stratus is deploying capital and expertise to grow Unnafibras in exactly the same way that, as Mr Radke outlined, the industry did in the last two challenging years. That is, by working hard on portfolio companies.
“It’s very exciting to see the legal system in different jurisdictions adopt private equity,” enthuses Mr Radke.

“It’s like what happened in Europe in the 90s. It’s a very gratifying time for a lawyer specialising in private equity.” (A far-flung firm, Kirkland & Ellis has offices in London, Germany and Asia-Pacific as well as in its home base in the US.)

But far from particularly US-style or other forms of private equity migrating more or less unchanged as it becomes more international, the industry is changing in subtle ways when it crosses borders. This process of adaptation clearly delights Mr Radke who revels in the legal and corporate diversity that he witnesses as he travels around the world.

“I don’t see a US, Europe or any other blend of intellectual property in international private equity,” he explains. “It’s become a model of corporate governance which is translatable in various forms into doing good business around the world and that includes emerging markets.”

Indeed, the next day he was on a plane to Asia to feel the pulse of private equity there.

World Bank: Peru will record 9% growth in 2011

Posted on February 22, 2011 by

Peruvians are very proud of one important fact: the country is growing and World Bank figures prove it. 2011 will be remembered as the year the Peruvian economy grew nine percent, an incredible rate representing the highest individual economic growth in Latin America and indeed the world.

Peru’s economic success is based in no small part on a clear legal framework allowing any individual or legal entity an easy entry into the market, as well as an orderly and relatively quick exit from it should financial problems arise.

Insolvency – governing law
Insolvency matters in Peru are governed generally by the Bankruptcy Law (Ley General del Sistema Concursal). Other bodies of law, such as the General Companies Law (Ley General de Sociedades), complement the Bankruptcy Law and have subsidiary application.

Jurisdiction
Under the Bankruptcy Law, all insolvency matters fall initially within the administrative jurisdiction of the Bankruptcy Commission (Comisión de Procedimientos Concursales), which is one of seven specialised commissions of Peru’s National Institute for the Defence of Competition and the Protection of Intellectual Property (INDECOPI).

Decisions issued by the Bankruptcy Commission can be appealed to INDECOPI’s Administrative Tribunal (Tribunal de Defensa de la Competencia y de la Propiedad Intelectual). The Tribunal’s decisions exhaust INDECOPI’s administrative jurisdiction. Decisions issued by the Tribunal may then be appealed to the Peruvian Courts for judicial review.

In special circumstances, decisions issued by the Bankruptcy Commission and the Administrative Tribunal may also be challenged directly – not only on appeal – before Peru’s constitutional and commercial courts.
INDECOPI is an agency of the executive branch. Thus, the Bankruptcy Commission and the Administrative Tribunal are not part of the Judiciary and should not be confused with bankruptcy courts existing in other countries such as the United States.

Insolvency proceedings – commencement
Insolvency proceedings may be voluntary or involuntary. Generally, an involuntary insolvency proceeding commences when one or more creditors file a petition with the Bankruptcy Commission, asking it to declare the insolvency of a debtor.

Requirements for admission
In order for an involuntary insolvency petition to be admitted, the creditor or creditors must show (i) that the debtor has obligations with them that are at least 30 calendar days past due, and (ii) that such obligations amount in the aggregate to more than 50 Tax Units or UITs. The current value of a UIT is around $1,000.

Notification and obligation to show ability to pay
Once the petition is filed and the Bankruptcy Commission verifies the existence prima facie of the obligation claimed by the creditor, the debtor is notified of the petition and given 10 business days to prove its ability to pay the debt subject of the petition. The debtor can show its ability to pay by (i) paying the debt claimed by the creditor, or (ii) offering to pay the debt at a later time and giving additional guarantees of payment to the satisfaction of the creditor.

If the creditor is not satisfied with the guarantees offered by the debtor, the Bankruptcy Commission will give the debtor an additional period of 10 business days to show that it is solvent. The debtor can do this by producing a list of duly appraised real or personal property, indicating all encumbrances that may exist over such property. The Commission will find the debtor to be solvent if the appraised value of the debtor’s property, taking into account any disclosed encumbrances, is sufficient to cover the debts subject of the petition.

If the debtor shows its ability to pay or proves that it is solvent, as described above, the Commission will dismiss the involuntary insolvency petition filed by the creditor.

If the debtor is unable to show its ability to pay the debt subject of the petition, or fails to show solvency, as described above, the Commission will issue a resolution declaring the insolvency of the debtor.

Declaration of insolvency – consequences
Once the Bankruptcy Commission issues a resolution declaring the insolvency of the debtor, the resolution is published in Peru’s Official Gazette “El Peruano” and in other major newspapers of general circulation.

Upon publication of the insolvency resolution, all obligations of the debtor are suspended, and all courts, judges, and executors must stop any pending collection proceedings against the debtor. This suspension will be effective until such time as the debtor and its creditors enter into a Restructuring Agreement or a Liquidation Covenant. For this purpose, the Bankruptcy Commission will call for the formation of a Creditors Junta (“Junta de Acreedores”), charged with deciding the debtor’s faith. This can be (i) a restructuring process under the Bankruptcy Law, or (ii) the debtor’s dissolution and liquidation.

Recognition of credits
In order to participate in the Creditors Junta, creditors must file for recognition of their credits within 20 business days of publication of the resolution declaring the debtor’s insolvency. Creditors may file for late recognition of their credits after this period, but they cannot challenge decisions made by the Creditors Junta in their absence.

Creditors priority
The Bankruptcy Law establishes the following order of priority for the payment of debts claimed by creditors of the debtor-in-bankruptcy: (1) salaries and social benefits, including monies owed to pension funds; (2) alimony payments; (3) debts guaranteed by security interests such as mortgages and pledges; (4) taxes owed to Peru’s National Tax Authority (SUNAT); and (5) unsecured debts.

Profile: Victor Marroquin
Victor Marroquín was born in Lima, where he attended the Colegio de los Sagrados Corazones “Recoleta,” the Naval Academy of Peru, and the Pontificia Universidad Católica. He received his Juris Doctor degree with honours from the University of Miami School of Law, where he was Editor-in-Chief of the International and Comparative Law Review, and his Master of Laws degree magna cum laude from Harvard Law School.

Marroquín was invited to join the Legal Department of the IMF in Washington DC, where he worked on various international projects involving legal and financial issues in Europe and Latin America. Following his work at the IMF, Marroquín joined Baker & McKenzie as a member of its Latin America Practice Group. He was resident in Chicago, where, in addition to his involvement in other major projects and transactions, he acted as the project leader of the Baker & McKenzie team that represented the Peruvian government in the privatisation of the country’s airports, ports, railroads, and energy facilities. This included the granting of a master concession for Lima’s International Airport, the BOOT contract for Peru’s main electricity transmission line, and the master concessions for the Camisea Gas Field, one of the world’s largest deposits of natural gas.

Marroquín is now a senior partner at Marroquín & Merino, one of Peru’s most prestigious corporate law firms. His most recent transactions include advising AIG in the acquisition of a major stake in Peru’s Pacífico Seguros, the successful defence of PepsiCo Inc in insolvency litigation with a former bottler in Peru and New York, counselling Google Inc in the establishment of its Peruvian subsidiary and operations, the acquisition of 48 mining concessions in Northern Peru by Sezar Russia Investments, and the successful defence of Cisco Systems, Inc. in litigation with Peru’s National Tax Authority (SUNAT).

Marroquín’s practice involves M&A, finance, insolvency, taxation, and complex civil litigation. A former Ford Foundation Fellow in Public International Law at the University of Miami, Marroquín is the recipient of the International Lawyer of the Year Award from the University of Miami, the Distinguished Service Award from the Chicago Volunteer Legal Services Foundation, and the Merit Award from the Legal Clinic for the Disabled in Chicago.

Among other activities, Marroquín teaches Corporate Law at the Graduate School of the Universidad del Pacífico and serves as President of Peru’s Harvard Law School Association and member of the board of directors of the Harvard Club of Peru. He is also the President of Peru’s International Dispute Resolution Institute, and a member of the board of directors of several Peruvian companies and non-profit institutions.

Private pensions in Russia

Posted on February 22, 2011 by

1994 was a very challenging time for starting up a corporate pension system in Russia. The newly established private pension market was at its very early stage of development. The economy suffered bearing costs of the transition from plan to market. The old-fashioned national PAYG system was unsustainable due to the huge arrears in tax collection and hyperinflation. The drop in retirement income was incredibly large: the replacement rate was at the lowest level since 1985.

At that particular time Russian giant Gazprom moved forward with establishing the largest corporate pension plan in Russia. It was aimed to finance additional retirement income to Gazprom’s employees. To meet this challenging objective NPF Gazfond was founded in October 1994. No one predicted at the time that it was the start of a new era for private pensions in Russia.

From its early days Gazfond has confidently grasped the leadership position in the newly developed market.

After one year of operation the fund started paying out its first lifetime pensions to gas-industry veterans. The pension benefit was calculated at a level exceeding the old-age state pension with the appropriate indexation during the payment period. It was a real success. Now the corporate pension system covers employees of 170 employers in the Russian gas industry. Gazfond provides its services to several multinational companies with branches in Russia.

Gazfond demonstrated impressive growth dynamics: its assets doubled each year and now it is the biggest national private pension fund. Its total assets and pension payments are the highest in the Russian market. As of 1 October 2010, Gazfond accumulated 279.9bn RUB ($9.3bn) in assets, representing more than 45 percent of total assets accumulated by all Russian pension funds.

In 2002 Russia embarked on a large scale pension reform. Its goal was to improve pension benefits and redesign the old PAYG to the multilevel system with establishing a mandatory funded component. The pension reform also provided employees with a right to make decisions on who will operate their funded pension accounts. All individuals born after 1967 may now transfer their savings to the non-state pension fund from the Pension Fund of Russia. In 2004 in response to the new opportunity Gazfond started servicing the open market, providing a wide range of pension products: both corporate and individual pension plans for the various industries as well as mandatory social insurance.

Today Gazfond operates about 400,000 individual accounts. About 50,000 of the fund’s clients accumulate voluntary pension savings. It pays out pension benefits to more than 85,000 individuals at an average of 6,418 RUB per month. Gazfond runs more than 420 corporate pension plans and a large number of accounts for non-gas industries; currently it is represented in more than 60 Russian regions.

On 1 October 2008 the governmental programme for co-financing of individual voluntary contributions came into force. It provides governmental financial support to those who voluntarily contribute to the individual pension accounts. More than four million Russians entered the system, and Gazfond is an active participant in the programme providing such services for thousands of its clients. After the 2008 financial crisis Gazfond was able to guarantee a zero percent loss on individual accounts opened in the state pension insurance system.

Gazfond is a leader on setting up the industry quality standards. Following its clients’ needs in 2008 it opened the first toll-free call-centre on the Russian pension market, which now serves more than 1,000 clients a week.

In 2010 Gazfond established a new on-line service to providing information and support to those who are unable to contact the fund’s offices and representatives in person.

Gazfond is a co-founder of the National Association of Non-state Pension Funds. As its board member, Gazfond is one of the most active members of this self-regulated organisation. Gazfond participates in a public-private pension dialogue on a permanent basis.

Gazfond is widely represented internationally. This way it gets the best industry practices and is able to be ahead in improving its services. For the moment Gazfond is the only Russian non-state pension fund that obtained a permanent membership at ISSA (International Social Security Association) by the recommendation of the Pension Fund of Russia and the Ministry of Health and Social Development of the Russian Federation.

The fund’s representatives were members of the OECD subgroup on private pensions and contributed to getting associated membership in the sub-group for Russia. Gazfond is a permanent member of the Russell 20-20 International Association.

Since 2008 Gazfond has proved its highest business standards by getting the highest credibility and stability rating A++ from Russian rating agency Expert-RA.

“We are not going to rest on our laurels,” says Dmitry Konshin, Gazfond vice-president, strategy and business development. “Our goal is to improve the level of the Fund’s services on the continuous basis, make our offers more accessible for all groups of citizens everywhere across our country. We are proud of our achievements and we are excited about our future. Though the general understanding and awareness of the population considering the importance of their future pensions funding still remains at a very premature level we believe that shortly we will demonstrate even more impressive performance results.”

Egyptian broker launches high-tech platform

Posted on February 22, 2011 by

Aspiring for more – this is the philosophy that Sigma Capital has adopted with the start of 2011, aiming to broaden its share in the Egyptian brokerage and trading market by diversifying its services and extending beyond the Egyptian stock exchange.

The end of 2010 marked a decade since Sigma Capital’s inception as an entity that continues to build and grow through focusing on customer trust and excellence in online brokerage services within the Egyptian market. As pioneers of online trading and banking in Egypt, the company’s vision is that brokerage and trading online are the future of the stock market. Sigma Capital were the very first to make an electronic trading transaction available in Egypt in 2000. The company now benefits from the leadership and vision of this decision.

A vision of excellence
Sigma Capital’s founder, Ahmed Ashraf Marwan, was ahead of the game when he and the co-founders of Sigma Capital decided to utilise the web as a safe and effective trading tool in Egypt. Mr Marwan and his team looked upon the coming decade with optimism, believing that the web should always adapt to its users as new online services are introduced. Proud of their achievements to date, Sigma Capital’s team is determined to retain its position as key innovator in online trading services market in Egypt.

To maintain its dominant position, Sigma Capital is preparing to launch a completely made-over online trading platform and streamer during 2011 that relies on state-of-the-art technology to enhance the platform’s usability.

“Since its inception, Sigma Capital has always made staying on top of technology one of its priorities,” says Mr Marwan. “Having the most cumulative experience in online brokerage in Egypt simply means that we not only know the relevant technology, but also know how to use it in a manner that optimises its benefits.”

“As the internet becomes a vital part of our daily lives, online trading customers need to have access to the latest that technology has to offer,” says Mohammed Hammam, Managing Director. “Consequently, our clients experience a distinctive quality from their online experience with transactions and investments carried out easily, securely and with utmost speed.”

Currently, 30 percent of Sigma Capital’s trading is executed online. This is expected to increase substantially with the launch of the new online trading platform, especially with the growing trend of clients who find online trading to be a more convenient solution. Winning the World Finance award for Broker of the Year – Africa in both 2010 and 2011 has further endorsed the company’s position in this area.

The ambition that drives Sigma Capital towards enhancing online services for its clients, coupled with the company’s firm policies of transparency and integrity, have been an integral part of building client loyalty. It has also encouraged the company to reach and maintain its position in the top 10 percent of securities brokerage companies in Egypt. Sigma Capital ended 2010 at 11th place in the official ranking of Egypt’s Capital Market Authority – an enviable position in a competitive market of 148 licensed brokerage firms. It remains among the leaders of trading in Egypt, largely through a customer-centric approach that promotes customer retention as a priority over acquisition.

Diversification and expansion
As a brokerage business, one of the philosophies that Sigma Capital has adopted over the years is offering financial services to customers of all portfolio size, an extension of Sigma Capital’s focus on customers. For this reason, it has remained one of the very few top brokerage companies in Egypt to accept customers of all portfolio sizes without setting a minimum. This philosophy of championing the small investor has now been extended to SMEs.

During 2011, Sigma Capital plans to play a major role in facilitating investment opportunities for SMEs through providing them with strategic and financial consulting services. As part of this, Sigma Capital will introduce SMEs to the equity market through sponsoring them to list on the Nile Stock Exchange (Nilex), the first stock exchange in the Middle East that endorses small and medium-sized businesses. This service will provide businesses with the opportunities they need for financing and growing in their relative sectors.

Sigma Capital’s ambitious vision includes the effort to broaden its scope and geographical presence, and to be among the most recognised names in the stock exchange market regionally. As such, expanding beyond the boundaries of Egypt constitutes a pillar of Sigma Capital’s growth strategies in 2011 and in the years to follow. This two-pronged international expansion relies on bringing international markets to Egyptian customers and introducing the international market to the Egyptian stock market.

To facilitate this, Sigma Capital is to launch a comprehensive online trading platform that allows customers to access multiple world markets and to trade a multitude of financial instruments. To introduce international investors to the Egyptian stock market, Sigma Capital will focus on extending its customer base throughout the Gulf region, thus relying on the robustness of its online trading platform as well as the investment opportunities that Sigma Capital continues to identify in the Egyptian stock market.

More than technology
While Sigma Capital firmly believes in the importance of technology as the basis for excellence in brokerage services, the company also understands that a solid brokerage service relies on the wealth of information in the form of data and analysis provided to customers. It is for this reason that Sigma Capital was a pioneer in providing stock market knowledge in the form of Technical Analysis, and was the founder of the Egyptian Association for Technical Analysis. During 2010, Sigma Capital also restructured its research and news division, gearing its work towards identifying superb investment opportunities for their clients.

The guardians of Sigma Capital’s customer-centric approach remain its workforce, selected for their integrity, experience and professionalism. Through a staff of over 230 and a management team with an average 10 years of experience in the field, the company prides itself on its ability to align the entire team towards adopting its values of integrity, service excellence and customer satisfaction. To ensure that Sigma Capital’s team is always up to the challenges related to the ebb and flow of the stock market, employee development has always been an integral part of Sigma Capital’s strategy. This is achieved through a combination of training, coaching and on-going evaluation and ensures Sigma Capital remains competitive throughout the markets it serves.

As Sigma Capital embarks on a new decade, the future continues to look bright in terms of its prospects for growth. Having laid the foundation on which the company can build towards its vision, Sigma Capital continues to reap the benefits of its guiding principle: to always do its best. This simple formula provides Sigma Capital’s stakeholders with the reassurance that Sigma Capital will continue to maintain the success it has enjoyed over the years and continues to be a pioneer of innovation in brokerage services in the Middle East region, as well as a beacon of service excellence for its customers.

For more information: Tel: +20233355353, email: info@sigma-capital.com

NCPI ready for European exports

Posted on February 22, 2011 by

“It’s obvious that NCPI is on the right track, winning this distinction from World Finance for the second time,” says Dr AlKamal. “We have grown and developed in a very short time, and achieved a high quality standard that enables us to be registered in countries with very stringent conditions.”

NCPI – the National Company for Pharmaceutical Industry – is a private company established in 1989.

“‘National’ is our mindful thought,” Dr AlKamal says. “We love Syria, we are loyal, and these sincere beliefs are embodied in naming our company ‘National.’ National furthermore means that we must acquire every knowledge and technology from outside, whenever required, and implement it as an essential basis for good manufacturing practice and quality assurance, thereby serving our nation through this sense as well.”

Syria’s pharmaceutical industry is relatively new, beginning with a handful of companies in 1990 and growing – as a direct result of government incentives for private sector investment – to include 63 companies in 2009. NCPI was one of the first private pharmaceutical companies in Syria, established by educated partners working in healthcare, pharmacists, doctors, and medical representatives.

In the last three years the company has developed and expanded tremendously, establishing several new production lines and renewing or enlarging some older lines. This growth sees NCPI ready to penetrate new markets and broaden its sales volume.

Fitness to practise
The company developed rapidly thanks to well formulated plans and stringent controlled rules. Each success helped the company develop consumer trust in the local market, and therefore acquire the confidence of the health authorities and medical bodies in Syria and abroad.

Through constant research and development of new and traditional pharmaceutical products the company is quickly developing an excellent reputation for competence and competitiveness in domestic and international markets.

The plants and main offices of the company are located in Aleppo, the second largest province after Damascus. The site consists of five blocks, each hosting a separate production line: one for oral penicillin, one for oral cephalosporin, one for dry powder filling vial cephalosporin injection, one for generic, and one for anesthesia products such as halothane, isofluoran, and savoflourane.

According to good manufacturing practice (GMP) standard, each block is strictly separated to avoid cross contamination: workers’ clothes of each block are colour coded to prevent confusion, and the cafeteria, canteen, garment washing facilities and rest rooms are all confined and dedicated to their respective block.

Although NCPI produces a great variety of products (see boxout, overleaf), the ultimate goal for each is to develop a safe and effective pharmaceutical product and thereby provide people with a healthy life, free of pain and disease. This is only possible through continuous research and development of safe and effective pharmaceutical products, coupled with strict quality control.

Emotional Pharmacopoeia
The company’s GMP-compliant quality control system ensures its output meets the highest client standards. Of course the constant aim is zero-defect, and this quality target, coupled with international access to technology, helps NCPI save lives worldwide.

At the core of NCPI’s quality philosophy is the commitment to achieve a level of perfection that matches the highest international pharmacopoeia standards. “The final test for quality is a very simple question: ‘Would we use this product to treat our dearest ones?’” says Dr AlKamal. “If the answer is an unhesitant ‘yes,’ the product can pass. We call this ‘Emotional Pharmacopoeia.’”

Through many years of hard work, NCPI has gained an excellent reputation in Syria and around the world. Several European companies have retained NCPI as a licensed manufacturer, including Servier Laboratories (France), Ebewe and BASF group (Austria), and full technical collaboration from ACS Dobfar (Italy) regarding the Vials plant.

This reputation led NCPI to be certified in 1997 the ISO 9001:1994; in 2003 the ISO 9001:2000 and at the beginning of 2004 the ISO 14001 (based on environmental standards). In 2003 it was awarded a gold medal by the Foundation for Excellence in Business Practice for its commitment to sustainable and open business, based on criteria including credibility, efficiency, quality and modern management applications. And in 2007 the company was inspected by the German Health Authority and the World Health Organisation, meeting quality standards that allow it to export medicines to the EU.

Governance
NCPI’s scientific headquarters in Aleppo provides its 10 subsidiary offices – which span all of Syria – with brochures, promotional materials, and up to date scientific information to be delivered to local specialists and practitioners. The company also employs a strong distribution network through a dozen wholesale subsidiaries in Syria, while its export operation spans more than 12 countries, where NCPI has maintained a strong foothold since its inception.

“Our initial vision was to become the leading company in Syria, and our aspiration is to enrich our people – our driving force – to become highly competent professionals,” says Dr AlKamal. “Furthermore our responsibility to improve society – driven by our high ethical standards and belief in our practice – has culminated in our increasing the availability and affordability of different kind of drugs, which enable NCPI to cover a considerable range of the treatment spectrum.”

“In the area of HR, we continue hiring qualified workers and seniors, and implementing training programmes to develop employees’ knowledge, behaviour and awareness, so that we continue to reach the high level of GMP,” he says. “We have never slashed training budgets, as we believe that innovation, progress and development come from strong, well trained and capable workforces.”

As part of its corporate and social responsibilities, NCPI has sponsored many medical congresses and scientific workshops, as well as social and charity events. It also supports university research – it has allocated a budget for pharmaceutical research to the Arab International University to develop formulations in its Masters and PhD programmes – and finances training courses for postgraduate pharmacists, enabling intelligent recruitment and expansion of NCPI’s specialty departments.

The company is also mindful of its environmental responsibilities, and strives to reduce its impact by preventing smoke pollution, treating solid and liquid waste, and recycling liquid effluent for irrigation and other uses.

“Receiving this award is a moment to be proud of,” concludes Dr AlKamal, “but our vision extends more and more, and our ambition and mission will continue to grow.”

For more information: www.ncpipharma.com

Reviewing trust law in Cyprus

Posted on February 22, 2011 by

Characteristics
– The settlor is not a permanent resident of Cyprus.
– At least one of the trustees is resident in Cyprus at all times.
– No beneficiary other than charitable institutions are permanent residents in Cyprus.
– The trust property does not include any immovable property situated in Cyprus.

Benefits from the use of a Cyprus International Trust
– No formal registration is required.
– No taxation on any income, profits or capital gains of the trust.
– Complete freedom of the trustees to invest the trust funds subject only to the provisions of the trust deed.
– Trust profit is not subject to estate duty.
– Absolute confidentiality.
– Non-disclosure of information.

Power to transfer jurisdictions
– The law applicable to a Cyprus International Trust can be expressly changed to a foreign law, provided that this law recognises the validity of the trust and the respective interests of the beneficiaries.
– Conversely, a trust established in a foreign jurisdiction may, by its term, select Cyprus Law provided that the foreign law itself recognises such a change. This provision ensures flexibility, which may be important in the event of a change in government, fiscal or other policy which makes it beneficial to change a trust’s location.

Confidentiality
– Confidentiality is the cornerstone of the new law, which ensures that the trustee or any other person, including officers of the government and of the Central Bank of Cyprus, may not disclose to any person any information or document in relation to the name of the settlor or any of the beneficiaries, the consultations of the trustee regarding the exercise of his power, discretion of duties, the reasoning of such specific exercise of power, discretion or duties or the elements supporting the aforesaid reasoning, the exercise of the power, discretion or the performance of the duties of the trustee and the accounts of the International Trust.
– These non-disclosure provisions are critical because many jurisdictions cannot guarantee such confidentiality, or registration requirements necessitate disclosure of settlors or beneficiaries.

Protection of assets
– Assets may be placed in the trust to safeguard the interests of a beneficiary, e.g. sheltering the inheritance of a daughter from claims in case of divorce.
– Professional partnerships may also find that a trust assists in providing custody for personal assets and safeguarding them from loss through litigation.

Management, profit sharing and pension scheme
– Companies may provide pension schemes, benefit plans and profit sharing arrangements by using a trust with their employees forming the class of beneficiaries. The trust provides an effective method for grouping and sharing benefits and has the added advantage of being able to accommodate a rule book designed to suit each specific and individual circumstance.

Trust advantages and uses
– Individuals who have income arising outside the country of residence which they do not wish to remit to that country can arrange for such income to be remitted to the trustees of a settlement in another jurisdiction to be held in accordance with the trust deed and letter of wishes.
– Individuals with substantial assets outside their country of residence, which may in the future extend or change its control restrictions to include the remittance of overseas funds, may wish to retain flexibility by transferring these funds to the trustees of a settlement.
– Individuals wishing to divest themselves of personal liability can arrange those assets to be transferred to the trustees of a settlement and to be in accordance with the trust deed and letter of wishes.
– Persons expecting to leave one country to take up residence in another may obtain more financial advantage with regard to the new residence by placing the assets in a suitable settlement.
– Persons who wish to invest in businesses overseas but do not wish profits and dividends to be remitted to their country of residence, may set up a settlement to undertake the investment.

Validity of a Cyprus International Trust
– No foreign law relating to inheritance or succession will invalidate the trust
– The validity of the trust is not affected by the settlor’s bankruptcy or legal action by creditors unless it can be proved that the trust was made to defraud creditors, and an action is brought by them within two years of transfer of trust assets to the trustees.

Re-energising corporate governance

Posted on February 22, 2011 by

Winner of this year’s World Finance Award for Corporate Governance for Austria, Telekom Austria Group values and embraces the recognition of its longstanding efforts in the area of corporate governance.

The company has a clear vision – to become Central and Eastern Europe’s most innovative and efficient telecommunications provider. Currently it is the leading telecommunications services provider in Austria and is a strong player in the region.

Striving for that leadership role also requires the company to set high standards for its corporate governance. A public company since 2000, Telekom Austria Group recognised early on the importance of ethical corporate behaviour and excellence in corporate governance.

New group governance
Telekom Austria Group is an integrated, convergent provider of intelligent information and communications services. It is well positioned in CEE with international mobile operations in Bulgaria (Mobiltel), Croatia (Vipnet), Belarus (Velcom), Slovenia (Si.mobil), the Republic of Serbia (Vip mobile), the Republic of Macedonia (Vip operator), and Liechtenstein (mobilkom liechtenstein). In July 2010, the group merged its Austrian mobile communications and fixed line divisions creating A1 Telekom Austria AG. The company is now in the position to offer convergent products for voice telephony, internet access, data and IT solutions, value added and wholesale services, mobile business and payment solutions in Austria. With the merger, Telekom Austria Group introduced a new group governance model to create a clear framework for efficient and fast coordination within the group. The model is aimed at faster decision making, closer and more binding collaboration and shorter times to market.

Today, approximately 22 million fixed line and mobile customers place their trust in products and services provided by Telekom Austria Group. It has been and is an innovation leader when it comes to mobile communications with numerous ‘one of first to launch’ rollouts, such as the world’s first rollout of a UMTS network, one of the first launches of m-commerce applications worldwide, and one of the first commercial rollouts of HSPA+, HSPA+ Dual Cell and LTE in Europe.

Commitment to transparency
Since its IPO in 2000, Telekom Austria Group has declared its commitment to maximum transparency in reporting, in line with international capital market practices. As a result, Telekom Austria Group has developed a reporting culture that exceeds Austrian requirements. It also adheres to the guidelines and extended reporting obligations of the Austrian Corporate Governance Code, a system of rules in accordance with international standards for the responsible management and guidance of companies in Austria. The code was developed by the Austrian Working Group for Corporate Governance in 2002. Enjoying widespread acceptance, it was expanded and amended in the following years, last in 2010. Several provisions of the code were adjusted to comply with amendments to the Austrian Stock Corporation Act 2009. Telekom Austria Group committed itself to voluntary compliance with the code as early as 2003.

Code of conduct
Telekom Austria Group has implemented additional corporate governance instruments, such as an effective risk management system and its code of conduct. The group’s risk management system enables a group-wide structured identification, evaluation and management of risks on the basis of a defined risk policy as well as strategic and operational objectives. Its effectiveness is subject to external evaluation by auditors pursuant to Rule 83 of the Corporate Governance Code and, along with the effectiveness of the internal control system, it is monitored by the Audit Committee. The internal control system of Telekom Austria Group is aimed at safeguarding the effectiveness and profitability of business activities, the integrity and reliability of financial reporting and compliance with the relevant laws and regulations.

Telekom Austria Group’s code of conduct, which is binding throughout the group, is designed to raise awareness among employees with regard to corruption prevention and lawful ethical conduct. It is available on the official website www.telekomaustria.com so both the public and staff can view it. To prevent the misuse or passing on of confidential information, group-wide compliance guidelines have been implemented and classified units defined within the company. A reporting system has been put in place that enables employees to confidentially report legally dubious procedures or violations of this code.

Anti-corruption management as part of a comprehensive risk-based compliance management system is also an integral element of Telekom Austria Group’s high corporate governance standards. The management board and the audit committee of the supervisory board receive regular reports regarding the effectiveness of the internal control system and the audits carried out by the internal audit department. Furthermore, in spring 2010, the supervisory board closely scrutinised the systemic fundamentals and effectiveness of Telekom Austria Group´s compliance management system.

Investor relations
Telekom Austria Group’s excellence in corporate governance has been recognised on numerous occasions. In addition to this year´s World Finance Corporate Governance Awards, it received the Vienna Stock Exchange Prize for Best Corporate Governance in 2009. Telekom Austria Group also has a proven track record of award-winning investor relation (IR) work; it was recognised as having the Best IR Team in Austria, the third best IR team within the telco industry, the best IR website within the telco industry (IR – GlobalRankings) and achieved numerous awards for its annual reports (Arc Awards, Trend AAA).

Sustainable value enhancement
For Telekom Austria Group, corporate governance has wide-spread implications that exceed good business practice, reporting standards and risk management. Its aim is to ensure long-term sustainable, value-enhancing corporate development. Therefore, Telekom Austria Group not only adheres to strict principles and is committed to transparency, but also shows a strong willingness to engage in open dialogue with its stakeholders. The challenge of responsible company management is to combine economic success with care for environmental and social aspects.

To underline its deep-seated commitment to this principle, Telekom Austria Group endeavours to further develop its sustainability profile, and last year set in place a group-wide sustainability programme. The increased involvement of its international subsidiaries and their integration into the corporate strategy are central to these efforts.

Equal opportunity is considered an important component of Telekom Austria Group’s interpretation of corporate governance and social responsibility. The percentage of women on the supervisory board of Telekom Austria AG has risen steadily – 16 positions were held by women in 2010, as were two of four Officer positions at group level and eight management board or managing director positions at the group´s international subsidiaries. The proportion of women in managerial positions at Telekom Austria Group in 2010 totalled around 32 percent and Telekom Austria Group´s recently founded “TAG Business School” plays an important role in further anchoring the group’s values and gender diversity.

Having won this year’s World Finance Corporate Governance Award is of utmost importance to Telekom Austria Group, given the profile of the jury and entrants. It is a moment for a brief halt, to get re-energised for our further corporate governance quest. Telekom Austria Group already plays a vital role in the Austrian Working Group for Corporate Governance and actively contributes to the advancement of corporate governance standards on the European level today. Our clear aim is to stay abreast of and even anticipate new developments in corporate governance – as any leader should do.

Matthias Stieber, Director Investor Relations, Telekom Austria Group

Pirelli returns to F1

Posted on February 22, 2011 by

In 1872, a young Italian engineer called Giovanni Battista Pirelli established Pirelli & C. in Milan and opened a plant manufacturing rubber articles. A century and a half later, Pirelli is now the world’s fifth largest tyre company in terms of sales, and a leader in high-end and high-tech development.

Pirelli now has 20 plants on four continents, working in more than 160 countries all over the world, with a research centre in Italy and eight application centres the world over. It has more than 1,000 people working in research and development, and will continue to invest about three percent of its annual revenues in research over the next three years: one of the highest rates in the sector.

Continuing an industrial tradition more than a century old, the group focuses on ongoing international expansion (as in Russia and Mexico), while maintaining strong roots in the local communities it works in.
Pirelli stands out for its ability to innovate, quality products and brand strength. Since 2002 the brand has been supported by the PZero fashion and high-tech project, and now it has been given a further boost by the company’s return to Formula One, after a 20 year absence, as exclusive supplier for 2011-13.

Pirelli focuses on research and development in line with its green performance strategy, maintaining a growing focus on top quality high-tech products and services with a low environmental impact. Its activity in this area is supported by Pirelli EcoTechnology, active in the areas of emissions control technologies, and Pirelli Ambiente, concerned with energy and environment.

The name Pirelli has also been associated with the Pirelli Calendar ever since 1964. Within a few years ‘The Cal’ became a status symbol, although in 1974 severe budget cuts due to two oil crises forced the company to suspend publication. But the interruption was temporary. After the oil crisis, the calendar made a comeback in 1984, and it has been an integral part of the Pirelli brand since 1994.

In its 40 years of history, the Pirelli Calendar has proposed an astonishing array of styles and models of beauty. And now, after 38 editions, it is still a reference point epitomising the changes and transformations of our society. In 2011 the 38th Pirelli Calendar, reflecting the creative genius of Karl Lagerfeld, was presented to the press, guests and collectors from all over the world in Moscow.

Responsibility in business
At the end of 2010, Pirelli presented the financial community with its new 2011-13 Industrial Plan, with a vision for 2015, after meeting the goals of the challenging 2009-11 Industrial Plan a year in advance.

The new plan requires Pirelli to achieve total revenues of more than €6.05bn, with an EBITDA after restructuring costs of 15-16 percent, and an EBIT after restructuring costs of 10.5- 11.5 percent in 2013. Investment in 2011-15 is to reach €1.9bn. In accordance, Pirelli is to settle at a total productive capacity of 77 million pieces in 2013, with the goal for total capacity in 2015 at around 88 million pieces.

The Pirelli Group combines economic profitability with social responsibility in pursuit of its goals. Corporate governance plays an essential role in this. In 1999, Pirelli became one of the first Italian companies to fully implement the ‘Code of Conduct for listed companies’ recommended by Borsa Italiana SpA, the Italian stock exchange. Awareness of the importance of an adequate system of corporate governance in order to achieve the goal creating value drives Pirelli to keep its corporate governance system constantly in line with the ongoing evolution of standards and best practices in Italy and abroad.

Pirelli’s corporate governance system is based on the following milestones:
i) central position of the board of directors as the authoritative organisation in charge of company management;
ii) consolidated disclosure practices regarding decision-making choices and procedures which are entirely compliant with legislative regulations and an effective system of internal control;
iii) an innovative and pro-active risk management system;
iv) a system providing incentives for managers which is clearly linked with medium- and long- term goals; and
v) effective monitoring of potential conflicts of interest and a rigorous code of conduct regarding the implementation of transactions with related parties.

Pirelli’s board of directors plays a central role in the definition of the company’s and group’s strategic guidelines. Made up of 90 percent (18 out of 20) non-executive and independent directors, the board monitors the performance of top managers and supervises the entire risk management system.

Minority shareholders and independent directors have considerable weight on the board.

Pirelli introduced list voting for appointment of the board of directors in 2004, allowing minority shareholders to elect 20 percent of the directors in office.

The committee includes two board committees (the Internal Auditing, Risks and Corporate Governance Committee and the Remuneration Committee) composed exclusively of independent directors. In November 2005, the board of directors introduced the position of Lead Independent Director to further emphasise the independent directors’ role.

Risk governance
The new risk management model introduced by the Pirelli Group is a pro-active model aimed at guiding decision-making and adoption of tools for preventing, mitigating and in all cases handling the most significant risk events, considering risk assumption an essential component of company management.

Pirelli’s Risk Governance System is based on a specific methodological approach:
i) Value driven: in that the most significant risks analysed are identified in relation to their potential impact on achievement of the Group’s strategic goals as set forth in the Industrial Plan or to affect critical company assets (key value drivers);
ii) Top-down: in that top management performs the role of guiding identification of top priority risk areas and the events with the greatest impact on the business;
iii) Quantitative: that is, based on precise measurement of the impact of risks on expected economic and financial results.

In line with this, the most significant risk events identified by top management are subjected to careful analysis with the involvement of middle management, whether managers of central staff functions, regional or country managers. This permits representation in line with the Pirelli Group’s organisational structure, present in both mature and emerging markets, and allows the board of directors to define target levels of exposure to high priority risks. It also allows for risk management strategies to be drawn in line with the existing propensity for risk (transferring, reducing, eliminating or mitigating risk) and for plans of action and guidelines for a form of management to be aimed at keeping exposure levels within target limits.

The results of the assessment conducted by middle management are analysed and consolidated at the central level by top management and become, along with the corresponding mitigating actions, an integral part of the Annual Risk Management Plan incorporated in operative management.

On launching the 2009-11 Industrial Plan, Pirelli defined a long term incentive plan intended to align remuneration with creation of value.

Pirelli further reinforced its long term incentive programme on the occasion of the launching of the 2011/2013 Industrial Plan. The new Long Term Incentive programme defers payment of part of the annual incentive and makes payment of the final incentive subject to achievement of three-year goals, creating a direct link between remuneration and sustainable medium to long term performance.

Under the new incentives system adopted by Pirelli, more than 70 percent of management’s variable pay is linked with medium to long-term goals. Part of the long term incentive is also tied to total shareholder return, in order to further align management’s work with creation of value for shareholders. The economic targets of the Industrial Plan take into account the cost of the incentives.

In view of this, Pirelli has been included in the Dow Jones Sustainability STOXX index since 2002 and has also been included in the world-wide Dow Jones Sustainability World index for several years. In 2010, for the third year in a row, Pirelli was declared a world-wide leader in sustainability in the ‘Autoparts and Tyres’ sector and a Gold Class company by the Sustainability Asset Management Group in the prestigious Sustainability Yearbook 2010. Finally, Pirelli has been included in the FTSE4GOOD Global and Europe indexes since 2002.

Turkish fund extends asset base

Posted on February 22, 2011 by

OYAK established by law (number 205) in 1961 as a private corporate entity, is subject to private law and is financially and administratively autonomous. It can be seen as a second tier private pension fund, primarily for the officers (commissioned and non-commissioned) of the Turkish Armed Forces, all of whom are permanent members (Reserve Officers are defined as ‘temporary members’). It provides pension, death and disability benefits, as well as housing and personal loans for its members. All of OYAK’s members are also members of the Turkish state pension scheme – OYAK can be seen as a system to provide benefits to its members to supplement their state benefits.

The company operates a revenue sharing system and, as such, it is not a ‘defined benefit’ scheme, for which the precise level of benefits can be calculated in advance. Instead, returns generated by OYAK are shared among all eligible members – nearly 260,000 at end of 2010.

In addition, OYAK acts as an investment holding company, generating returns for its members through investments in financial instruments and its equity participations in more than 60 companies – including subsidiaries, joint ventures and affiliates in the iron and steel, cement, automotive, energy, logistics and other sectors.

As a pension fund, OYAK’s primary objective is to preserve its members’ assets and to maintain its actuarial balance, together with the maximisation of member returns. Its investment strategies are designed accordingly.

Focus on profitability and cash generation
OYAK’s investment strategy is to enhance the profitability and cash generation of the group and to strengthen its position in key sectors, whilst maximising opportunities to further diversify holdings through measured participation in privatisation initiatives or purchases of majority interests in companies operating in the industries and sectors on which it has decided to focus. It does not invest in equities that are not likely to distribute dividends regularly or that are not likely to distribute dividends in the relatively short term. Investments generating insufficient profit or which no longer fit the investment criteria of the group are sold if there is an opportunity to recognise a profit.

OYAK’s investment strategy is risk averse and centres on preserving its members’ reserves. OYAK invests its assets in fixed income instruments and in equity participations in order to generate income and capital gains and to provide real returns above the rate of inflation. In order to safeguard its assets, OYAK has sought to diversify its financial investments and has pursued an investment allocation strategy that takes into account market risk and seeks to hedge its exposure to market volatility.

Equity investment strategies
OYAK controls and actively manages all of its subsidiaries, and exercises shareholder rights to the greatest extent possible in those partnerships and affiliates when it does not own a controlling interest.

OYAK seeks to maintain a majority of the share capital of its subsidiaries, and to ensure they follow its investment strategies and management principles. To that end, either OYAK’s CEO or an executive vice president act as chairman of any subsidiary in which OYAK owns the majority of outstanding shares.

Following various acquisitions and disposals during the last 50 years, OYAK’s strategy is to invest its members’ funds primarily in industrial sectors such as automative, logistics, iron and steel, cement and concrete, and energy, together with any businesses that may complement these core sectors – but not necessarily within Turkey. Currently most of the group’s investments are located in Turkey, but it is seeking opportunities to further diversify its holdings geographically.

Clear corporate governance framework
OYAK has a well defined corporate management structure, which encourages a high level of corporate responsibility, accountability and governance. Because OYAK is primarily a pension fund, its statutory objective is the preservation of members’ assets and the maintenance of its actuarial balance. OYAK selects its investments according to prudent financial management principles. It has four levels of corporate management structure: a representative assembly, a general assembly, a board of directors and a general directorate.

OYAK’s corporate governance framework is designed to provide clear lines of accountability between the management of OYAK and its members. OYAK’s representative assembly, with around 75 members, meets every three years and is responsible for the election of 20 of the 40 members of the general assembly. The general assembly holds regular annual sessions, which are akin to shareholder meetings but last two weeks. For strategic investment decisions, the board of directors may also convene extraordinary meetings of the general assembly.

The board of directors consists of seven members plus the CEO. Three members are elected by the general assembly from a list of candidates, and four other members – who must be graduates specialised and experienced in the fields of finance, law, banking or insurance – are selected by an election committee established specifically for this purpose. As a result, the members of OYAK represented at all levels of management are able to exert a significant amount of influence over the investment decisions of OYAK and the group.

Skilled management team
The OYAK Group has, throughout its history, benefited from the knowledge and experience of its senior management teams. These industry professionals have significant experience in the group’s areas of investment, including iron and steel, cement and concrete, and automotive. Senior executives of OYAK sit on the boards of directors of its subsidiaries, joint ventures and affiliates, ensuring consistency and compliance with the group’s overall strategy.

Brand, reputation, transparency
OYAK imposes on itself, and throughout its subsidiaries, high standards of transparency and accountability. The protection of its members’ rights is paramount in its operations. OYAK’s financial management principles emphasise its corporate accountability towards the concerns and interests of not only its members but also of the wider Turkish community.

OYAK’s annual report is voluntarily made public in order to demonstrate its commitment to corporate transparency. The group’s accounts are audited by international accounting firms and are reviewed by its internal auditors who also sit in on board meetings. For further transparency and accountability, and to elicit their comments, the minutes of OYAK’s annual general assembly meetings are mailed to all of OYAK’s members.

Ratings by Moody’s and S&P
OYAK was the first corporate group to be rated by both Moody’s and S&P in Turkey. Until recently both of OYAK’s ratings were above the sovereign, until Turkey’s rating was increased. Currently OYAK is rated Ba2 by Moody’s (equal to sovereign) and BB+ by Standard & Poor’s (one notch above sovereign). The recognition by the international ratings agencies of OYAK’s stability has enabled the OYAK Group to obtain stable medium and long term financing. OYAK is very active in international loan syndications as well as in private deals.

Proven record of successful investments
OYAK’s return on members’ assets was 2.2 times the CPI for the year ended 31 December 2009, with a rate of return (based on profit for the year) of 14.2 percent. In 2008 the rate was 26.3 percent, 2.6 times CPI, while for 2010 the it is expected to be around double CPI. OYAK has a consistently strong record of achieving annual returns for its members above inflation, despite a sometimes harsh and hyper inflationary economic environment.

Partnerships with major foreign and domestic corporate groups
The OYAK Group has partnerships in different forms with several major international corporations, including two ongoing partnership agreements with Renault Group of France for the manufacture and export of sale of automobiles in Turkey and a partnership with German company Evonik STEAG GmbH in one of Turkey’s largest power generation projects Iskenderun Enerji (Isken). In addition, the group is working on increasing its equity holdings outside of Turkey to diversify its geographical spread.

From pension fund to strategic investor
In its 50 years of history OYAK has come a long way from being solely a pension fund providing services and returns to its members, to become one of the largest and most profitable conglomerates in the country. It is recognised not only as a pension fund but also as a strategic investor, and its proven track record of consistent profitability, steady growth in assets, strong liquidity and strict adherence to corporate governance principles gives OYAK the domestic and international reputation and recognition it deserves.

Greece works to regain investor trust

Posted on February 22, 2011 by

Then again, Greece was not the only member of the eurozone (a union which, unlike any successful financial organisation, seems to have based its existence exclusively on positive assumptions) to face financial difficulties.

Difficult decisions had to be made by the financially stronger eurozone members to provide assistance to weaker ones. Early in 2010 the decision was made that financial assistance be granted to Greece – not only from European sources, but also from the IMF.

But financial assistance is never free. Severe conditions were imposed, and the country was obliged to start a long and painful restructuring of its public management and finances by imposing strict public policies. However the public reaction against these policies sent Greece back to the top of the news, with images of protests against the austerity measures shown around the world.

Public reaction, however, is just one side of the coin. The other side is that austerity measures, when properly implemented with the support and guidance of the ECB and the IMF experts, may lead to an impressive reform of the legal framework, securing a cost efficient and revenue generating environment for investments. And undoubtedly Greece, especially today, is in great need of anyone willing to make new investments in its troubled but recovering economy. So, Greece has to prove itself – once again – as an investor friendly country.

Greece, even before the financial crisis and austerity measures, held a very strong record in attracting foreign investments. During the last two decades Greece completed a long list of large concession projects, one of the most favoured categories of foreign investments in Greece. Some of these, such as Athens International Airport and the Athens ring road, were undoubtedly the inheritance of the 2004 Olympic Games. Others that followed simply took a free ride on the project finance model, which was developed and tailor-made for Greece. Impressive projects, such as the Rion-Antirion bridge, the longest multi-span cable-stayed bridge in the world, and the new generation of large finance projects, such as the MK or E65 toll road concessions, which reached financial close less than three years ago, were organised and completed based on such a model.

Also, Greece had made it in the list of approved jurisdictions of some of the most rigorous and difficult-to-persuade investors. Equity funds, such as BC Partners, Rhone Capital, TPG or APAX, and strategic enterprises, such as Deutsche Telekom, have already completed a first round of sizeable – and in most cases successful – transactions targeting Greek companies.

This success in attracting foreign investment resulted from Greece’s years of experience in organising projects that require foreign resources. And Greece knows very well that the recipe for attracting foreign investment requires that an investor friendly jurisdiction can tackle one of the most significant risks: the legal one.

Both older and more recent pieces of Greek legislation provide for the creation of a safe legal framework and for the right tools for financing and completing large projects in Greece. An excellent example is law 3894/2010, a very ambitious piece of legislation that Greece enacted in late 2010 to attract foreign investors to Greece by introducing a fast track process for strategic investments. Also, older pieces of legislation deal with the legal risk. Legislative Decree 2687/1953, the oldest piece of Greek project finance legislation, allows for the creation of a secure legal environment for the foreign investments brought under its scope. Originally used in the shipping business, this decree was then applied to a whole range of projects, from casino investments to the international airport.

In addition, acting as a prudent full EU and EMU member state, Greece saw that all the EU directives dealing with various financial markets and taxation issues were adopted in good time. Moreover, the long list of new directives that preceded the Union’s enlargement have now become Greek law. Greece has also kept pace with all significant EU legal developments and directives in the fields of financial collateral, prospectuses, market abuse and transparency, take-over directives, markets in financial instruments and banking, harmonising all of the respective Greek law fields.

Further steps had been taken at a national level before the outbreak of the crisis to mark Greece out as an investor-friendly jurisdiction. These include the very recent modernisation of the bankruptcy and companies legal regime, as well as the enactment of the very useful bond and securitisation Law 3156/2003, which introduced the notion of private securitisation of receivables and modernised the framework for issuance of bonds by Greek entities. Law 3156, by providing for tax relief and finance-associated cost caps and limitations, and by deviating from traditional legal notions such as the assignment of claims, set a safe legal environment to raise funds for investments into Greece. Law 3156 has been consistently applied for the financing of virtually all the major investments made in Greece since 2003.

The austerity measures and strict public policy that came with the IMF and ECB’s support had only a positive impact on this already existing investor-friendly environment. The liberalisation of the provision of services regime, limitations on unreasonable union rights are some examples of such impact, which further facilitated the investor-friendly legal framework.

The recovering Greek economy is expected to provide for significant opportunities to everyone who is willing to take its risk. Whether these expectations will be fulfilled remains to be seen. One thing, however, is certain. Anyone who will take this risk can rely on Greece’s long standing commitment in sustaining and improving its investor friendly legal framework.

Rethinking sustainability

Posted on February 22, 2011 by

It is a pity that the most abundant metal in the earth’s crust, which is also one of the most useful to mankind, is so difficult to render into a useable form. The chemical properties of aluminium make it appear only in combination with other elements, forming compounds such as aluminium sulphate and aluminium oxide.

Although scientists first extracted and identified the metal in 1825, it was not until 1888 that commercially viable processes were developed to obtain aluminium oxide from bauxite ore and extract the pure metal from aluminium oxide. The latter process, based on electrolysis, is still in use today, and its environmental impact in terms of energy use and CO2 emissions are an area of focus for leaders of the industry.

Which makes it all the more notable that the leading producer in the world, New York and Pittsburgh-based Alcoa, has won numerous awards, including the World Finance Best Carbon Markets Heavy Industries Pioneer – 2011, for its ground-breaking work on sustainability.

“Sustainability is in our DNA,” says Kevin Anton, VP and Chief Sustainability Officer at Alcoa. “Just a few months ago the company created my position reporting to the Chairman and CEO with a mandate to further drive sustainability into everything we do, from working with suppliers, to continued improvements in our production processes, and helping to educate customers, partners and the public understand the environmental benefits of using aluminium solutions from Alcoa.”

First of all, the bad news. There is no question that the production of aluminium disrupts the landscape where bauxite ore is mined, consumes large amounts of electricity and produces waste. But each of these aspects of the production process is the subject of constant research and efforts to reduce or eliminate its impact – efforts which Alcoa is leading. However, based on the full lifecycle of Alcoa aluminium products, the benefits already outweigh the impacts.

At the beginning of the ore to metal transformation is the extraction of bauxite, which is generally done in open cast mines that have the potential to disrupt local ecosystems and the way of life of native people. Alcoa’s most recent mining project was opened in the Juruti region at the heart of the Brazilian Amazon region in 2009. This region is known to have one of the single largest high-quality bauxite deposits in the world, but it is also home to some of the most endangered habitats and the 35,000 strong Juruti Velho people.

The new mine is being cited as an example of how sensitively handled mining developments can benefit the local region as well as the mine owners. Following extensive consultations with the local community, Alcoa identified and implemented 20 environmental and 15 social and economic initiatives to fulfil its licensing requirement. Furthermore, under its own sustainability agenda, the company is investing extensively in additional community initiatives relating to health and education, as well as environmental programmes focused on minimising the removal of vegetation, preserving vital genetic material and seeds, and relocating threatened animals to preserved areas.

Since the century-old electrolytic process is still the only commercially proven method of producing aluminium, the production process remains a heavy user of electric energy. The industry is sensitive to this and has pursued opportunities to reduce its use of electricity. In the last 50 years, the average amount of electricity needed to make a pound of aluminium has been reduced from around 10 kWh to seven. In addition to using renewable hydroelectric power where possible, Alcoa has made a further commitment to achieve an additional 10 percent reduction in the energy intensity of its primary operations from a 2005 baseline by 2020.

A similar commitment has been made with respect to reducing byproducts of the production process. Alcoa has reduced GHG emissions 43 percent from a base year 1990 while more than doubling production – an impressive feat. New environmental targets set by the company in 2010 take that achievement even further and call for a 20 percent reduction in total (direct and indirect) CO2 equivalent intensity from a 2005 baseline by 2020 and 30 percent by 2030.

These goals are just one part of Alcoa’s sustainability agenda, according to Anton. “We look at three distinct areas,” he says. “The first, of course, is the area of production – how do we produce aluminium in an environmentally friendly way. The second is the use of our product and how it can enhance the environmental performance of the products it goes into – such as making cars and trucks and airplanes more fuel efficient and therefore generating fewer emissions. The third is how we promote environmental awareness and protection… we view that as part of our role to help others in their journey toward a more sustainable world.”

It is the second area where Anton and his team believe even better improvements to the global carbon footprint can be made, and with good reason. Given its attributes of light weight, strength, malleability, superconductivity and non-corrosiveness, aluminium is the metal of choice for uses ranging from cooking and canning to space travel. Demand for the metal is growing fast, as aluminium is used to replace other materials in product design, and developing economies like China and India increase their consumption.

In 1900, annual output of aluminium was 1,000 tonnes; by the turn of the next century, production had reached 32m tonnes. Demand grew by around eight percent per annum from 2002 until the recession hit in 2008, when world aluminium production declined for the first time in fifteen years. Fuelled by growth in China, production has started to grow again, and in its report The Economics of Aluminium, 2009, Roskill Information Services Ltd forecast a total demand of about 58m tonnes by the end 2013.

“What many people fail to realise is how the use of aluminium in the place of alternative materials can enhance the carbon footprint of the product it goes in to,” Anton points out. “Obviously it is more relevant to the sustainability of our planet to look at the environmental impact of any item over its entire life cycle.”
One of the clearest examples of his argument is aluminium in the transport industry.

In 2006, aluminium overtook iron to become the second most used material in new cars and trucks worldwide. Alcoa works closely with automakers to include aluminium in new car designs in ways that will improve fuel economy, reduce emissions and enhance vehicle performance. According to the International Aluminium Institute, a kilogram of aluminium used as a substitute for heavier metals in the car industry reduces petrol consumption by 8.5 litres and emits 20 kg less CO2. A 10 percent reduction in car weight results in a nine percent increase of fuel consumption efficiency. Essentially, aluminium provides three times the fuel economy benefit of high strength steel.

The same principle is being applied to a wide range of products in general use. Aluminium laptop computers are lighter, and do not need to rely on a fan because of the metal’s thermal properties – making them more energy efficient. At the worlds’ largest light metal research centre, Alcoa scientists are constantly working to exploit the unique properties of aluminium to enhance the energy performance of products in transportation, packaging, construction, lighting, electrics, electronics and surface coatings.

Of course, all of these products will eventually wear out and be discarded, spelling the end of their life cycle – but not of the aluminium content within them. Unlike most other constituent materials, aluminium is 100 percent recyclable without any loss of its natural qualities, and can be recycled an infinite number of times: that’s good news for the planet. And the recycling process uses a mere five percent of the energy used to produce aluminium from ore, so part of the Alcoa sustainability agenda is about encouraging as much recycling as possible to meet the growing demand for aluminium with this more energy efficient material.

“Aluminium is the most commonly recycled post-consumer metal in the world,” explains Anton. “Seventy-five percent of all the aluminium ever produced since 1888 is still in use today.”

With little financial incentive to recycle, consumers needed to be made aware of the environmental benefits of returning their beverage cans for reprocessing. Two years ago, Alcoa launched an initiative that gained the support of the entire industry to lift beverage can recycling rates in the US from 52 to 75 percent by the year 2015. Today that rate is 58 percent and growing. Europeans currently recycle just over 70 percent.

Sustainability is defined by the World Business Council for Sustainable Development as “ensuring a better quality of life for everyone, for now and for generations to come.” As the benefits outweigh the costs of aluminium, it forces us to rethink how we define sustainability in a complex world. For the sustainability team at Alcoa, the concept of lifecycle is an important part of judging aluminium, but they are not content to rest in their focus on constantly improving all aspects of their business process. Their commitment includes embedding sustainability goals in the corporate incentive compensation scheme, to ensure that everyone is focused on best practices and achieving improved levels of performance.

It is this commitment that has given investors confidence in Alcoa’s sustainability agenda – the company has now been listed on the Dow Jones Sustainability Index for nine years.