Policing derivatives

While the intent exists on both sides of the Atlantic to police the complex financial instruments that have come under fire for causing or exacerbating the latest global financial crisis, it is perhaps unsurprising that there are disagreements over how derivatives should be regulated.

The differences between the EU and the US centre on how regulators are defining new trading platforms for over-the-counter (OTC) derivatives (contracts that are traded – and privately negotiated – directly between two parties, without going through an exchange or other intermediary, such as swaps), the ownership of clearing houses that will beused to process such contracts and whether brokers can get access to membership of a clearing house to handle OTC derivatives for customers.

In the US, the Commodity Futures Trading Commission (CFTC), the futures watchdog, is in favour of creating new trading platforms called “swap execution facilities” (SEFs) which would require participants to request price quotes from multiple contributors. This would limit the ability of dealers that have effectively long controlled the OTC derivatives markets. But the European Commission has proposed a looser definition of these platforms, which it calls “organised trading facilities.” Industry experts say this could allow the dealers’ current model to continue to exist, prompting banks to shift activity from the US to Europe to take advantage of a laxer regime, in so-called regulatory arbitrage.

Maria Velentza, head of the securities market unit at the European Commission, said in March that “our idea in Europe is not to disturb existing business models for trading of OTC derivatives.” Jill Sommers, a commissioner at the CFTC, has said that her agency was already “out of step” with proposals on SEFs from the Securities and Exchange Commission (SEC), the US’ financial regulator which is also implementing derivatives reforms under the Dodd-Frank act. “We need to be consistent, not just with the SEC but globally, otherwise we could have enormous regulatory arbitrage,” she has said.

There are other important differences too. For instance, Europe is not proposing – as the CFTC is – to place limits on the ownership of clearing houses. Furthermore, brokers are angry that, while it is relatively easy for them to become members of clearing houses as the Dodd-Frank act stipulates, the costs of doing so in Europe look prohibitive.

It appears that – yet again – there is unlikely to be a unified approach on both sides of the Atlantic as to how derivative markets should be regulated. Anthony Belchambers, chief executive of the Futures and Options Association, the European affiliate of the FIA, recognises the problems. “Clearly, there are going to be differences between the US and Europe, and some will be quite fundamental,” he says.

But this is not the only source of disagreement. Tensions are also mounting over attempts by Brussels policymakers to widen the scope of the European Market Infrastructure Regulation (EMIR), which would result in increased competition for derivatives trading among exchanges.

The European regulation was originally intended to increase the robustness of the OTC derivatives market by forcing all OTC trades through a clearing house. But some policymakers now want the new rules to cover derivatives listed on an exchange, turning the EMIR text into a battleground over competition in the European derivatives market.

The inclusion of listed derivatives would break open the lucrative vertical silo model operated by Deutsche Börse where trades executed on the exchange are automatically cleared through its own clearing house Eurex Clearing. Analysts say this could affect the value of the $10bn deal. Deutsche Börse and NYSE Euronext have opposed expanding the scope of EMIR to listed derivatives while derivatives dealers and the London Stock Exchange, which is hoping to break into the listed derivatives market, have argued in favour.

Yet despite the uncertainty about how the regulatory landscape is likely to pan out in Europe and the US, derivative trading has started to pick up again – and not just in the world’s biggest and most developed financial markets. Derivatives exchanges have reported a spike in trade volume on the back of growth in Asia-Pacific and Latin America, and strength in the commodities sector. According to new figures released by the US-based trade body Futures Industry Association (FIA), derivatives exchanges witnessed a 25.6 percent increase in trading volume in 2010 compared with the previous year, with 22.3bn contracts changing hands.

In its Annual Volume Survey, the FIA said the spike was led by large growth rates in volumes in the Asia-Pacific and Latin America; the strong performance of the commodities sector; and a partial revival in the market for interest rate futures in the US and Europe. As of the end of 2010, the Asia-Pacific region accounted for 39.8 percent of trade volume in exchange-listed derivatives worldwide, compared with 32.2 percent in North America and 19.8 percent in Europe. Much of the volume increase in Asia was down to the performance exchanges in China, India and Korea, with Chinese commodity futures performing particularly strongly.

The report came a day after the Bank for International Settlements’ (BIS) Quarterly Review, which reported a 30 percent increase overall in trading on derivatives exchanges in contract terms in the same period. The BIS report found that trading volumes on international derivatives exchanges, measured by the notional amount of traded contracts, rose nine percent in dollar terms in the fourth quarter of 2010 compared with the previous quarter. It added that there was a 38 percent rise in trading of Korean equity index options, which represented 59 percent of total equity index options turnover in the fourth quarter. But trading of short-term euro interest rate options fell 16 percent from the third to the fourth quarters.

The rise in derivatives trading in Asia is fuelling opportunities for growth. The Bombay Stock Exchange (BSE) has signed a licensing agreement to launch derivative contracts with the International Securities Exchange (ISE), the US options exchange owned by Deutsche Börse, which also owns a five percent stake in the BSE. Analysts say that the move demonstrates how exchanges are using their ownership of index businesses to expand into Asia and Asian exchanges. The BSE will be seeking approval from Indian regulators to launch derivative products for Indian investors, based on ISE indices, as part of the BSE’s futures and options product portfolio.

“ISE’s indexes provide investors with equity-based exposure to highly topical investment themes, including emerging markets, widely-traded commodities and water. We look forward to working with BSE as they broaden their derivatives business with new products based on ISE’s indexes,” said Kris Monaco, head of new product development at ISE.

The BSE is not the only exchange to sign such an agreement. Early last year the BSE’s main rival, the National Stock Exchange of India (NSE), signed an arrangement with CME Group of the US. The agreement makes the Indian exchange’s S&P CNX Nifty index, the leading Indian benchmark index for large companies, available to the Chicago operator for the creation and listing of US dollar-denominated futures contracts for trading on CME. At the same time, CME will make the rights to the S&P 500 and Dow Jones Industrial Average indices available to the Indian exchange for the creation and listing of rupee-denominated futures contracts for trading in India on the NSE.

Meanwhile, the Singapore Exchange (SGX) plans to become the “multi-asset-class clearing hub” for OTC derivatives in Asia, according to co-president Muthukrishnan Ramaswami. Use of exchange-traded derivatives in Asia is growing. According to data compiled by the World Federation of Exchanges, Asian markets traded 40 percent of global derivatives last year, outpacing North America for the first time, which accounted for just 32 percent.

The history of trade embargoes

Gaddafi’s Libya
Before we went to press, the US imposed trade sanctions on Gaddafi’s regime. Whether it will have any effect is another thing. Trade embargoes don’t have an effective track record to point to, and in some cases simply stoke feelings of victimisation, personal aggrandisement and the cult of The Leader. In other words, they can even rally popular support (think Robert Mugabe et al – see below). What sanctions will do effectively with the current Gaddafi situation is close off the conduits for money to flow in and out. Applying clamps to the international financing system should cut off the regime’s access to buy raw materials and food. With Libya, we’ve been here before, of course. And there is an argument that US sanctions against Libya did help give Gaddafi the push to renounce his country’s programmes to develop weapons of mass destruction (those sanctions were lifted in 2004). So, déjà vu.

But there are increasing reports that Libya’s oil industry is now on the verge of paralysis due to the recent embargo. Western governments have, on the whole, moved quickly to freeze Gaddafi’s assets. For example, a three percent holding in Pearson, owners of the Financial Times, worth more than £250m, has been frozen.

Overall it’s estimated the Gaddafi family’s own assets could be worth up to $100bn (though for obvious reasons, reliable figures are hard to come by). Interestingly, the new trade sanctions against Libya should be a litmus test for Western banks chastened after the credit crisis. Awareness of foreign banks operating with US and UK banks has been considerably heightened and new money laundering and know-your-client laws have been implemented. Freeze first, ask questions later – a very new approach for the international financial community. Will it work? We’ll soon know.

Mugabe’s Zimbabwe
Recently the EU extended sanctions on individuals and businesses linked to human rights abuses in Zimbabwe. However, it was a mixed bag, because the EU also lifted asset freezes against more than 30 people closely linked to Mugabe’s regime. That’s partly because there has been some political reform (though not enough by some margin). Since the government of national unity came together in early 2009, Zimbabwe has absorbed more than €360m in EU aid for a whole host of social programmes including food security, despite the reluctance of some countries to relax sanctions individually. Meanwhile Mugabe has threatened to seize privately-owned companies unless “western sanctions” are fully lifted. “Why should we continue having companies and organisations that are supported by Britain and America without hitting back? Time has come for us to [take] revenge,” he has said. Mugabe has a long and successful history of playing the victim, skillfully turning up the rhetoric despite many of his people living in an economic – though slowly improving since 2010 – shambles. Recently Mugabe has switched the focus of his anger to large UK-based multinationals like Standard Chartered, which continues to operate there, despite exhortations from the international community not to operate in countries that prop up thugs. He has also ratcheted up the anger on Zimbabwean citizens who call for sanctions against the country themselves. They should face treason charges – which carries a death sentence – he recently said. Sanctions have hardly been effective in ridding this loathsome dictator from Zimbabwe. But then, if sanctions didn’t have some bite, why would Mugabe be so hugely angry about them?

Castro’s Cuba
It’s a regular occurrence. Every year the US reviews its trade embargo with Cuba. Could it finally be lifted this year? The truth is that, with so much else happening in the world, particularly the new Middle East recalibrations, the US Congress can’t work up the necessary enthusiasm or energy to do away with the embargo (though that hasn’t stopped Obama cutting some decent sized holes in current arrangements). But let’s roll back to the start, to 1960 when Cuba nationalised the properties of US citizens and corporations. President Dwight Eisenhower responded, enacting a commercial and financial embargo on the island in October 1960. “There is a limit to what the United States… can endure. That limit has now been reached,” he said. To this day this is probably the most enduring trade embargo in modern history. Fidel Castro has, like Mugabe, been highly skilful in using the embargo to claim it has scapegoated the country and its citizens. The UN General Assembly has slated the embargo as a violation of international law. There has also been concern that possible malnutrition and disease resulting from higher food and medicine prices have hit men and older people disproportionately harder (Cuba’s rationing system also gives preferential treatment to women and children). Internationally, commodities companies like Respol, Spain’s largest energy company, increasingly face the choice of doing business with Cuba – or the US. Oil prospecting off Cuba’s coast is potentially big business. But can they risk it, however attractive the Cuban oil licences look?

Saddam Hussein’s Iraq
At the end of 2010 the UN Security Council voted to lift the vast majority of sanctions imposed on Iraq during the era of Saddam Hussein. It was quite a journey from 1991 – when Hussein first dispatched his forces across the Iraq-Kuwait border – to December 2010 when sanctions were, more or less, lifted. “Iraq is on the cusp of something remarkable – a stable, self-reliant nation,” said US vice president Joe Biden at the time. However, the combination of air attacks on the country and sanctions had a devastating impact on much of the population, with an estimated death toll of infants under the age of five between 700,000 and 880,000. Iraq is a case in point of how many who belonged to its brutal regime could – if they had influence or money – buy their way around many of the measures. “Smart” or “targeted” sanctions were developed against Iraq’s rulers: personal computers, tractors, x-ray equipment for airports and hospitals, irrigation, sewage and water filtration systems, medicine plus cars for personal use; all such items were waved through as opposed to military or “dual-use” goods. Sanctions busting is taken seriously in the UK. In February 2011, two ex-directors of one of the UK’s largest privately-owned companies, bridge building operator Mabey & Johnson Ltd, were both jailed and fined for sanctions offences relating to contracts involving the construction of prefabricated bridges in Iraq. It was discovered that Mabey & Johnson had agreed to pay kickbacks to the Iraqi government to help them win a €4.2m contract for 13 bridges through the Oil-for-Food Programme.

Thomas Jefferson’s trade problem
Trade sanctions were deployed as far back as the 18th century when US President Jefferson established an embargo – at the time called ‘discriminatory duties’ – on all US trade with Europe to protest against attacks on US merchant ships. Like so many sanctions, it proved ineffectual – and dramatically curbed US trade in commercial centres like New York and Philadelphia. Both suffered profoundly as a consequence. In fact, the reduction of America’s cotton exports was actually welcomed by many UK merchants, many of whom had warehouses packed-to-bursting with US cotton; previous oversupply fears were promptly wiped out. By early 1809 the US Embargo Act was lifted and trade with all ports was resumed – except with Britain and France.

India on the acquisition trail

For many years India has been a willing recipient of overseas investment in order to bolster its economy, provide funding in a market where western debt structures are underdeveloped, and to bring its business operations up to speed with international standards.

The figures bear this out. According to the Indian Ministry of Commerce, investment by foreign companies in Indian businesses has grown rapidly in recent years, from just under $9bn in 2006 to $34.4bn in 2008. The origins of these funds are principally based in the US and the UK. During the period 2001-9 the US and the UK together made total foreign direct investments (FDI) of $11.5bn, accounting for 14 percent of all FDI for the period.

Traditionally, the bulk of all FDI since 2001 has been pumped into the services sector, the figure of $84bn is indicative of the amount of investment in new infrastructure and continued development. Computer hardware and software as well as telecoms have also benefitted, with $9bn and $6.3bn of all FDI respectively.

Clearly India continues to be an attractive proposition for foreign investors and it is easy to see why. GDP projections for the next five years vary between four percent and as much as eight percent, and at an enterprise level, according to Reuters, since 2005, Indian companies achieved an average growth of 8.6 percent per annum. As a rapidly emerging market, investment in India holds great potential upside for those who can penetrate the market at the right moment in the cycle.

Today, the huge amount of investment received by India over the past decade is beginning to bear fruit. Despite the fact that more than 70 percent of the 1.2bn population of India is based in the rural regions, India boasts some 55 billionaires – 22 more than in the UK – a clear sign that India’s business environment is booming. Furthermore, years of inward investment in India has helped create a multitude of successful enterprises that, in turn, have begun to look to expand their geographical reach beyond the Indian Ocean.

To put this into perspective, in 2001 Indian outbound investment was less than $1bn, but by 2006 it had reached $10bn and the following year it had doubled again. In 2007, overseas investment by Indian businesses had eclipsed the total amount of outward investment by Indian companies since the country gained independence in 1947. This growth continued in 2008, when, according to Reuters, India made $24bn of outbound acquisitions.

And since many Western nations have been impacted severely by the recession, these countries are happy to be on the receiving end of investment from a nation in which economic growth has proved relatively resilient to a global economic downturn.

Investments in the UK and Europe
Looking at the figures in more depth, according to Corpfin/Experian, from the beginning of 2007 to the date of publication, there have been more than 239 investments by Indian companies in UK and European businesses, with a combined value of more than $27.8bn. And considering that in nearly half of these transactions the consideration was not disclosed, the total value of these deals may be up as much as 50 percent higher than this tally.

Drilling down to the individual deals it becomes clear that there is a healthy spread both in terms of sector and segment. In total there were seven deals with a total consideration above $1bn. These were:

– Tata Steel’s $8.1bn acquisition of Anglo-Dutch group Corus, Europe’s second largest steel manufacturer
– The $1.6bn acquisition of Germany’s REpower Systems by wind-power operator Suzlon Energy
– Tata Motor’s $2.3bn purchase of the Jaguar and Land Rover brands from the Ford Motor Company
– The acquisition of automotive parts company Valeo France by the diversified conglomerate Hiduja Group Ltd
– Sterlite Industries’ takeover of mining company Anglo American Zinc, for $1.4bn
– Hinduja’s acquisition of KBL European Private Bankers for $1.8bn

But eclipsing these, the largest transaction in this period was the $10.7bn acquisition of Zain Africa BV, a Netherlands-based mobile telecommunications provider, by Bharti Airtel Ltd.

Slightly lower on the scale, there were some 20 deals in the $500m-$1bn segment. The combined value of these deals was in excess of $5bn, with the pick of these transactions being HCL Technologies’ $794m acquisition of Axom Ltd and the acquisition of the Grosvenor House Hotel group by Sahara India Pariwar for $734m.

The $100-500m segment also recorded a great deal of activity, with $3.1bn transacted across 19 deals.

Investments in North America
According to Corpfin/Experian, since 2007, Indian companies made 206 investments in the North American market, totalling more than $22.3bn. And considering that approximately 35 percent of the deals did not have disclosed values, the total value of these transactions may be as much as $34bn.

In the $1bn+ bracket, seven deals accounted for $15.9bn of the total transacted value. These were:

– Aluminium manufacturer Hindalco Industries’ $6bn acquisition of Novelis
– Essar Steel’s $1.56bn takeover of Canadian group Algoma Steel
– The purchase of General Chemical Industrials by Tata Chemicals
– The takeover of US power distributor InterGen by diversified industrial group GMR Infrastructure
– Oil and Natural Gas Corporation’s $3bn acquisition of Kosmos Energy
– Religare Enterprises’s takeover of investment firm Northgate Capital

Looking along the scale, there were three acquisitions in the $500-$1bn range, with a combined value of $1.3bn, in addition to a further 16 deals in the $100-$500m range, carrying a total value of more than $3.2bn.
In view of the success enjoyed by India, South East Asia now looks set to be the new kid on the block when it comes to M&A. According to Mergermarket, the value of deals in the Asia-Pacific region (excluding Japan) totaled $89.4bn for the first three months of 2010, representing an increase of almost 93 percent over the same period a year earlier.

This was against a wider backdrop which saw European M&A activity continue to decline, with the value of European deals falling 5.7 percent during the same period. Furthermore, the US market dipped by 26 percent to $148bn for the quarter.

Further evidence to suggest that South East Asia may be the next growth market comes from Cass Business School’s M&A Research Centre, which published its annual M&A Maturity Index, which gauges a country or region’s ability to attract and sustain M&A. The index, taking into account several financial, socio-economic, financial, political and and regulatory factors into account, concluded that the region was rapidly approaching the levels of maturity and sophistication enjoyed by its European and North American counterparts.

This move towards maturity is visible in the figures. According to Experian/Corpfin, there were 87 investments in UK and European companies by South East Asian businesses in 2010. This compares with 72 the previous year. The total value of these deals was $24bn, almost double the 2009 value.

Looking ahead
Using M&A as a key performance indicator, we can see that India has benefitted from over a decade of investment into the country’s business community and is now committed to repaying the compliment by investing in overseas businesses, principally in Europe and the US. Going forward, all the signs point to South East Asia as being the next growth region, and, once the regulatory environment becomes more stable, we should expect to see a surge of outbound acquisitions originating from this region.

On fish and finance

However, the two fields of fisheries and finance do share certain properties. Their overseers are both charged with the management of complex ecosystems, either of different ocean species, or of different investor species. They each have to deal with sudden, apparently inexplicable crashes – in fish populations, or markets. And increasingly, they are adopting the same kind of approach to their work, based on systems science, of the sort championed by people like the ecologist Robert May.

While studying the behaviour of fish populations in the 1970s, May discovered that populations could boom and bust purely as a result of their internal dynamics, without any need of external shocks. Instead of trending towards equilibrium, as assumed by the conventional “balance of nature” theory, they were intrinsically unstable. His work helped drive the development of chaos theory. Today, though, his attention has turned towards a different kind of chaos – that of the financial markets.

As he pointed out in a recent paper in Nature, co-written with the Bank of England’s Andrew Haldane, one of the reasons for the credit crunch was because risk was assessed for individual firms rather than for the system as a whole. Risk metrics such as Value at Risk (VaR), for example, calculate the risk for a particular firm’s financial position, but don’t reflect systemic risk which results from the net action of all the firms. The result during the early 2000s was that systemic risk – in the form of ballooning credit – was allowed to accumulate. As individuals, banks were meeting their requirements, but as a system, the financial network was getting deeper underwater.

Until recently, fisheries management had a similar problem. It was performed on a single species basis, with catch limits determined according to population levels. This approach failed to prevent disasters such as the collapse of the Grand Banks fishery off the coast of Nova Scotia, Canada. It was soon realised that, because each species is just one link in a complicated food chain, it is impossible to assess the risk of collapse for any species in isolation. Instead, the entire eco-system has to be taken into account. The result was ecosystem-based fisheries management.

Clearly, financial regulators can learn much from fisheries management. As May told the Financial Times, “The more I hear about financial economics, the more I am struck by its similarity to ecology in the 1960s.” The time has come for a systemic approach to risk.

In 2007, a team of fisheries experts came up with a list of ten commandments for ecosystem-based fisheries.* In case it is of use for financial regulators, we here present the same list, along with the appropriate finance interpretation.

1. “Keep a perspective that is holistic, risk-adverse and adaptive.”
Risk measurement in financial systems is currently evaluated on a case-by-case basis for each institution. This gives little idea of the overall risk of the entire network. We should therefore supplement single-firm metrics such as VaR with adaptive techniques that adjust for systemic risk. For example, margin requirements and minimum capital requirements could be tightened during a boom, and relaxed during a bust.

2. “Question key assumptions, no matter how basic.”
That would include the assumptions that markets operate at equilibrium, or that people behave in a rational, non-fishy manner.

3. “Characterise and maintain ecosystem resilience.”
Banks should have sufficient reserves to pass stress tests which include the possibility of extreme events. Diversification is also important – though as May points out, it isn’t enough for institutions just to diversify their investments amongst different asset classes, they have to do it in different ways (otherwise there is no real diversity).

4. “Characterise and maintain the natural spatial structure of fish stocks.”
Robust ecosystems such as food webs tend to be built up of a number of separate, weakly connected subnetworks. The international finance system has become increasingly connected in recent years, and a degree of modularity could similarly make it more robust. One possibility is to structure global banks into national subsidiaries, so that if one part gets into trouble it won’t spread internationally.

5. “Identify and maintain critical food-web connections.”
Complexity scientists are starting to analyse the finance system to understand the relationships between different players and investment strategies, in the same way that ecologists monitor the interactions between species in an ecosystem. This should help identify the sources and indicators of systemic risk.

6. “Characterise and maintain viable fish habitats.”
In other words, don’t forget the real economy. No bottom-trawling or ripping up local habitats, as happened during the subprime crisis. And make the regulatory environment fair and transparent, so institutions feel happy and safe.

7. “Account for ecosystem change through time”
For example due to climate change. Regulations have to be constantly updated to keep up with both financial innovation, and with new markets such as carbon trading.

8. “Account for evolutionary changes caused by fishing.”
Just as fishing changes the composition of the ecosystem, so financial regulation changes the composition of the financial system. For example, restricting a particular financial product in too narrow a manner may result in a bloom of new but related products to fill the available niche.

9. “Maintain old growth age structure in fish populations.”
New products offering supposed benefits need to be scrutinised carefully before being adopted. Other critical industries (e.g. pharmaceutics, nuclear) only allow new technologies once they are shown to have demonstrable benefit without dangerous side-effects.

10. “Implement an approach that is integrated, interdisciplinary, and inclusive.”
Finally, be open to ideas and methods from other areas of science – such as fisheries management.

Banks wrest from the wicked

Few would deny that freezing the assets of fallen or besieged dictators during the turmoil in Tunisia, Egypt and Libya was a good and important decision. The problem is that it happened so quickly that it is obvious the various governments knew all the time exactly where they could find the bank accounts, property and other investments acquired over many years by the kleptocrats.

They could hardly not have known, given today’s laws on money-laundering. Yet they did not swoop until the strongmen – Tunisia’s Zein al-Abidine Ben Ali, Egypt’s Hosni Mubarak and Libya’s Muammar Gaddafi – were either toppled or had behaved so outrageously it was no longer possible to keep up the pretence. Under pressure from their national governments, banks all around the world blocked assets with unseemly haste.

Indeed Switzerland, the long-time champion of secret bank accounts, jumped so fast that it was almost laughable. It took Switzerland four days to freeze Ben Ali’s accounts after he fled, but only a few hours to block those of Mubarak and no time at all to shut down Gaddafi’s. Astonishingly, the Swiss institutions moved even before the UN security council issued an order to padlock the assets of Libya’s sovereign wealth fund.

By then everybody was getting religion, possibly because they were shocked that the UN had actually done something instead of just talking about it. The European Commission ordered sanctions against all the dictators’ ill-gotten gains, including Libya’s gigantic oil-fed fund which among other things owns shares in Italian banks, two percent of Fiat and a chunk of Juventus football club, not to mention Switzerland-based Tamoil refinery. Not to be outdone, President Obama signed an order blocking $30bn of Libyan assets “under US jurisdiction” in the biggest such action ever.

What had happened in this global cleansing process was a belated and public recognition that all these assets belonged to kleptocratic regimes rather than bona fide governments. Nothing had changed, except that the names on the bank accounts were no longer in a position to complain.

Moubarak’s stash has been variously estimated at between $5bn and $70bn but, however much it is, Tutankhamun wouldn’t be ashamed of it. More importantly, the total sum isn’t what matters – rather, it is how he came by it (according to international watchdogs, much of it was paid by arms manufacturers in the 1980s in exchange for huge orders). While the kleptocrats and their cronies enjoyed the ride, the people suffered. As Middle East expert David Gardner points out, at the same time as the Mubarak inner circle was miraculously achieving stupendous wealth on modest official salaries, the number of Egyptians living on less than $2 a day drifted from 39 percent to 43 percent.

It wasn’t as though nobody knew what was going on. As far back as 2002, a UN report described a “sinister cohabitation between power and capital” in Egypt. Meanwhile, African dictators are still getting away with it.

The Ivory Coast’s ex-president Laurent Gbagbo, seeing the writing on the wall, hastily shifted $5bn out of Switzerland earlier this year. Yet something like $20-40bn a year is illegally siphoned out of developing nations such as the Ivory Coast into European accounts. So not a lot has changed since the 1970s when the billions of Haiti’s infamous Papa Doc Duvalier infamously ended up in Switzerland, triggering a protracted legal battle for restitution.

And yet there’s hope. The collapse of the dictatorships may have triggered a breakthrough: “We’ve made more progress in three weeks than in 15 years,” rejoices Daniel Lebegue, president of Transparency International France. Similarly, the Organisation for Economic Cooperation and Development’s corruption fighter Mark Pieth, who has been on the case for 20 years, has noticed a mounting nervousness in known offenders.
Regrettably, there are still kleptocrats everywhere.

Intel Q1 profits up 29%

US computer chip group Intel beat Wall Street’s expectations with a 29 percent year-on-year net profit increase when it published Q1 earnings late on Tuesday.
The reported net income was $3.16bn or 56 percent per share compared to $2.44bn or 43 percent the previous year.
Intel saw a 25 percent rise in revenue to £12.8bn from $10.3bn a year ago, surpassing its own predictions of $12.3bn and the $11.9bn forecast by analysts.
The company generated an estimated $4bn in cash from operations, paid cash dividends of $994m and used $4bn to repurchase 189 million shares of common stock, the company said in a statement.
Paul Otellini, Intel president and CEO said: “The first-quarter revenue was an all-time record for Intel fueled by double digit annual revenue growth in every major product segment and across all geographies.”
He added:  “These outstanding results, combined with our guidance for the second quarter, position us to achieve greater than 20 percent annual revenue growth.”

Removing barriers to FDI

One would expect that this global marketplace has encouraged all countries to make their markets more attractive destinations for investment. In Canada, Georgia and Rwanda, efficient bureaucracy allows a foreign company to establish a subsidiary in less than a week. In Angola, this same process can take half a year.

Leasing industrial land in Nicaragua and Sierra Leone typically requires half a year as opposed to less than two weeks in Armenia or South Korea. In Pakistan and Sri Lanka it can take up to two years to enforce a commercial arbitration award; in the United Kingdom and Kazakhstan, less than two months.

Investment opportunities in 2011 and beyond
After a year of stagnation, FDI is expected to rebound by 15-30 percent in 2011, according to UNCTAD, the UN body dealing with trade and investment. The growth in FDI is likely to continue to come primarily from Asia and Latin America. In fact, last year marked the first time developing and transition countries worldwide attracted more FDI than high-income countries. However, despite an optimistic outlook for 2011, investors are worried about the civil unrest in the Arab world, increasing commodity prices, sluggish economic growth in many economies, high unemployment and the associated depressed consumer demand, and risks related to currency volatility and national debt.

Increased investment is a priority for many countries and companies alike. For countries it provides access to new sources of capital and new markets, generates jobs, allows for the transfer of technology and for associated diversification of economic activities. It also provides access to competitively priced goods and services. For companies, investment creates opportunities to access resources, expand markets, enhance strategies and increase efficiency. Consider Aspen Pharmacare, a South African pharmaceutical manufacturer.

Its 2008 decision to enter the East African market resulted in a major upgrading of a pharmaceutical manufacturing center in Dar es Salaam, Tanzania, creating jobs and providing access to affordable generic drugs for a much larger group of customers. Another example is General Electric’s recent decision to build a research and development facility in Brazil. Brazil will gain from high-skill jobs and the transfer of new technologies, while GE will gain access to the Latin American market and its talent pool while cutting production costs.

Countries need to be proactive about improving their attractiveness to FDI. However, many drivers of foreign investment—such as a country’s location, market size, and availability of natural resources—cannot be influenced by decisions and actions of policymakers. Furthermore, other policy-related drivers of FDI—such as macroeconomic performance, infrastructure quality, and human capital—can only be influenced in the medium- to long-run. In contrast, there are factors related to laws and institutions that countries can address and improve in the short-term.

Indeed, the factors driving investment decisions are changing, making many new markets more attractive to foreign investors. Research by the McKinsey Global Institute suggests that there are more high-return investment opportunities in Africa than any other developing region. To capitalise on this opportunity, countries in Africa and elsewhere can follow the examples of Colombia, Georgia, and Rwanda, which have dramatically reformed their business environments. In fact, a World Bank Group study finds that among the 10 economies that have improved their business environments the most over the last five years, four are from Sub-Saharan Africa – Rwanda, Burkina Faso, Mali and Ghana.

How to attract more FDI
What actions can governments take in the short-run to boost their international FDI competitiveness? A new global benchmarking report of the World Bank Group (www.investingacrossborders.org) surveyed more than 2,000 attorneys and investment consultants in 87 countries to identify specific legal and administrative barriers that foreign companies faced in each of the countries. The study finds that countries with well-designed laws, efficient administrations and strong institutions have higher FDI stock and lower political risk.

In contrast, the report finds that regulatory restrictions continue to impede FDI in many countries. Almost 90 percent of the countries surveyed limit foreign companies’ ability to participate in some sectors of their economies. The differences are significant even among economies at similar levels of development. In Africa, for example, some countries have opened up all major economic sectors to FDI (for example Rwanda, Senegal or Zambia), while others still do not allow foreign investment in key industries such as electricity distribution and transmission (Cameroon), rail transport (Morocco) or banking and insurance (Ethiopia). In general, while light manufacturing, construction and tourism sectors are open to FDI in all economies, many countries impose foreign ownership limits in services sectors such as media, transportation, electricity and telecommunications.
Some countries require the directors or managers of foreign-owned companies to be nationals or permanent residents of the country of incorporation. For example, executive officers of Brazilian companies must be either Brazilian citizens or foreigners who hold a permanent resident visa. In Zambia and the Philippines, majority of the directors must be residents. In Canada, at least 25 percent of the directors must be resident Canadians. In Greece, Madagascar and Mauritius at least one of the directors must be a resident. Such requirements limit the foreign companies’ freedom to appoint any executives that the parent company feels would be most competent in managing the local subsidiary’s operation.

Foreign companies need foreign exchange to conduct business with overseas partners. Yet some countries prohibit foreign companies from holding bank accounts in foreign currencies, including Colombia, Morocco and Venezuela. Other countries first require an approval from the central bank or another public authority, as is the case in Pakistan, Burkina Faso or Papua New Guinea.

When it comes to resolving commercial disputes, all countries allow the use of arbitration, and many have modernised their laws and set-up effective arbitration centers. In other countries specific barriers still impede foreign companies’ ability and interest to use arbitration. In Russia, Bosnia and Herzegovina and Azerbaijan, arbitrators must be locally licensed attorneys. In Argentina and Costa Rica laws prohibit foreign lawyers from representing their clients in arbitration. In Chile and Ecuador, arbitration proceedings must be conducted in Spanish. In contrast, in most other countries around the world such restrictions do not exist.

Some basic principles should guide the design of countries’ laws and regulations for attracting foreign investment. First, all investors should be treated fairly. For example, the process for opening a local subsidiary should be governed by the same rules for all companies, regardless of their home country. Any difference in treatment should be due to a company’s size, legal form, or commercial activity—not the nationality of its shareholders. Next, countries should have clear, transparent laws and regulations allowing for efficient commercial transactions. A country’s legal regime should provide investors sufficient security to make them feel comfortable operating and expanding their businesses. In addition, the authorities should adopt effective regulations that both ensure fair protections for the greater public good, and eliminate unnecessary and burdensome bureaucracy. Finally, countries can enhance their competitiveness by creating supportive public institutions. The shapes these institutions take will depend on the country and context in which they are created. Yet in all cases supportive institutions are those that provide public officials with incentives to supply the public with useful services at least cost in terms of corruption and rent seeking.

It is an ambitious agenda that is relevant to all countries. As the world’s economic power continues to shift, more and more investors are looking globally for the best, most lucrative and most stable opportunities. With the heightened political and business risk worldwide, countries must act now to create predictable and transparent conditions attractive for FDI.  

Pierre Guislain, Kusisami Hornberger and Peter Kusek are, respectively, director, investment policy officer and senior investment policy officer at the Investment Climate Department, World Bank Group

Reliability goes beyond transactions

PT Bank Central Asia Tbk (BCA) is one of Indonesia’s major banks and the leading payment settlement bank in the country. Supported by a wide range of delivery channels, BCA processes around five million banking transactions daily. To serve more than nine million customer accounts and provide a strong complement of products and services, BCA operates 902 branches, 7,459 ATMs and more than 100,000 EDCs (Electronic Data Capture) located conveniently in commercial, retail and leisure centers nationwide.

BCA is constantly building its long-term transaction banking franchise by offering enhanced convenience and enriched features in its extensive range of products and services. By means of its diversified electronic delivery channels, BCA delivers flexibility and accessibility, allowing customers to do banking transactions at their comfort. By advancing the convenience of internet and mobile banking services, BCA has seen the value of banking transactions through internet banking and mobile banking increase significantly to $211.7bn (up 46.7 percent) and $20.8bn (up 44.5 percent), respectively, during 2010. The value of transactions through ATMs amounted to $104.0bn.

BCA continues to expand transaction banking capabilities by developing cash management services. This range of services for payment, collection and liquidity monitoring enables businesses to better manage their Business-to-Business (B2B), Business-to-Customer (B2C) and Customer-to-Customer (C2C) transactions. BCA developed integrated financing solutions using the value chain-financing approach to support financial transactions of large corporations, integrating their extensive upstream and down-stream business relations. For example, BCA worked with the state-owned oil and gas company’s customers, such as gas stations, oil distributors, and LPG agents, to develop specialized host-to-host applications. One of BCA’s cash management features is the Virtual Account, which systematically facilitates and accounts for payment transactions, thus minimizing a customer’s reconciliation of unidentified payments.

The bank’s convenient, reliable and accessible transactional banking services succeeded in building higher customer trust, translating into a strong funding base. BCA was therefore able to maintain its deposit franchise as transaction accounts continued to dominate the bank’s funding composition. Third party funds grew significantly by 18.1 percent to $30.8bn at December 2010 from $26.1bn the year before. Savings accounts and demand deposits represented 75.5 percent of the bank’s funding portfolio, while the remaining 24.5 percent came from time deposits. As a result, the bank maintained a low cost of funds at 2.95 percent at December 2010. BCA’s liquidity has also been well maintained as it booked secondary reserve funds (such liquid assets as central bank certificates and placements with other banks) of $8.4bn at December 2010.

We took advantage of strength in third party funds and converted them into a dynamic yet prudent expansion of the bank’s diversified loans portfolio. BCA’s liquidity and capital position give strong potential for continued loan growth. Over the past five years, loans grew at CAGR of 25.4 percent while December 2010 loans growth was 29.5 percent.

Domestic economic expansion in 2010 spurred demand for loans in the corporate, commercial and SME sectors. Corporate lending grew by 22.9 percent to $6.2bn while Commercial & SME lending increased by 32.4 percent to $6.8bn. The strong performance in consumer lending reflects the vehicle loan portfolio growth of 34.6 percent to $1.5bn and the 45.2 percent expansion of the mortgage loan portfolio to USD 2.0 billion.

To accomplish its vision to be the bank of choice and a major pillar of the Indonesian economy, BCA continues to deliver quality growth by leveraging-off its strength in transactional banking. BCA had been able to navigate well during the global economic crisis of 2008 supported by its resilient business model. Throughout that difficult period, BCA maintained a solid business and financial performance and the increase in third party funds was a reflection of the trust and confidence that customers have in the BCA brand. Throughout 2010, BCA successfully recorded quality growth by utilizing the momentum of Indonesian’s economic growth.

International banking
Indonesia’s strong economic growth in 2010 was driven by continuing high domestic demand and heightened export activities.  Supported by a healthy balance sheet, the bank continues to benefit from the vigorous expansion of the Indonesian economy.

As our customers grow their business internationally, BCA provides trade finance services through a fast and competitive service.  BCA’s trade finance volume increased by more than 39 percent in 2010, partly due to the world economic recovery and domestic growth.

The bank’s trade facilities include the issuance of Letters of Credit (L/Cs) as well as the pre- and post-shipment financing for exports in the form of negotiated or discounted export bills on L/Cs. In 2009 BCA became the first commercial bank in Indonesia to be a direct participant in the Hong Kong Monetary Authority (HKMA)’s Renminbi clearing system. As such, BCA now facilitates trade transactions in Renminbi, reflecting the Bank’s commitment to serve customer needs.

The bank maintained its performance in remittances sustained primarily by good growth of inward remittance transactions and facilitated by an internet based system known as FIRe (Financial Institution Remittance). This system provides a cost efficient and instantaneous transfer of funds from BCA’s network of correspondent banks and financial institution partners. BCA promotes its inward remittance business in some key markets – the Gulf States, Hong Kong and Malaysia – through further deployment of marketing staff and strategic expansion of the overseas office network. BCA’s correspondent banks now total 1,915 banks in 107 countries, including more than 300 correspondent banks in the Middle East and Asia-Pacific. In early 2010 BCA opened a remittance subsidiary in Malaysia to meet migrant workers’ need for fast and secure remittance to Indonesia. As of December 2010, this remittance company has 4 remittance branches in the Kuala Lumpur area.

BCA provides outward remittance services in 14 major foreign currencies. For remittances to China, BCA offers the China Today (send USD today-receive today), Yuan Remittance (receive full amount in Yuan on the same day) and the RMB Trade Settlement which enables customers to settle their trade payments in Yuan.

For more information email: int_banking@bca.co.id; www.klikbca.com

Brazilian CEO in leadership award

When it comes to consigned credit, Banco BMG is a pioneer in the Brazilian market. The bank began its activities in this segment in 1998. Today, 11 years later, the bank is the undisputed leader in the sector and responsible to stimulate and develop this form of credit in the entire country, thanks to the diligent work of its CEO, Ricardo Guimarães.

Born in Belo Horizonte, in the state of Minas Gerais, Mr Guimarães learned with his father, Flávio Pentagna Guimarães, how to lead the company with efficiency, integrity and competence. His successful history in companies from the BMG Group started in 1980, as an office assistant. He has been president of the company since 2004.

The bank’s recent figures confirm the efficient and competitive guidance of its CEO. In 2010, the financial institution registered a net profit of R$606m, a 16 percent growth over the same period of the previous year, which was R$533.3m. This was Banco BMG’s best result in eight decades of operation, and Mr Guimarães hopes his entrepreneurial spirit will lead to even more growth in 2011.

Profitability in 2009 was 26.1 percent and in 2010, 27.6 percent. Owner’s equity reached R$2.3bn. During 2010, credit generation reached R$10.8bn, a 28 percent growth from 2009’s R$8.5bn. As for the credit generated in 2010, R$7.5bn were for payroll consigned credit, representing 69 percent of the amount of credit in the period.

Recently, Mr Guimarães led a successful negotiation for Banco BMG which resulted in the acquisition of GE Money in Brazil, comprising Banco GE S/A and GE Promoções, a sales promotion company and service provider. The acquisition included the totality of GE Money Brasil, in addition to existing partnerships with retailers and 54 stores. With this action, the CEO wishes to increase the number of Banco BMG branches (currently 3,000) throughout Brazil. The purpose is to use the structure to invest and focus even more in consigned credit.

A vision of growth
In early 2011, Guimarães once again showed his entrepreneurial spirit. He conducted the purchase of stocks of Seguradora CONAPP – National Insurance Company, an important Brazilian brand. The purpose is to act more aggressively in the insurance sector, which in 2011 should have a 12 percent growth according to data from the National Confederation of Insurance Companies for General Purposes, Social Security and Life, Health Care and Capitalisation Insurances (CNSeg).

With its headquarters located in Belo Horizonte, in the state of Minas Gerais, and a broad structure all over the national territory, BMG relies on a partnership with 1,044 bank correspondents, about 30,000 agents, 3,098 points-of-sale, of which 557 are its own, 547,000 active card points and 395 public partnerships. The bank has developed a technologic system to promote prompt and efficient approval. The technology allows on-the-spot online approval. Clearance is only granted after previously authorised by a public body, private entity or the National Social Security Institute.

The market approves of the path taken by Ricardo Guimarães as head of the bank, as evidenced by the prizes and awards it has received. BMG has been acknowledged as Best Financial Conglomerate by Fundação Getúlio Vargas for eight times in the Consumption Loan segment. For three times the bank has been the Best Bank in Consumption Loan by Gazeta Mercantil / Austin Rating. The institution is also among the 100 best companies to work for, according to the Great Place to Work listings.

Sponsorship and citizenship
Of course Banco BMG is focused on good results, but it is also attentive to the needs of society. As a sports lover, Mr Guimarães has associated the bank’s brand with soccer sponsorships. Currently, Banco BMG invests more in this area than any other Brazilian company. The bank sponsors several teams in the first and second divisions in Minas Gerais, as well as teams in other Brazilian states. Among them are Cruzeiro, América Mineiro, Clube Atlético Mineiro, São Paulo, Santos, Coritiba and Esporte, from Recife, Vasco, Flamengo and others.

Banco BMG is also a partner to volleyball and basketball teams, and assists a number of athletes in individual sports, such as gymnast Jade Barbosa, judo player Eduardo Santos, martial artist Vitor Belfort and tennis player Gabriel Pente. In addition, the bank supports Valdeno Brito and the BTBR3 team in the Stock Car BMG Racing, Cruzeiro’s track and field team and Flamengo’s gymnastics team. More recently, the bank has lent its brand to the most important soccer tournament in Minas Gerais, now known as the Minas Gerais BMG Tournament.

As another way to promote sports, Mr Guimarães has formed an important partnership with TV Alterosa, sponsoring the Soccer Talent-hunting project, the greatest Brazilian project ever created to identify, encourage and reveal soccer talents. Some 15,000 youths applied, seeking opportunities in the sport which is the greatest national passion for the Brazilian people. The goal is to find youths who can be used by the main clubs in Minas Gerais. Teenagers with ages between 13 and 17 took part and a great structure in terms of training, meals, medical care and follow-up with specialists to assist them to take the best steps in order to follow a professional career in soccer. The project’s main target is to show participants that sports practice should be used as a means to promote personal and social growth.

The concept of citizenship is part of Mr Guimarães’ philosophy, as it is also part of BMG’s history. Clients, employees and partners are involved in activities that value culture, leisure, health and education. This can be seen in the investments in projects that contribute to the quality of life, appreciation of culture and the strengthening of our country’s identity.

In this area, the Solidary Corporate Gift project, already in its third edition, can be brought to the foreground. In 2010, the company chose to collaborate with institutions supporting the elderly and located in nine different states. The project conquered the entire country, as well as others. The Solidary Corporate Gift project has contributed to 22 entities since its first edition in 2008, including day cares for the needy and nursery homes. The objective of Banco BMG is to encourage and promote a solidary movement including the entire society, helping diverse institutions in several regions in Brazil.

BMG is the first financial group in the Americas to use clean energy, using the roof of its Belo Horizonte headquarters to benefit from developing energy technology. As part of its commitment to sustainability, the institution has effectively begun using renewable energy, especially wind power and photovoltaic solar power. This way, BMG Group is considered a pioneer in Minas Gerais when it comes to renewable energy.

For more information
Tel: (31) 2126-8051/8080 – 9609-6706; Email: katia.soares@linkcomunicacao.com.br

GE’s gas engine business honoured

Holidaymakers sipping a Coca Cola while sunning themselves on a Greek island this summer might not realise it, but they are part of a chain of innovation in the energy sector that is helping to reduce Europe’s carbon emissions.

Coca-Cola has used technology developed in the Austrian town of Jenbach, after which GE’s Jenbacher gas engine business is named, to significantly cut carbon emissions from its European bottling plants, helping the European Union to meet guidelines on environmental targets.

The Coca-Cola Hellenic Bottling Company has been installing a total of 15 combined heat and power (CHP) plants at bottling facilities in 12 countries, featuring GE’s Jenbacher units, which are able to run on nearly any gaseous fuel source. They will generate electricity to meet the need for a reliable source of on-site power, while also capturing the by-product heat generated by the engine for heating purposes.

As well as making good business sense, the engines have a wider benefit. Thanks to the greater energy efficiency and lower emissions of CHP technology, each bottling plant utilising GE’s Jenbacher gas engines will be able to eliminate more than 40 percent of its annual carbon dioxide emissions.

CHP: The key to energy efficiency
The European Commission wants European Union countries to help the continent achieve a 20 percent reduction in emissions by 2020. Currently, the European Union generates 11 percent of its electricity using cogeneration, saving Europe an estimated 35m tons of oil equivalent a year.

Technology such as GE’s for gas engines is therefore vital if Europe – and the rest of the world – is to address its energy problems. Currently, two-thirds of all fuel is wasted globally. And the problem is likely to grow: global demand for energy is set to increase by 44 percent in the next 20 years. Growing at the same rate will be calls to cut greenhouse gases. The pressure for companies to reduce waste and drive energy efficiency will continue from all quarters.

Hence the importance of technology like combined heat and power. Also known as cogeneration, CHP is inherently more energy efficient than using separate power and heat generating sources, making it an effective anti-pollution strategy. That’s why from coal mines in the Ukraine to cow farms in the American countryside to luxury hotels in Singapore, businesses are using GE’s Jenbacher gas engines to power their facilities in one of the cleanest, most efficient ways possible.

Many recognise that renewable sources of energy such as solar and wind power will play an important role in meeting those needs. But, those technologies cannot do it alone. That means finding cleaner, more efficient ways of using fossil fuels.

A commitment to innovation
But being able to generate more energy and reduce harmful emissions from fossil fuels can only come with technological advances, and it is here that Jenbacher’s innovation comes into play. Beyond its ability to operate on natural gas at top efficiency, GE’s Jenbacher gas engine technology makes it possible to generate power while disposing of environmentally harmful gases (such as from landfill, agriculture, mining and chemical plants). The utilisation of these gases for power generation ensures the long-term economic viability of GE’s Jenbacher power systems, while continuing to set the environmental standard for energy production and waste management around the world. By enabling the use of a broad range of gases, GE’s gas engines will continue to reduce emissions and encourage efficient use of natural resources.

The recently-launched J920 provides top of its class electrical efficiency. Developed as part of ecomagination, GE’s commitment to build innovative solutions to today’s environmental challenges, the engine can provide enough energy for 18,500 average European households. With an electrical efficiency of 48.7 percent, it prevents around 1,500 tons of CO2 emissions every year – the equivalent of removing 800 European cars from the roads. Coupled with a significant reduction in lifecycle costs and lower fuel consumption, the new engine is an important step in not only helping companies meet the competitive challenges of the global economy, but in giving added impetus to the march towards more efficient use of energy resources.

The development of the J920 is just one example of GE’s longstanding commitment to innovation – a concept that has guided the company from its earliest years, when Thomas Edison perfected the light bulb, to the revolutionary technology of today.

Three drivers of innovation
But innovation, by its very nature, cannot be static; so GE’s approach to innovation continues to evolve. The company’s recent Innovation Barometer – which polled 1,000 business leaders in a dozen countries – revealed three key changes to the way innovation is happening today, all of which chime with GE’s approach.

First, cooperation is vital: innovation is no longer about a single organisation’s success. Second, innovation is driven as much by smaller and medium-sized firms as larger ones. And third, to effect change, finding solutions that work at a local level is crucial. More than three quarters of respondents in the survey said innovation must be tailored to local market needs.

Jenbacher products therefore place GE at the forefront of this new paradigm. The company’s flex fuel enables distributed power generation to be provided in remote regions throughout the world, and the engines themselves are able to run on nearly limitless resources: biogas, landfill gas, steel gas, ethanol, methane. This refusal to subscribe to the ‘one-size-fits-all’ theory of innovation highlights how the Jenbacher team is applying its products to meet particular needs in particular segments, as it works closely with its customers to learn what issues they have and develop specific solutions.

An award winning technology
With a commitment to technology embedded in everything we do, GE’s Jenbacher gas engine business is delighted to have been named Best Carbon Markets Energy Efficiency Pioneer for Western Europe in the World Finance Carbon Awards 2011. These awards pay homage to companies from around the world which offer the pioneering methodologies and are making the investments required to achieve the significant reduction in carbon output that is needed to safeguard the environment.

It is only through constant innovation and technological excellence that the world will be able to address its energy needs in the years ahead. Such innovation will continue to be one of the defining features of both Jenbacher gas engines and GE Energy.

It is through technologies like gas engines that the world will be able to contain its carbon footprint, something that is vital if we are to protect the future of the environment in a sustainable, effective way.

Prady Iyyanki is CEO gas engines for GE Power & Water

ITG outlines pan-African vision

The March 2003 launch of Internet Technologies Angola (ITA) was inauspicious. Group CEO Barney Harmse’s start-up had little in the way of meaningful cash behind the project, the accommodation for staff was basic or non-existent, and the transport means were poor.

Despite the glaring drawbacks in its Angolan venture, ITG – which now consists of several operations in various African countries – quickly grew on a raft of technological change and huge consumer demand.
In December 2004 it managed to roll out a national network in Namibia, despite enormous practical difficulties and being a late starter in the country’s already competitive ISP market. It launched officially in March 2005. Today ITG boasts almost 100 employees, and turnover is expected to hit R200m (£17.8m) this financial year – a huge turnaround.

Setting a standard
The long list of achievements continues to grow, though clear landmarks stand out: the first commercially available Multiprotocol Label Switching (MPLS) network was implemented in June 2006 in Namibia, a mere year or so after officially launching the company. Another year later, VSAT and Broadband was launched.
Not long after, CEO Barney Harmse oversaw an International Data Gateway License and Voice Trial License. “We have moved from success to success without hesitation, with poise and precision and a relentless focus,” he says. “We are very proud of the entire African project. To do business in Africa takes a special breed of entrepreneur, entrepreneurs that can dig deep in their souls when the going gets really tough, and find the courage to continue with the dreams they have.”

The continent presents unique challenges to companies just starting out, Mr Harmse says. “Things like lacking infrastructure, operating in diverse cultures with many different languages across the African continent makes it extremely difficult to stay focused and motivated. Our ability to overcome these challenges and achieve success in that country, then gives us the strength and confidence to move onto the next country.”

His colleague Miles October, Managing Director of ITA, agrees. “One of the toughest periods of our lives was when we first started out in Angola. When we arrived we were not able to speak the local language. We knew very little about the business/regulatory environment or how to go about organising ourselves in terms of registering a business.”

To make matters worse, Luanda is one of the most expensive cities in the world to live in – so the ITG team did not have much time to find its feet. But Messrs Harmse and October spoke to as many people as possible with experience of setting up a company in Angola – and they soon had a good idea of what was required to establish an internet business in the country.

Always responsible
Now there are also social responsibility projects in which ITG aims to provide telecommunications infrastructure in rural establishments way off the beaten track across Africa. Due to the vast geographic distribution of these communities, costs significantly increase for implementations.

“As part of our social responsibility projects we have provided free internet access to a few underprivileged schools in Luanda,” says Mr October. “We regularly sponsor food and clothes to an orphanage close to our office. We have also started a project to sponsor the setup up of an Animal Welfare Society in Angola.”
Meanwhile, the backbone of the company is growing at a tremendous pace. Usefully, the regulatory environment is providing the group with opportunities that were previously closed for other companies.

ITG is well aware that people remain its core assets though, and to keep them motivated the company challenges them with more technological and market change. The more deregulated the market becomes, the more passionate Mr Harmse’s team become to achieve the next level of success. “The steady de-regulation of the telecommunications industry is something that drives the exhilaration inside the company and from a group perspective, its drive into Africa,” says Mr Harmse.

 “We have a drive to implement networks and solutions right across Africa. At the moment ITG owns and operate companies in six African countries… Angola, Namibia, Botswana, South Africa, Mauritius and Zambia,” he says. “In terms of their satellite business alone they already have customers in eight countries, being Angola, Namibia, Zimbabwe, Zambia, Nigeria, Central African Republic, DRC, Ghana, and soon South Africa. By 2015 we would prefer to have a presence in even more African countries where we will distinguish ourselves, I strongly believe, from the rest of the local and international market.”

Corpbanca focuses on efficiency savings

Corpbanca is Chile’s oldest operating private bank, with one of the fastest-growing loan portfolios in the country and one of the most successful stories of the Chilean banking industry. In 1995 the bank was bought by a group of investors who, led by Álvaro Saieh Bendeck, developed a strategic plan to grow the institution into a global bank across the entire spectrum of financial services. In 1995 the bank’s capital was $50m with a subordinated debt with the Central Bank of $600m; at the end of 2010 the bank had no debt with the Central Bank and its market value was over $4bn.

As of December 31, 2010, Corpbanca was the fourth largest private bank in Chile in terms of the size of its loan portfolio, with a 7.3 percent of market share. Corpbanca’s risk management strategy has enabled it to maintain favourable solvency ratios and risk indicators: throughout 2010 Corpbanca had a capital-weighted assets ratio of 13.4 percent and a risk indicator of 1.9 percent, lower than the industry’s average. Corpbanca provided an average annual return on equity of 25 percent in 2010, higher than the market average.

These results are explained by the banks:
– Strong risk management – the bank has one of the lowest risk indices of the major banks
– Efficiency – it’s a key driver in Corpbanca’s strategy, which explains why the bank has one of the lowest efficiency ratios of the industry
– Development of new innovative products
– Successful consolidation of wholesale business
– Focus on customer satisfaction

These have helped Corpbanca’s local stock achieve the highest return of a bank stock in the Santiago Stock Exchange during 2009 and 2010, of 79 percent and 129 percent respectively. In recognition of this strong performance, Feller Rate improved Corpbanca’s local risk classification from AA- to AA in May 2010.

Strategic overview
Corpbanca’s vision is to become the best bank in Chile: become the number one bank to its customers, increase its market share, systematically exceed the Chilean banking system’s ROE and be a great place to work, attracting and retaining talented employees. To achieve these goals the bank is focusing on four main strategies.

– Portfolio rebalancing. By innovating in first class products, focusing on the most profitable segments and utilising its aggressive sales force, the bank hopes to achieve organic growth by offering competitive products and services in all lines of its business. The bank’s strong franchise in the retail banking segment offers the potential for significant growth in its loan portfolio – and increased market share and profitability can be gained by continuing to cross-sell services and products to existing clients. It has also instituted processes to facilitate the offering of additional financial services to clients, with the aim of increasing revenues from fees for services.

– Maintaining first class risk standards. A dedicated risk management team monitors risks across all areas of the bank’s business, with robust valuation models and solid provision policies. The Retail Risk and Companies Risk divisions actively participate in establishing credit policies, approvals, monitoring, collections and operational risk associated with the business. The Risk Committee meets periodically to review and consider proposed loans – and the bank’s conservative credit approval standards and reserve policies help minimise the risk of ultimate loss.

– Continue with efficiency measures. This is a consequence of the bank’s cost control culture and the centralisation of all its processes. It seeks to increase operating efficiency by continuing to reduce costs, broadening its array of distribution channels and enhancing the network by adopting cost-saving technologies. Branch operations continue to be updated, allowing for an increased level of customer ‘self-help,’ and the bank is working to increase customers’ use of internet banking. Currently, customers can obtain account information, make bill payments, transfer funds and perform other transactions through the bank’s website. A central information system gives the bank efficient electronic access to up-to-date customer information in each of its business lines and calculates net earnings and profitability of each transaction, product and client segment.

– Lead on customer satisfaction. Quality of service is key to Corpbanca’s growth strategy, both in acquiring new customers, and establishing and strengthening long-term relationships. The bank continually develops new processes and technological solutions to understand the needs of clients and in turn measure their satisfaction – a new division exclusively focused on customer satisfaction was recently established.

Performance targets
Each commercial division also has its own specific strategies to help the bank achieve its key goals.

Consumer banking
The bank is striving to increase its retail loans portfolio in a profitable way. In retail banking this means focusing on clients that have a monthly income higher than CLP1.2m ($2,500). To achieve this, the bank has opened new branches located in geographical areas which are closer to the target market, designed products specifically to satisfy these clients’ needs, and established incentive programmes for its sales force and commercial staff to focus on this type of client.

For the low income segment, the Corpbanca brand Banco Condell is looking to consolidate its number of clients and offer a more personalised service – this new strategy and completely different management should help the brand achieve higher profits.

Wholesale banking
For corporate clients, Corpbanca is offering integrated solutions to provide more sophisticated products according to the client’s needs. This has been a key driver for the success of this area in the last two years. The commercial relationship has not been oriented only to the senior management of corporations but also to its owners, offering sophisticated products at all levels. To strengthen the transaction service of this segment, the bank is improving its cash management service products which imply an increase of the reciprocity index in order to reduce its funding cost.

Corpbanca is hoping to establish a more significant presence in the SME segment and increase its market share. For this purpose, the bank has significantly increased its sales force for 2011. The SME unit currently offers an array of products, including products (such as lines of credit) backed by governmental warranties created to develop small and medium sized businesses.

Malta’s evolving economy

The small island nation located in the Mediterranean Sea has few natural resources, restricted fresh water supplies and no domestic energy sources. Until the late 1980s, the Maltese economy was heavily dependent on tourism, a limited manufacturing sector and its favourable position as a freight trans-shipping stopover, but that has changed radically over the past 25 years.

Working closely with an emerging financial services industry, the government aims to grow that sector to 25 percent of GDP by 2015. The growth of Malta’s financial services sector is to be attributed to a highly experienced, professional talent pool, a sound legal and regulatory framework, a ‘can do’ and reasonable time to market culture, and cost-competitiveness. Already, Malta is seen as a viable alternative to Dublin and Luxemburg as a base for investment funds and operators alike.

“Malta has evolved from an offshore tax haven set up in the late 1980s to a fully fledged financial services centre,” says Dr Rosanne Bonnici, partner at law firm Fenech & Fenech Advocates. “According to the University of Malta, the number of professional investor funds locating here since 2007 has grown to over 400, an increase of over 40 percent.”

Although the country is sometimes still referred to as an offshore tax haven or a low tax jurisdiction, neither term correctly describes Malta’s tax system. In response to a request from the European Commission that Malta abolish tax provisions that might distort competition within the EU, a number of changes were introduced in 2007 creating a tax regime that is fully EU sanctioned.

Safe benefits
It is still, however, favourable. The Maltese fiscal regime has played an essential role in creating an attractive business environment. Malta has also proved to be a sought-after holding company jurisdiction and a base for conducting international activities. These regimes are underpinned by Malta’s favourable tax system and its key advantages, which include the fact that Malta is the only EU member state with the full imputation system (with certain distributions also triggering a right to tax refunds in the hands of the shareholder, bringing the overall effective Malta tax rate to five percent or less), an extensive network of double taxation treaties, with benefits being granted unilaterally when no bilateral treaty is in force, and an ideal tax residency status for individuals.

Regulatory bureaucracy is also kept to a minimum, making it possible to set up a company in Malta in two to three days. “Clients intending to establish operations will find all the expertise and support they need to incorporate and maintain Maltese companies,” Dr Bonnici says. Dr Bonnici, winner of this year’s World Finance award for Best Tax Consultant in Malta, is widely recognised as one of the country’s leading tax lawyers, and heads Fenech & Fenech Advocates’ tax practice. The firm also includes an inhouse corporate services group and accordingly provides clients with a comprehensive A-Z service.

It is no wonder, then, that investors are moving in and Malta is winning awards. The country is in fact emerging alongside traditional rivals to London, such as Switzerland, as a European location for hedge fund managers. Managers who have moved to Malta recently include Clive Capital, Vector Commodity Management, Duet Asset Management, Finisterre Capital and Belay Partners. Custom House Global Fund Services relocated its headquarters from Dublin to Malta in 2008, with Chairman Dermot Butler noting that the regulator in Malta is “more pragmatic, business friendly and helpful than anywhere else.” 

In preparing its Global Competitiveness Report 2010-11, the World Economic Forum reviewed 139 countries and ranked Malta 10th soundest banking sector and 11th in financial market development. In the third edition of the Global Financial Centres Index (published by the City of London University in February 2008), Malta was named as one of the top three financial centres likely to increase in importance over the next two to three years. Only Dubai and Shanghai were placed above Malta in the index.

Mediterranean appeal
“There are, of course, many other reasons to take a look at Malta,” says Dr Bonnici, whose firm is one of the largest full service law firms in Malta. “In addition to our well-regulated financial services sector, Malta offers excellent opportunities for efficient tax planning for the private and corporate client alike.” Fenech & Fenech Advocates advises clients across a wide range of practice areas, including the highly specialised areas of financial services and taxation through its well established Tax Department. High net worth clients welcome the firm’s expertise in related areas of corporate law, trusts and foundations, amongst others.

Many of those high net worth clients also appreciate the lovely climate and beautiful harbours of the island. Malta has a long maritime tradition: with its strategic location inside the Straits of Gibraltar, the island has been a position of naval importance to conquering nations from the Phoenicians to the British. Today the Maltese maritime flag is ranked second largest in Europe and seventh largest in the world, and many beautiful Maltese registered yachts can be found moored in her marinas.

“We are proud of what we have achieved in Malta,” Dr Bonnici says. “A recent survey of investor and fund manager views on domiciliation, migration and fund servicing in the Mediterranean for International Fund Investment recognised our island as the best know Mediterranean fund domicile, with 76 percent of respondents aware that it is an option for those looking for a base in the European Union. Malta is becoming a real destination of choice.”

KTPB debuts first Turkish sukuk deal

The Kuwait Turkish Participation Bank (KTPB) issue is the first ever sukuk out of Turkey. The $100m debut sukuk was issued mainly to fund KTPB’s future expansion plan and general corporate purposes. The transaction attracted a large amount of liquidity across the GCC, Europe, and Asia regions, resulting in the book being oversubscribed 1.5 times.

KTPB (or Kuveyt Turk Katilim Bankasi, in  Turkish) is a fully fledged commercial bank which has operated primarily in the Republic of Turkey since 1989. It undertakes all its business in compliance with the principles of interest-free banking, a central tenet of Islamic finance and a practice known as ‘participation banking’ in Turkey. As a result of this, and following the introduction of a new banking framework in 2005, Kuveyt Turk was reclassified as a participation bank and renamed to Kuveyt Turk Katilim Bankasi A.S.

Today the bank is 62 percent owned by Kuwait Finance House. It offers interest free banking, primarily to corporates and SMEs, but also targets retail banking segments such as mortgage related businesses – although these amount to less than 20 percent of the loan portfolio.

KTPB ranks third among the four participation banks in Turkey by deposits, with a 22 percent market share, and ranks 19th largest by unconsolidated assets of the 49 banks in Turkey. The bank has 156 branches throughout the country.   

Structure overview
The issue consists of three year fixed rate Sukuk Trust Certificates. The certificates are denominated in US dollars and offered under Regulation S. The offering is structured as a Wakala Sukuk on the basis of the transfer of the beneficial rights and interest in a portfolio, consisting of 51 percent ijarah receivables and 49 percent murabaha receivables. The issuer for KTPB’s inaugural sukuk is KT Turkey Sukuk Limited (Sukuk SPV), an exempted company with limited liability incorporated in the Cayman Islands. KTPB assumes the roles of the obligor, guarantor, managing agent and seller in the transaction. The certificates were cleared through Euroclear and Clearstream and are listed in the London Stock Exchange as a primary listing. KTPB conducted a non-deal roadshow in Dubai, Abu Dhabi, London and Bahrain in July 2010, which attracted favourable attention. The sukuk pays a semi-annual coupon of 5.25 percent and has been geographically distributed throughout the Middle East, Europe, and Asia.

For more information email: info@liquidityhouse.com; www.liquidityhouse.com

Brazilian banking sector rides growth

Banco Pine is a publicly-held multiple bank specialising in servicing the corporate segment, especially companies with annual revenues above R$150m. It is a client-focused, relationship-based bank; its strategy is based on a deep understanding of each of its clients, including their histories, businesses and potential.

Through this, the bank builds customised solutions and offers alternatives to suit each client’s profile and expectation.

This strategy requires product diversity, qualified human capital and agility – characteristics that are consistently developed by the bank.
Product diversity
Banco Pine has developed a wide base of products, including several credit and onlending alternatives in domestic and foreign currencies. In addition, the bank has established a solid sales desk for it clients, being able to offer hedging derivatives in FX, interest rates and several commodities. It is also a provider of financial and strategic advisory services, including M&A, and is a niche player in the DCM and syndicated loan markets.

Credit is Banco Pine’s flagship product, and the main entry door for the client to the bank. It has an established track record and expertise in this segment, ensuring market leadership, agility and solidness in the lending business.

The bank has a unique policy of evaluating each transaction diligently and completely. All credit decisions follow a strict credit policy, and need to be approved unanimously by the credit committee.

As part of its business model, the bank has a relatively low number of clients assigned to each origination officer, enabling for a closer credit monitoring and constant and proactive client management. The same is valid in the credit department. Transactions are analysed and monitored by a staff of approximately 16 percent of the bank’s personnel.

PINE has also an efficient loan and collateral formalisation and documentation policy and process, which keeps the credit portfolio robust and with very low default rates.

The loan portfolio is well dispersed across various economic sectors. The bank acts prudently with diversified exposure to each of the sectors.

Sales desk
The main objective of the sales desk is to offer alternatives for clients to hedge against adverse market moves, giving more predictability to a client’s balance sheet.

Banco Pine has important credentials in this business. Most importantly, the expertise acquired over the years qualifies the bank to quickly respond to market conditions, offering adequate hedge products to mitigate gaps in its clients’ balance sheets.

The main areas of business are currency, commodities and interest rates. The main products are traditional derivatives instruments such as non-deliverable forwards (NDFs), options and swaps.

All hedging transactions are executed with clients that already have an active credit relationship with the bank, rated between AA and C. Most of these transactions are short-term, with duration of 120 days. The sales desk keeps no mismatches, since all material market risk is hedged through the BM&FBovespa or directly with counterparties through OTC transactions.

PINE Investimentos
Banco Pine’s investment arm offers unique solutions for its clients in capital markets, asset management and financial advisory. With a highly qualified team that is deeply knowledgeable of the market, this area operates as an advisor and not as counterparty, serving the interests and needs of its clients in a customised manner in line with market demands.

Moreover, one of its goals is to provide personalised, high value-added financial advice, offering resources and alternatives for financial and capital restructuring, which demands complex solutions and long-term relationships in line with client profiles and expectations.

The bank’s funding sources are highly diversified. It funds in the local market from companies, individuals and institutions, mainly through CDs, Letras Financeiras and other instruments such as LCAs. It also funds through the Brazilian Development Bank for its onlending business.

In the international market, the bank funds through senior and subordinated debt, with foreign banks and investors and trade finance lines from correspondent banks. It also has close relationships with multilateral agencies such as the International Finance Corporation and the Inter-American Investment Corporation, regional agencies like the Inter-American Development Bank, and bilateral agencies such as the German Investment Corporation, the Dutch Development Bank and the US Agency for International Development. As a rule, the bank hedges 100 percent of the currency risk from offshore funding transactions.

A good example of this kind of funding is the syndicated A/B loan contracted on January 21st, 2011. The transaction, which reached $106m, was globally coordinated by the Inter-American Investment Corporation (IIC) in the “A” portion and by three co-leading banks for the “B” portion (Santander, WestLB and Standard Bank), and by two joint lead arranger banks (Bradesco and Banco do Brasil). Demand for the issuance exceeded the initial offer, which was $75m.

The IIC carried out due diligence of the bank and also evaluated its commitment to social and environmental responsibility, as part of the loan approval process.

Asset and liability management
Historically, PINE maintains a conservative policy in relation to its liquidity position. On December 31, 2010, the liquidity position remained at comfortable levels, representing 43 percent of time deposits on that date. PINE also maintains a conservative asset and liability management policy. Accordingly, its funding sources are adequately aligned on terms and costs with the respective assets in the credit portfolio: while the weighted average maturity of the loan portfolio is 15 months, the weighted average maturity of the funding is 18 months.

Human resources
Banco Pine’s mains assets are its employees; it therefore attracts, retains and develops the best talent while maintaining a high-performance work environment focused on results and based on meritocracy. The bank constantly invests in training and qualification of its employees, encouraging deep knowledge of clients and products, which facilitates cross-selling opportunities that bring value to clients and to the bank.

Corporate governance
Banco Pine has active corporate governance policies, given its permanent commitment to shareholders and other stakeholders. The most important differentials of its corporate governance practices are:

– Two independent members and one external member on the board of directors
– 100 percent tag-along rights for all shares, including preferred shares
– Arbitration procedures for rapid settlement of disputes
– Fiscal council

The bank adopts best corporate governance practices, with an internal compliance and auditing structure that assures an operational environment based on the company’s best values.

A well-prepared bank
Today, Banco Pine has the main resources necessary for sustained growth: qualified human capital, comfortable capitalisation and adequate funding. In other words, the bank is ready to continue developing its strategy of providing complete service to corporations, building trust and loyalty on the one hand and profitability on the other.

These resources enable the bank to provide a continually improving service by creating new solutions, generating client captivity and promoting an environment that is propitious for cross-selling. Banco Pine is well prepared to continue growing with quality, capitalising on the momentum of the Brazilian economy.