Month: January 2014

Davos update: Shinzo Abe discusses Japan-China future

Posted on by Ashton Wenborn

Japanese Prime Minister Shinzo Abe has discussed his country’s fraught relationship with China during a moderated discussion with journalists at the World Economic Forum meeting in Davos.

“Unfortunately with China we don’t have a clearly explicit roadmap,” said the Prime Minister. “There may be some conflict or dispute arising out of the blue or on an ad hoc level or inadvertently.”

Unfortunately with China we don’t have a clearly explicit roadmap

Abe also referred to a “new dawn” rising over Japan, speaking about his “Abenomics”. He alluded to the upcoming complete liberalisation of the Japanese electricity sector and of labour market reforms that are in the pipeline. He also suggested that corporate tax cuts are eminent as well. When FT correspondent Gideon Rachman pressed Abe on the risks associated with his economic policy, the prime minister answered with a golfing metaphor. “He said that like a golfer, stuck in a bunker for 15 years, but reluctant to reach for the sand wedge, in case they over-hit the ball and shot out of bounds,” wrote Rachman. “Now Japan had finally had the courage to use the sand-wedge.”

Abe was also keen to emphasise that much of his plans involve attracting significantly more women into the workplace than ever before.

However, the greater focus of the talk was on Japan’s relationship with China and Abe refused to rule out any conflict arising in the near future.

Davos update: WEF discusses Africa’s spiralling population

Posted on by Ashton Wenborn

A panel of five experts gathered today at the World Economic Forum in Davos to discuss Africa’s growing population, which is forecast to reach two billion by 2050, and the ways in which the continent can ensure sustainable and inclusive growth for all.

The panelists opened by discussing the ways in which Africa differs to that depicted by the media, making specific reference to the conflict in South Sudan. “I want to agree that very much is positive on the continent,” said Winnie Byanyima, Executive Director of Oxfam International. “It’s so good to hear it from both the private sector and government,” she said, after Nigeria’s President, Goodluck Ebele Jonathan and CEO of Dangote Group, Aliko Dangote spoke about the region’s recent progress and bright prospects for the future, on both social and economic fronts.

“My vision is that if you look at the Africa of 2050, we should have a united Africa, an African economic community where we have only one common market, where there will be free movement of goods, services and people,” said Dangote. The company CEO then went to on to outline a vision for the future, in which Africa would supply not just raw materials, but the workers and factories required to facilitate these operations, in effect reaping far more sustainable rewards for the continent.

I feel ashamed that trade between our countries is only at 11 percent

“I feel ashamed that trade between our countries is only at 11 percent,” said the Nigerian President, “it’s unacceptable.” The inability to move freely from country-to-country without incurring extortionate border fees was an issue that dominated the hour-long discussion, as each member of panel conceded that it was an incredible opportunity for the continent going forwards.

“Our target by 2050 should be 80 percent of the inter country trade flows,” said Julian Roberts, Group Chief Executive of Old Mutual, who acknowledged that the barriers between African nations are holding the continent back. “The opportunities are there, and the trade will flow.”

The potential for growth was best summed up by Dangote: “Imagine if we had sufficient infrastructure or sufficient power, and not only that, but going forward, if we’re going to even grow at 4.5 percent until 2050, it means that Africa will have a total GDP of about $9trn; that’s twice China today.”

Panelists

Julian Roberts
Group Chief Executive, Old Mutual, United Kingdom; Co-Chair of the Governors for Financial Services Industry for 2014 

Goodluck Ebele Jonathan
President of Nigeria

Aliko Dangote
President and Chief Executive Officer, Dangote Group, Nigeria

Doreen E. Noni
Creative Director, Eskado Bird, Tanzania

Winnie Byanyima
Executive Director, Oxfam International, United Kingdom

Luis Gerardo Del Valle and Alejandro Aceves Perez on tax reforms in Mexico | Jauregui and Del Valle | Video

Posted on by Ashton Wenborn

Mexico’s economy has undergone drastic change in recent years. The government is now looking to pass several tax reforms. Luis Gerardo Del Valle Torres and Alejandro Aceves Perez, Managing Partner and Tax Partner of Jauregui and Del Valle, talk about the proposed reforms and how they are expected to impact investors.

World Finance: Luis, tell us more.

Luis Gerardo Del Valle Torres: Economically speaking, it’s always stated that it’s better to have the resources in the hands of the businesses rather than in the hands of the government. The government is coming up with a 10 percent dividend tax, and that did not exist before, and it’s also increasing considerably the individual’s tax rate from 30 to 35 percent. So any tax reform that just intends to collect more revenue will always and has always been controversial.

World Finance: Alejandro, how will this impact on Mexico’s investment climate?

Alejandro Aceves Pérez: One of the objectives is to increase the collection of revenues for the government, so there is no doubt that it will affect the investment climate. However, we do not consider that this will have a significant negative effect, because the opportunities are there, the markets are there, and we still believe and consider Mexico to be a very attractive place for foreign investors.

Our advice to multinational companies is mainly to be careful to take care of the new regulations in order to avoid the negative consequence

World Finance: What advice would you offer multinational companies who could potentially be impacted?

Alejandro Aceves Pérez: As the tax climate becomes more complex, multinational companies are required to carefully analyse the way they have been performing operations in Mexico. Our advice to multinational companies is mainly to be careful to take care of the new regulations in order to avoid the negative consequence. From an operational perspective, everything becomes more complex, so they need to be closer to their tax advisors, to their legal advisors, so basically they do not have any future negative consequences with respect to the creation of liabilities. So everything basically gets to a more complete environment from a legal and tax perspective, that’s our view.

World Finance: And what opportunities are there for foreign investors? If you think about the various sectors, are there any that are specifically open to them and are there any that are off limits?

Alejandro Aceves Pérez: The real estate sector has been very attractive to both existing investors and new investors, either from Mexican sources or from foreign sources. That has been under a very dynamic environment very recently, so in the future for certain that is one of the major opportunities that our country’s offering. One of the off limits sectors, what we call the energy reform may provide the opportunity to open that sector to foreign investors. That has been under discussion and depending on how they perform the analysis, what the outcome is, we may be seeing more foreign investors coming to our country with respect to the energy sector, which now probably is closed to certain company profiles. That could be off limits at the moment but that might be opened in the very near future.

World Finance: The OECD commenced an action plan with respect to base erosion and profit shifting. Tell me more.

Luis Gerardo Del Valle Torres: What the report suggests is that governments come up with general anti-avoidance provisions, that they tighten the CFC. By CFC I mean controlled foreign corporations regimes, meaning that whenever the trans-nationals try to organise their business in a way that actually shifts profits from a higher tax jurisdiction to a lower tax jurisdiction, that that’s just included in the basis of wherever the company’s a tax resident.

Mexico is still a very powerful economy, there are a lot of opportunities

World Finance: How will this impact Mexico, and what is the country’s take on it?

Luis Gerardo Del Valle Torres: All of this tax reform will clearly impact the decision of trans-nationals, of where, when and how much to invest. Mexico is still a very powerful economy, there are a lot of opportunities and the Mexican government is relying on the fact that just increasing taxation with this 10 percent dividend tax shouldn’t affect the decisions of trans-nationals in a way that should affect the economy, or the investment that we’re expecting will come into country in future years.

World Finance: And finally, why should investors look to Mexico?

Luis Gerardo Del Valle Torres: The productions costs are still low, probably not as low as in China or as in certain other countries, but then the development of the Mexican economy, the services that are available, the privileged geographical location of Mexico, should be taken into consideration, so I think we’re clearly going to be competing strongly against great countries for foreign investment.

World Finance: Luis, Alejandro, thank you very much for your time

Alejandro Aceves Pérez: Thank you.

Luis Gerardo Del Valle Torres: Thank you for inviting us.

Inflation targeting backed by India’s central bank

Posted on by Ashton Wenborn

A Reserve Bank of India (RBI) panel has recommended an overhaul of the country’s monetary policy. The committee said that the consumer price index (CPI) inflation should be used to establish a formal inflation target of four percent. The report detailed that the long-term retail CPI target should be within a two percentage point range of the established target in just over two years.

Retail inflation currently stands at 9.9 percent, and as the panel suggested, this should be reduced to eight percent in 12 months and six percent the following year. Failure to meet targets would result in a public statement, as in the British model.

Failure to meet targets would result in a public statement, as in the British model

Currently, the Indian Central Bank doesn’t have a formal inflation target and the recommendation laid out by the committee is a big ask given the country’s near double digit price increases. Such changes would shift the emphasis from wholesale price inflation – India’s current main price movement indicator – towards global norms. This would result in greater transparency and predictability; a stark contrast to the central bank’s history of setting ad-hoc interests rates, often to the surprise of international markets.

Historically, the RBI has based policy on its own perception of inflation, currency stability and growth. “It will be a very, very important step for monetary policy in India,” chief economist in Asia for JPMorgan, Jahangir Aziz, told the Financial Times. “Until now, we’ve had no idea what the RBI is doing. If this proposal goes through, we will have a quantitative objective by which we can judge the RBI’s performance.”

The 130 page report also recommended the formation of a monetary policy group, whose primary objective would be inflation management. At present, interest rate decisions are made solely by the RBI governor. This committee would be led by the government and meet every two months to discuss monetary policy.

The current RBI panel was established shortly after former IMF chief economist Raghuram Rajan became governor last year. Its aim is to get New Delhi to cut its budget deficit to three percent of the GDP within three years, while loosening its control over prices. These suggested reforms coincide with general elections, which will be heavily based on being able to offer stable prices.

Despite normalising the country’s monetary policy, Indian business groups stand to be disadvantaged by such modern reforms. For years, these groups have blamed high interest rates for deterring new investment. Only once India successfully regulates its fiscal policy structures will the accuracy of these allegations come to light.

TEPCO to rebuild nuclear plant in Japan despite opposition

Posted on by Ashton Wenborn

Three years after the devastating tsunami that led to the Fukushima power plant disaster, Tokyo Electric Power (TEPCO) has finally been given the go-ahead by the Japanese government to start rebuilding its business. The company, which is now state-controlled, has kept its nuclear reactors offline since the disaster. The agreement will involve over one trillion yen in cost cuts for TEPCO, and there are plans to restart its two main reactors as early as July.

There is fierce opposition in Japan to resorting back to nuclear energy after the Fukushima meltdown

“As an electricity utility we’d like to have nuclear power as an option to sustain a stable power supply,” Naomi Hirose, president of TEPCO, told reporters in a press conference. “If the Kashiwazaki-Kariwa plant restarts, the company will be able to generate electricity from sources that will allow us to cut rates.”

The Kashiwazaki-Kariwa plant is the world’s largest nuclear reactor, and TEPCO has announced its plans to restart it by July. There is fierce opposition in Japan to resorting back to nuclear energy after the Fukushima meltdown. Before the disaster, up to a quarter of Japan’s power was generated from nuclear plants, but it has since been relying on oil, coal and gas plants for power, at huge cost to the economy.

TEPCO has announced it is considering making investments of up to 2.67 trillion yen in order to rehabilitate its nuclear business by boosting upstream projects and overseas electricity businesses. When outlining the plans, TEPCO suggested it would borrow two trillion yen from fresh lenders as soon as possible.

Experts divided over reported STEM human capital crunch

Posted on by Ashton Wenborn

The Social Market Foundation, a leading cross-party think tank, released a paper called In the Balance: The STEM Human Capital Crunch in March 2013. The key findings of the study were that a labour shortage was preventing growth in the Science, Technology, Engineering and Mathematics (STEM) sectors. The paper referenced a study published in 2011, in which it was reported that 26 percent of STEM vacancies could not be filled, and that 21 percent of these vacancies were “skill shortage vacancies”. The findings echo those of several other studies from around the world, and some high profile business leaders have weighed in on the debate.

One of the most prominent is Sir James Dyson. Writing in the Huffington Post, he claimed the UK lacks the engineers required to build the recently announced Hinckley Point nuclear power plant. He said: “The government… signed an agreement which means our looming energy crisis will be solved by nuclear power stations built by the French and owned, in part, by the Chinese. This demonstrates the impact of Britain’s skills shortage and our lack of ambition.”

As part of a plan to improve British infrastructure by encouraging innovation in technology and design, the government announced £400m will be invested in higher education science and engineering by 2016

In the same article, Dyson wrote that Britain only produces 12,000 engineering graduates a year. Speaking to The Telegraph before that piece was published, he quoted the same figure and said there are currently 54,000 STEM vacancies in the UK. He said: “The Chancellor wants to increase exports to £1trn by 2020. But how, when we are importing expertise and it is predicted that we will have a deficit of 200,000 engineers by 2015.” Dyson said his own company was struggling to fill 650 vacancies.

Dyson has been a long-term advocate for increasing the number of British engineers. In 2010, he was invited by the Conservative Party to compile a report outlining what needs to be done to boost the engineering and technology sector. In 2012, he told The Guardian tuition fees should be waived for engineering undergraduates and post graduates should be paid £40,000 a year. Dyson also suggests an overhaul of the visa system would allow international graduates to stay and work in the UK to improve the labour force.

As part of a plan to improve British infrastructure by encouraging innovation in technology and design, the government announced £400m will be invested in higher education science and engineering by 2016. According to David Willets, UK Science and Universities Minister, this investment will include £200m from the Higher Education Funding Council for England with the other half being matched by the universities receiving the funding.

The goal of the fund is to improve facilities and increase the number of science, technology and engineering students to compensate for a shortfall of workers in these sectors. Another focus of the investment is to double the proportion of women in the science and engineering sector from the current 16 percent, to 30 percent by 2030.

The STEM myth
There has been talk of a similar crisis in the US for decades – recently investigated by Dr Robert Charette, Contributing Editor at IEEE Spectrum Magazine. In his article “The STEM Crisis Is a Myth”, Charette strongly opposes the argument that there is such a shortage. The piece has received a lot of positive feedback from STEM graduates who claim they are unable to find work despite the supposed labour shortage: it has also received negative feedback from industry insiders who claim they are unable to find a sufficient quantity of candidates to fill vacancies.

Charrete analysed data published in articles, white papers and government studies about global STEM labour shortages from six decades and what he found was compelling. Charrete points out the same argument has been reiterated for decades, with a lot of inconsistency in the presented data. He suggests “powerful forces must be at work to perpetuate the cycle”.

Charrete’s work has received mixed reactions and has been asked to prove his findings. However, he says it is not up to him to prove anything as he was merely analysing the data provided: “It’s really not up to me to be proving you wrong, if you’re screaming that there’s a shortage, it’s really up to you prove that there is a shortage, given that you’ve been crying wolf for 50 years.”

One theory as to what is “perpetuating the cycle” is that an excess of science, tech and engineering professionals are necessary to create a bigger pool of skilled labour for employers to choose the best from. Charrete writes: “companies would rather not pay STEM professionals high salaries with lavish benefits, offer them training on the job, or guarantee them decades of stable employment.” The more skilled STEM workers there are, the greater the chance of the ‘best and the brightest’ contributing to innovation in areas such as national defence, manufacturing and computer technology.

Running the numbers
Comparing various reports of UK engineering and tech graduate shortages with the actual numbers reported by the Higher Education Statistics Agency (HESA), it is difficult to overlook the fact the data doesn’t match up. The point of comparing the two is not to prove anybody wrong. The increased investment in science, technology and engineering education is undeniably a good thing.

16%

Proportion of women in UK science and engineering

£400m

UK investment in higher education science and engineering by 2016

The improved measures to increase female representation in these sectors is also a good thing, as is relaxation of the current ELQ funding rule in order to allow people to retrain in these fields. However, the figure of 12,000 British engineering graduates is quite vague, especially seeing as, in 2012, the BBC reported there was a shortage of engineers due to there being 23,000 graduates a year. It was not specified if these were post-graduates, undergraduates or PhD graduates – although, according to the HESA, there were a total of 50,680 “broad based engineering and technology” graduates in the 2011/12 academic year across all levels.

Of those graduates, 23,595 were undergraduates, 1,785 were described as “other postgraduate” and 18,395 were described as “doctorate or higher degree”. In the broad sense of the definition, which seems to be what is being reported, there are a lot more than 12,000 graduates.

It appears several factors are contributing to the reported shortage of engineering and technology labour. It may be the shortage of STEM workers being referred to could be better described as a shortage of ideal candidates. This would explain why business leaders such as Dyson call for looser immigration policy in order to create a larger pool of professionals. This also explains the £400m investment in science and technology training to improve graduate skills.

Furthermore, employers require graduates to be ‘work-ready’, which is often difficult in any field, as graduates often need a period of real-world experience in order to apply what they have studied to reality. It could also be the case that STEM graduates without the grades or experience to be employed at companies such as Dyson are taking jobs in other sectors. It really doesn’t help that there are a lot of inconsistencies in the data quoted by various commentators as it is adding to the confusion about the matter. However, overall, it seems the reported shortage of STEM labour might be a matter of quality, not quantity.

Arthur Lang on Asia’s real estate market | CapitaLand | Video

Posted on by World Finance

CapitaLand has grown to become one of Asia’s largest developers. Arthur Lang, CapitiLand Group CFO, talks about CapitaLand’s focus on China and Singapore: China’s five ‘city-clusters’ that are driving the real estate market, and how Singapore’s low interest rates are affecting property investments.

World Finance: Mr. Lang, which countries are you targeting for growth and why?

Arthur Lang: CapitaLand today is in almost 20 countries all over the world, even in Europe and in the UK, where our serviced apartments are, but really the focus is very much on Singapore and China. I think for Singapore and China alone today, it’s about 75-80 percent of total assets for the group. If you look at all the projects and activities we’re involved in in these two countries, I think in the next five years I wouldn’t be surprised if it’s about 85 percent of our total assets and total business. Specifically if you look at China, it’s perhaps the best place to do business in Asia, with 1.3-1.4bn people; it’s a huge market. I think more importantly as well, urbanisation rates in China are still relatively low compared to the developed world, it’s still in the 50 percent area, the developed countries are in the 80s or even in the 90s, in terms of the population that’s urbanised.

World Finance: Well staying on the subject of China, and we obviously hear an awful lot about the potential in the country, but there is a lot of talk about a possible housing bubble. How much of a problem do you see this being?

The urbanisation rate for China is still relatively low compared to other large countries, so there is still a lot of room for growth

Arthur Lang: With the new government I think we are still fundamentally confident with the residential sector, the property market in China, for the reason I mentioned earlier; the urbanisation rate for China is still relatively low compared to other large countries, so there is still a lot of room for growth. I think we are also very encouraged by the recent measures from the Chinese government to cool the residential sector down, and not create bubbles. Because I think for real estate companies, what we really like is sustainable growth, where we can make proper investments, we can make judgments in terms of which cities to invest in. If there are a lot of bubbles I think things get a bit too volatile, and it’s quite disruptive to business, because real estate is a very long-term business, and actually we wanted to grow sustainably.

World Finance: Would you say the housing bubble is perhaps less of a concern in places like China because there’s so much demand for housing there?

Arthur Lang: It really depends on which city you are looking at. China has something like more than 600 cities with populations of at least a million, so we can’t be in every city, and I think that each city has its own dynamic, has its own regulatory requirements, has its own market demand dynamics. So we need to look at each city. China as a whole, we are very bullish on its overall economic performance over the next 10-20 years, but I think also at the city level we have to look at and see where we want to place our bets.

World Finance: So moving on to Singapore now, where CapitaLand is based, the property market there has been flourishing due to low interest rates, so how do you see the new total debt servicing ratio impacting the market?

Arthur Lang: There have been a series of property cooling measures instituted by the government for the last three years, the last one being the total debt service ratio, TDSR. Cumulatively, that has actually moderated the residential market in Singapore. Now in terms of what we think of the prospects, the fundamentals are still there for Singapore. Population growth is still increasing, and I think the government is still wanting to make sure Singapore is a great place to live as well as a place to do business.

World Finance: CapitaLand has achieved great success over the past few years, in part because you haven’t relied on one source of funding. So why do you think it’s important to diversify sources of capital?

I think the government is still wanting to make sure Singapore is a great place to live as well as a place to do business

Arthur Lang: The realistic developments are a very long gestation period, meaning that at the point of buying the land and when you actually spend capital, in putting capital to buy the land and to build, you don’t see that capital coming back to you until a few years later. In certain very large projects it could take seven to eight years before you actually see the capital return.

Two, I think real estate fundamentally or inherently is a very cyclical business. There are peaks, there are troughs, we talked about bubbles earlier. So I think one needs to understand the cyclicality of the industry.

Three, I would say that right now, especially in Asia, where we are focused on our cities in Asia, the ticket size of real estate has become a very intensive business. For example, in Singapore I always tell my colleagues that any building and any office building in the CBD in Singapore costs you at least a billion dollars. So large amounts of capital are actually needed to make sizeable investments in Asia.

World Finance: Well finally, I think the question most people want answering is, where’s the next big thing, where will you next be targeting for investment?

Arthur Lang: I think we’ve got our hands full in Singapore and China. It’s definitely these two countries, as I mentioned earlier, we’re fundamentally very confident about our prospects in these two countries, and we still want to continue to grow there.

World Finance: Will you maybe be going to more third tier, even fourth tier cities, rather than just the major cities like Shanghai, Chongqing?

Arthur Lang: I think at this point if you look at, probably about 90 percent of our China business is concentrated in about 10-11 cities in China. I think that what we want is to really go deep, deepen our presence in these cities. So what we have done is, we’ve actually created five city-clusters at CapitaLand within China for China business. And each city-cluster is anchored by one of the major cities. So in the northern part of China, we’re Beijing, in the eastern part we’re Shanghai, in the southern we’re Guangzhou, Central we’re Wuhan, and then in the southwestern with Chongzhou, Chongqing. So I would say at this point we’re still very much focused on these five city-clusters, but always keep your options open, so maybe next year there might be a sixth city cluster, but at this point it’s five.

World Finance: Mr. Lang, thank you.

Arthur Lang: Thank you Jenny, thank you very much.

Japan leans in: Shinzo Abe’s push for womenomics

Posted on by Ashton Wenborn

Women in North America and Europe have been vital participants in since the 1960s. From then, women have gone from housewives, to clerical workers and finally to top executives. It would be foolish to say that the glass ceiling has been shattered, but a window up there has certainly been cracked open.

Figures vary from country to country, with Scandinavia topping the list for gender equality, according to the Global Gender Gap Report by the World Economic Forum, with other European countries following suit. Though wealthier nations tend to be more equal when it comes to gender, there is one notable exception: Japan (see Fig. 1).

Coining the term ‘Womenomics’
In 1999, analysts at Goldman Sachs led by Kathy Matsui concluded that Japan could increase its GDP by as much as 15 percent by bringing more women into the work force and closing the gender abyss that has formed in the Japanese labour market. Now, more than 14 years since Matsui’s legendary exposé of gender politics in Japan, things are finally beginning to change. The term ‘womenomics’, lifted from Matsui’s paper, is finally part of the Japanese political lexicon. And, ironically, it was a man who put it there.

Womenomics are a vital component of Prime Minister Shinzo Abe’s much lauded reform plans, affectionately known as Abenomics. Abe is committed to modernising the Japanese economy, long plagued with deflation and slow growth, and he insists that his goal of bringing Japan back to the foreground as an economic powerhouse will not be achieved without “tapping into its most underutilised resource: Japanese women.” Abe insists that his policies are all about empowering women. “Japan is a country with a shrinking population caused by a seemingly intractable decline in its birth-rate. But womenomics offers a solution with its core tenet that a country that hires and promotes more women grows economically, and no less important, demographically as well,” Abe wrote in his very well received op-ed column in the Wall Street Journal.

“My government’s growth plan forecasts that a two percent increase in productivity over the mid to long term will produce, in 10 years, an average of two percent in real GDP growth and three percent in nominal GDP growth,” he wrote. “To achieve this, we must capitalise on the power of women. We have set the goal of boosting women’s workforce participation from the current 68 percent to 73 percent by the year 2020. Japanese women earn, on average, 30.2 percent less than men (compared with 20.1 percent in the US and just 0.2 percent in the Philippines). We must bridge this equality gap.”

So far, Abe’s concrete plans for bringing more women into the workforce are still a little vague. When women joined the labour pool in Europe and North America in the 1960s and 70s, it was largely because of the contraceptive pill becoming available, allowing women to plan when and how to structure their families and careers. Birth control is already widely accessible in Japan, and yet women still don’t always choose to work. The prime minister has suggested that he will expand day-care provision to allow mothers to return to work after giving birth. In a speech to the UN General Assembly, Abe has vouched to implement an official development assistance programme in excess of $3bn over the next three years, with the aim of addressing women’s participation in society through health, medical care, and prevention and resolution of conflict related to women.

Birth control is already widely accessible in Japan, and yet women still don’t always choose to work

Japanese women seem to have responded positively to Abe’s plans, but they have been demanding better infrastructure and provisions for working mothers for a long time before Abe came along. In February, Ryo Tanaka, Mayor of Tokyo’s Suginami Ward, revealed that 2,968 families had applied for state authorised day care facilities, 400 more than the year before and 1,800 more than the state can cope with. In June, a group of women rallied in Tokyo demanding more public day care. Tanaka announced emergency measures to cope with the shortage of child-care spaces shortly after the protests. “I think the mothers were placed in a situation where they felt they had no choice but to raise their voices to be heard,” a Suginami official said. “We must earnestly listen to the urgent concern raised by these mothers, who need to go back to work and also raise children.”

A conflict of interest
Though the higher echelons of Abe’s government might be gearing up to meet these demands, Japan remains a deeply conservative society, and even innocuous calls for more free child-minding have been met with aggressive opposition. After the June 2013 protests, a number of political commentators took to the internet to express their displeasure at the thought of women leaving the home to work.

“What I am saying is don’t force your child rearing on society from the start,” read a particularly vitriolic blog entry by Liberal Democratic Party (Abe’s own) member, Yutaro Tanaka. He added that while he agreed that “women power” was necessary to boost the economy, the women who took to the streets to demand better support “had no touch of reserve nor shame.”

Japan remains a deeply conservative society…even innocuous calls for more free child-minding have been met with aggressive opposition

Though Yutaro Tanaka has been particularly vocal about his opinions, he is by no means alone. The trouble for Abe is that a number of high-ranking politicians and prominent businessmen still share these traditionalist and conservative beliefs. “Their view of women is basically as tools to boost the birth rate, reduce social security spending and increase growth. Women have a role because they are key to solving these three problems,” Mari Miura, a political science professor at Sophia University in Tokyo, told Reuters. “But they have a strong idea of the traditional family as a core ideology of conservatives. That ideology and reasonable solutions do not match, so the policy is always schizophrenic at best.”

But it is undeniable that when it comes to employment rations, Japan still lags behind in all key World Bank Gender Gap indexes. It ranks 104th in the world for female participation and opportunity, despite women and men scoring equally in literacy, primary and secondary education, and woman surpassing men by far in life expectancy.

Cracks start to appear at university level, where significantly less women choose to attend, and the gap gets persistently wider at boardroom level; so few women are on the boards of listed companies in the country that the World Bank could not compile a figure, and the same is true for firms with female participation in ownership.

Realising the only option
But Abe is well aware that in order to achieve greater female participation in the workforce, it is not sufficient to simply tackle the issue at the top. He will not be enforcing positive discrimination for women in boardrooms, for instance, but will instead follow the work the Jiro Aikawa, a Japanese development specialist working with young female African farmers. “Through his involvement in African agriculture, he has succeeded in doubling the incomes of 2,500 farmers in Kenya. Africa’s agriculture will not grow strong unless Africa’s women are first empowered, and unless Africa’s agriculture is made robust, Africa itself will not thrive. This is his conviction,” Abe wrote in his Wall Street Journal column.

“One of Aikawa’s strategies is to promote women farmers’ understanding of the consumer market. The goal is to move beyond agriculture that merely enables the farmer to eat, to agriculture that enables the farmer to earn money.” Though Abe’s bottom-up reforms might help women onto the first step in the career ladder, corporate culture in Japan remains entrenched in its regressive attitude towards women climbing the rungs after that.

[T]he policy is…schizophrenic at best

Though a number of large corporations have been publicly enforcing diversity policies as a way to boost profits, Keidanren – a big business lobby group – has blocked a proposal to make it compulsory for large companies to disclose gender statistics. While increasing female participation in the labour market will lead to growth in the long-term, Abe is still facing growing public debt and some measure of economic uncertainty. It will be a challenge for Abe’s government to find the funds to cover the reforms he has promised.

However, the economic possibilities of Abe’s womenomics might prove too irresistible for even the staunchest traditionalist to resist. In a recent interview with Reuters, Matsui reinforced that her findings of 14 years ago, and insisted that despite the opposition, Abe is doing the right thing. “It’s the first administration that I can think of that even mentioned women’s participation. So that’s a step forward. Obviously, this is going up against a tidal wave of potential opposition, but at the end of the day, what other choice do they have?”

A new era for the US Fed as Yellen takes the reins

Posted on by Ashton Wenborn

“She calls it like she sees it,” said President Obama in October as he backed Brooklyn-born Janet Yellen to succeed Ben Bernanke as Federal Reserve chair. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work, not just in theory but also in the real world,” he added, as a humbled Janet Yellen stood smiling by his side.

Yellen’s authority over 300 million Americans and the founding fruit on which they all depend will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton – at least for the time being – as the most powerful female figure in world finance.

Yellen’s authority…will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton…as the most powerful female figure in world finance

As the US returns to the verges of a fiscal cliff, one of Bernanke’s most celebrated protégés must stabilise the economy while somehow putting the breaks on quantitative easing.

Experience and early years
At 67 years of age, Yellen is six years older than the age at which the average American retires. However, with age comes experience, which in Yellen’s case is in no short supply. Having spent three years as the Fed’s vice chair, six heading the San Francisco Fed, two running the CEA and a further three on the Fed Board of Governors, her industry expertise is without compare.

Yellen’s childhood years were spent at Fort Hamilton High School, where she excelled academically and was named valedictorian of her graduating class in 1963. At the tender age of 18, Yellen migrated cross border to study economics at Brown University and in 1970 undertook a PhD at Yale University, which marked the beginnings of what would prove to be an impressive career in economics.

Soon after, Yellen became an assistant professor at Harvard University, served for two years on the Fed’s board of governors, and worked on the faculty of the LSE alongside her husband, George Akerlof. So often seen as second fiddle to the 2001 Nobel Prize-winning economist, Yellen found a perfect companion for bettering her own economic wisdom. “We liked each other immediately and decided to get married,” recalls Akerlof in his Nobel Prize biography. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics.”

Sticky wages
Nonetheless, as time progressed so too did Yellen’s standing, best evidenced by the New Republic journalist Noam Scheiber calling Yellen for a story, only for her husband to pick up and promptly retort, “Well, I’m a pretty good economist too.”

Together Yellen and Akerlof developed their theory of ‘sticky wages’, which determined that, despite increased earnings, wages are often slow to follow; a principle that Yellen later introduced to the Fed’s fiscal dealings.

The original concept was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply, leading the couple to conclude that this same principle could be applied on a macroeconomic scale to great effect.

The duo’s hypothesis highlighted the market’s inability to reach equilibrium in the event of a downturn and went on to attribute this phenomenon to a number of factors, among them being self-preservation, union activity and regulatory barriers. However, as is the case with many of Yellen’s economic principles, a conclusive reason for the imbalance is yet to be determined.

The original concept [‘sticky wages’] was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply

It did take quite some time for the pair’s theory to be put into practice, however, as the two were forced to wait until 1994 before Yellen was appointed to the Fed’s board of governors. This new role not only saw her fulfil a lifelong ambition to join the institution, but also establish an impressive reputation in the field of economics, and in 1997 she was promoted to the chair of president Clinton’s Council of Economic Advisors. Her career in world finance then passed from strength to strength, as the Bay Ridge resident exercised her dovish tendencies and made a name for herself as an astute economic mind in the process.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined, ahead of William Dudley, Elizabeth Duke, Richard Fisher and Ben Bernanke, to name a few.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned, and it is this astute eye for detail and capacity for decision-making that best characterise her long and successful career in finance and economics.

Employment first
Obama’s support is unsurprising given that Yellen’s policies share a certain likeness with the administration’s valuation of employment ahead of inflation. At the Trans-Atlantic Agenda for Shared Prosperity conference in February 2013, Yellen spoke of the three million Americans who had been out of work for over a year and emphasised the importance of combatting this phenomena above all else. “These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined

“Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation – contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.”

Jeffrey Frankel, former member of Clinton’s Council of Economic Advisors and professor at Harvard University’s Kennedy School of Government, said, “I very much expect Janet Yellen to continue the policies of Ben Bernanke,” an opinion that echoes the expectations of the many.

For all intents and purposes, the Fed’s policies with regards to inflation look likely to remain essentially unchanged under Yellen, whose background has focused principally on unemployment and whose past remarks have sympathised with Bernanke’s approach. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” she said in October 2013 at a White House ceremony.

For this reason, it would appear that under Yellen’s regime, an eventual ‘normalisation’ of policy for the Federal Open Market Committee (FOMC) is far from imminent and global markets will continue to depend upon artificial means of support. “Progress on reducing unemployment should take centre stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding two percent,” she said at a meeting sponsored by the Society of American Business Writers and Editors in March.

What will be interesting is to see how Yellen’s focus on unemployment will tie in with recent plans to increase America’s minimum wage. Her belief that decent pay leads to better morale, and consequently higher productivity, suggests that a minimum wage rise may well come into effect when she takes the position. Furthermore, it could be said that the theoretical reasons for raising the minimum wage share a certain likeness with quantitative easing, with each assuming that with more money comes greater productivity.

The problem with bonds
The Fed’s aggressive expansionary policies have seen it pump $85bn of new money into the system every month, consisting of $45bn in treasuries and $40bn in mortgage-backed securities. Although Yellen’s candidacy campaign has seen little opposition, there exist a fair few who remain dissatisfied with the Fed’s seemingly ceaseless bond buying campaign and have proceeded to question Yellen’s stance on the subject in this same vein.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US

Critics worry that the Fed’s excessive bond buying will continue for far too long under Yellen’s liberal leadership and that her often overbearing tolerance for inflation could well lead to excesses that bear a certain likeness to the events that preceded the crash.

Among those most disconcerted by the Fed’s policies is Florida’s Senator Marco Rubio, who said in a recent press release that he would vote against Yellen, “because of her role as a lead architect in authoring monetary policies that threaten the short- and long-term prospects of strong economic growth and job creation.” Rubio went on to add, “Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behaviour, and put the US economy at increased risk of higher inflation and another future boom-bust.

“Sound monetary policy established by the Fed is critical for long-term investment and economic growth. Unfortunately, the arbitrary way in which interest rates and our currency have been treated, especially over the last few years, has created asset bubbles and financial uncertainty that limit our economic potential.”

Cause for concern could well be justified given that America’s monetary base is rising rapidly as economic growth trails behind, leading many to fear an eventual bloat of inflationary implications at some point in the near future. Put another way, America’s wealth is but an illusion, and once Wall Street clocks on to this fact, losses could well spiral out of control.

Transparency and tradition
Although opinion is divided on Yellen’s dovish leanings, most are in agreement with her plans to improve upon the Fed’s transparency and better its longstanding and – some say – outdated traditions. The Fed’s history as a hierarchical and male-dominated space appears to be coming to an end, and Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change.

Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change

Another of the Fed’s structural changes can be seen in Yellen’s communications strategy, which is among her most impressive achievements to date, and requires a far greater degree of disclosure. “I hope and trust that the days of ‘never explain, never excuse’ are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public” she told the Society of American Business Editors and Writers in Spring 2013.

Where once the Fed’s policy was to disclose very little about monetary policy moves, believing that this stance would protect against market overreactions, the existing approach is to trust more in financial markets and accept responsibility for its dealings, however catastrophic. “The Federal Reserve’s ability to influence economic conditions today depends critically on its ability to shape expectations of the future, specifically by helping the public understand how it intends to conduct policy over time, and what the likely implications of those actions will be for economic conditions.”

Although America’s aggressive bond-buying regime at first glance appears radical, Yellen is far from it; instead she is merely a product of a time wherein unemployment and the extreme means by which it is combatted are par for the course. While her appointment to the highest chair in central banking marks the pinnacle of a long and successful career, it also represents the beginnings of a new era for the Fed and for the global economy as a whole.

From billions to bust: where did it go wrong for Eike Batista?

Posted on by Ashton Wenborn

“I’m not bragging. It’s just a consequence of all the things that we have done. Just look at the assets. Jesus, by 2015 we will be making $10bn. Between 2015 and 2020 that will double, or triple. And those are discounted numbers I’m giving you.” Eike Batista’s modesty might not have shone through in his now infamous interview with the Sunday Times in March 2012, but his confidence certainly did. He was then Brazil’s richest man, the fourth richest person in the world and on a mission to the top. What a difference two years make.

In the intervening time, Batista lost most of his $30bn and tumbled right off any rich list he once appeared on. Batista’s white-knuckle ride of ostentation and loss culminated with OGX, his once celebrated oil-and-gas company and the cornerstone of his empire, filing for bankruptcy this past November, after missing $45m worth of payments to bondholders.

Though he still heads another four listed companies in energy, ship building, mining and logistics, Batista’s unconventional set-up and management style means that even the profitable parts of his sprawling businesses are likely to face the axe as a direct consequence of OGX’s failure.

Building something from nothing
Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years. Known for his extravagant taste, exuberant (and public) family life, and unrepentant ambition, Batista became the face of Brazil’s emergence as an economic powerhouse over the last two decades. In many ways Batista’s success was symbolic of what Brazil could be, with just a little bit of hard work.

His father was a prominent businessman who once headed Vale do Rio Doce and served as Minister for Mines and Energy in the 1960s and then the 1980s, but his children were raised by his estranged wife in Germany. As the youngest, Eike abandoned an engineering degree in Aanchen to try his luck in Brazil, and by the age of 25 he had made $6m by buying and selling gold. He married a model, bought a very big boat and started growing his business.

Batista made his real money in mining in the 1990s. Since 2004 he listed five successful companies under the EBX (Eike Batista X) umbrella: MPX in energy generation; MMX in mining; LLX in logistics; OSX in shipbuilding; and of course OGX. Batista once boasted to Brasil Econômico, that “the ‘X’ represents multiplication”, referring, of course, to his assets.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later

The companies, excluding OGX, and a handful of other international holdings including a mining operation in Colombia, were virtually multiplying in size and value each month for much of the mid to late 2000s. In 2009 alone, EBX shares were up by 195 percent; LLX had gained 500 percent and Batista’s reputation as Brazil’s golden boy was solidified.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later. The oil and gas company was launched and listed on the basis that it would explore prospects around Brazil, but without any actual fields in operation. It was always a risky proposition, but Batista had assembled a reputable team of experts behind his project, all ex-Petrobras with a wealth of experience in drilling in Brazil.

Batista was riding the slipstream of the discovery of Brazil’s enormous ultra-deep-sea crude oil reserves, known as the Pré-Sal region off the southeast coast of the country. OGX’s IPO raised $3.7bn and was Brazil’s biggest ever IPO at the time.

But in 2012, news broke that OGX was slashing production in what had been touted as its biggest oil asset off the Rio de Janeiro coast. It soon became apparent that for all of Batista’s skilled sales pitch, there was nothing supporting the hype of OGX. When the company announced it would be winding down production by 2015, it was producing 10,000 barrels of crude a day – barely a fifth of what it had promised in the IPO prospectus five years earlier. Shares tumbled by 99 percent and bonds were being traded at eight percent of their face value. However, that was just the beginning of Batista’s problems.

In the five years between OGX going public and then going bust, Batista seemed to be caught up in what can only be described now, with the benefit of hindsight, as unbridled megalomania. He had extended himself from energy production to flashy – and expensive – entertainment and hospitality ventures. At one point an EBX subsidiary was bidding for the Maracanã stadium concession, had won the contract to renovate and run a historic hotel in downtown Rio and was running the Rock in Rio festival, a ten-day party that brings the biggest names in pop music to Brazil.

The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a 'celebrity millionaire' in Brazil for the past 30 years
The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years

These showy enterprises not only lost Batista a lot of money when it eventually became apparent they were being frightfully mismanaged, but they also lost him a lot of standing with the Brazilian public, who stopped thinking of him as an aspirational figure and started seeing him as something of an ostentatious show-off.

Overestimated assets
As OGX started to unravel, Batista’s almost risible capitalisation strategy became apparent; and the ultimate demise of EBX became a chronicle of a death foretold. Batista had relied heavily on government support, not only in terms when bidding for concessions, but also in investment through the Brazilian Development Bank (BNDES).

As of October 31, the bank stood to lose up to BRL 6bn, around $2.61bn of direct investment and financing of EBX projects. EBX’s main companies were all built upon the same foundations: the opportunity to profit from Brazil’s exuberant mineral reserves by investing in the infrastructure that the government would be unable to build itself.

Batista was building ports, ships, energy infrastructure and mines; all of his companies were interconnected, MMX’s mining products would be shipped from LLX’s multi-use port, which would also be used as an oil hub for OGX’s products, and so on. When OGX and its billions of dollars worth of debt came crashing down, it dragged down the whole lot of them.

He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs

Batista started his business life peddling insurance door-to-door, and his salesmanship is undeniable. He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs.

He sold a dream. However, by 2012 it was obvious that the man lacked the management skill to make that dream function past the sales pitch. Batista had not only built his conglomerate in such a way that his main companies relied heavily on each other to succeed, but he also severely leveraged OGX, by far his most ambitious enterprise, on his other, already successful companies. When OGX announced it was suspending operations, Batista was leveraged up to his ears.

In June, Batista, seeing EBX on the verge of collapse, took out a full page editorial in the O Globo and the Valor newspapers. Though described by the local media as a mea culpa of sorts, in which he confronted headfirst the perception that he benefited “from a rampant wave of capital building, that [he surfed] on a wave of an inflated market, that without any apparent reason, offered him a blank cheque with a few billion with which to play at being an entrepreneur.”

However, though he admitted this is how he has come to be seen by the market and the public, the editorial did nothing to disabuse any one of those opinions. Batista boldly placed the blame for OGX’s shortcomings on the ranks of executives he had drafted in from other oil and gas companies to help him develop the company, who he all but accuses of having over-inflated expectations with their optimistic analysis of the market and the company itself. “I was as surprised as any of my investors, collaborators and the market,” he wrote, referring to the losses accrued by OGX.

“More than anything I ask myself where I have erred,” he continued. “What should I have done differently? The first issue is probably linked to the financing model I chose for my companies.” Batista suggests that by relying on the stock market he condemned his companies to failure. He admits to being too eager: “If I could turn back time, I would not have resorted to the stock market. I would have structured private equity that would have allowed me to build the companies from zero and develop them each over 10 years.”

Though Batista is not wrong when he identifies his financing model as a major factor contributing to the undoing of his empire, his inability to take responsibility over the mismanagement of his many investments is worrying. Though he has managed to sell off the least damaged of the ‘X’ companies – LLX was bought by EIG Global Energy Partners, MMX was sold to Trafigura, a Dutch commodity trader and Mubadala, Abu-Dhabi’s sovereign wealth fund, and MPX was bought by E.ON and renamed Eneva. The Colombian coalmines are also being sold. But there are billions of dollars in debts to service, and the rest of his smaller enterprises continue to struggle.

Throughout the collapse of OGX and the subsequent quartering of EBX, it became increasingly apparent that for all of Batista’s confidence, his enthusiastic showmanship, his jolly arrogance and ostentatious lifestyle, deep down he remained the door-to-door peddler of his youth. He was a good salesman, but his shortcomings as manager and executive made his downfall.

He was a good salesman, but his shortcomings as manager and executive made his downfall

Batista is now facing a lengthy legal struggle against his creditors as he tries to limit losses. EBX is on full damage control mode now; they have filed a number of suits with the Brazilian justice system in an attempt to stay off bankruptcy and avoid trouble with the creditors, all of which remain unresolved.

Batista’s personal fortune, once estimated at $34bn, has dwindled to around $200m; three of his private jets and a helicopter have been sold. It is unclear how Batista will manage to extricate himself from the tangle of debts and collapsing contracts he has woven around himself, but it will take years before he can truly move on from this disaster. Perhaps he should have taken note of the old maxim: Jack of all trades, master of none.

The race for video game innovation

Posted on by Ashton Wenborn

Derided for years by older generations as an industry purely aimed at children, the video games industry has grown to such a level that it is now among the most dominant – and most profitable – of all the entertainment industries.

Worth around $80bn, the global video game industry has exploded in popularity over the last two decades, in part due to technological innovations but also because of the ageing population of youthful gamers that are reluctant to put down their control pads once they hit their 30s. Indeed, in the US, the average age of gamers is 34, while roughly two fifths of these gamers are female, defying the stereotype that this is an industry purely for adolescent men.

But despite this perception of the industry as a niche, frivolous market catering predominately to single young men, it is neverthless one that is shaping the future for many other markets.

Wii

100.3 million

Units sold

34.3 million

Copies sold of their best selling game (excl. packed-in games): Mario Kart Wii

Playstation 3

80 million

Units sold

15 million

Copies sold of their best selling game: Grand Theft Auto V

Xbox 360

80 million

Units sold

14 million

Copies sold of their best selling game: Grand Theft Auto V

It is not just about the major console designers and the games developers, however. Mobile devices and online platforms are rapidly expanding the gaming industry’s reach. There is also a vast ecosystem of branch industries that serve the console-makers, which includes a wide array of smaller, specialist firms that are innovating in all manner of areas.

Last year, US industry group the Entertainment Software Association (ESA) published its report into how the gaming industry has grown to the level it is today. Michael D Gallagher, President and CEO of the ESA, spoke about how the sector has experienced a level of growth unmatched by any other. “No other sector has experienced the same explosive growth as the computer and video game industry. Our creative publishers and talented workforce continue to accelerate advancement and pioneer new products that push boundaries and unlock entertainment experiences. These innovations in turn drive enhanced player connectivity, fuel demand for products, and encourage the progression of an expanding and diversified consumer base.”

Key players
The industry’s key players for the last decade have been Japan’s Sony and Nintendo and US tech giant Microsoft. Sony’s PlayStation revolutionised games consoles in the middle of the 1990s, bringing games to a more mature customer base. By the turn of the century, Microsoft decided to get in on the action by releasing its wildly popular Xbox console. Nintendo, previously the dominant player in the industry, retreated to offering consoles to a more family-orientated audience as opposed to hardcore gamers, as well as innovating motion-sensor products like its Wii console.

Last November proved to be the new dawn for the industry, with Microsoft releasing its hugely anticipated – and somewhat controversial – Xbox One console to replace its industry-leading Xbox 360. Sony followed suit, releasing its Playstation 4 console, which it hoped would reverse the company’s decline over the last decade. Nintendo aimed to steal a march on both rivals by releasing its Wii U product a year earlier.

Both the Playstation 4 and Xbox One come with radical new technologies designed to take gaming – and home media – to the next level. However, each company took a very different approach to the launch of their new console. Microsoft received derision from the gaming community when it announced it wouldn’t allow gamers to lend their games to friends and required an internet logon each time they were played – decisions that were quickly reversed. It also raised concern from people with its insistence that the Xbox One would use its Kinect motion tracking camera to monitor the room at all times, enabling it to sense when a user enters the room, and recognise the voice and physical appearance of that user.

Anand Shimpi, founder of AnandTech news and an expert on internal computer components, told the BBC in November he thought there were clear similarities between the two new consoles. “For the first time the guts of both the Xbox and PlayStation are very similar – their processor and memory hardware vary in performance but not capabilities. Gone are the days when Sony’s machine was substantially more difficult to program for than Microsoft’s. In fact, the PlayStation 4 has appreciably more graphics horsepower under its hood than the Xbox One, there’s no way around that fact.

“Both firms have licensed the same GPU (graphics processing unit) architecture, but Sony’s chip has 1152 ‘cores’ compared to Microsoft’s 768. Microsoft runs its cores at a slightly higher speed, but the maths works out to Sony having about a 40 percent peak potential graphics performance advantage.”

Shimpi added, “The real question is whether this translates into a substantially better gaming experience. Typically developers building one game for multiple platforms target the lower performing one, and may offer some additional perks to the faster one – smoother frame rates, slightly improved visuals.”

Controlling the living room
The new wave of consoles to enter the market in recent months have included features designed to amaze and astound players accustomed to relatively straightforward gaming. While online platforms are nothing new, both Microsoft and Sony have created online hubs where players can download exclusive content, play against complete strangers on the other side of the world, and access a range of additional services. No longer just about gaming, the industry has sought to diversify into new areas, with both the Playstation Network and the Xbox Live platforms allowing apps to be downloaded that include television and film streaming service Netflix, as well as email services and video messaging.

The Playstation Network has been praised recently for its openness to independent developers and flexibility, but Shimpi believes that Microsoft’s existing user base gives it an advantage here. The company still has a widely used ecosystem of services that will help it retain users. Shimpi says, “Here’s where Microsoft believes its other strengths – Xbox Live, developer relations, the Kinect sensor – will give it the advantage. Microsoft is basically counting on everything else being so good that developers would rather give it their exclusives.”

The tech market many think is likely to be revolutionised next is in the living room. With Apple rumoured to be launching a smart television set capable of doing many of the things personal computers are used for, consoles like the Playstation 4 and Xbox One are attempting to become the entertainment hub of people’s living rooms.

Apple has itself bought a company responsible for the Xbox’s Kinect motion-detecting capabilities. In November it confirmed the $360m acquisition of Israel-based firm PrimeSense, which developed key parts of the Kinect service. It is unclear what Apple plans to do with this, but it’s thought that the technology is likely to be implemented into a future smart television set. It certainly shows that there are innovative independent firms in the gaming industry waiting to be snapped up by some of the world’s leading tech companies.

Value chain
A typical value chain doesn’t necessarily apply to the video game industry, in which constant innovation means developers have to keep an eye on the latest trends. A concurrent engineering approach to developing products is employed, allowing new games to be created quickly. The development of a video game console begins with the investment layer, where funding is sought for the development and production of games. Most developers look to outside investment in order to fund their games, with leading companies like Activision and EA (see table) investing large amounts in potential new game franchises each year.

>60 million

UK population

>31 million

UK active gamers (approx.)

Once funding is received, the creative teams get to work designing the visuals and sounds for games, creating a unique style and story for the game. Leading developers like Ubisoft, maker of the popular Assassin’s Creed series, are renowned for creating distinct worlds in their games. Another, Rockstar Games, has been feted for its incredibly detailed approach to creating whole, living cities in its Grand Theft Auto series of games. The creativity of the games industry has led to many of the best writers that are traditionally found in Hollywood deciding to pen complex stories for video games, while actors are hired to give their likenesses and voices to characters.

Production is then carried out, where the necessary tools and game engines are created. Upon completion of the technical aspects of the games, distributors and publishers are brought into the equation. Some of the leading games companies, such as EA, Take-Two and Activision distribute their own games, but other firms act as the mechanism for spreading the game around the world. Japanese firm SEGA, which used to make consoles, is known for distributing many popular titles, including the Football Manager games.

The penultimate stage in the value chain is the hardware layer, which is the consoles or mobile devices that provide a platform for the games. While traditionally dominated by consoles like the Xbox and Playstation, mobile platforms are becoming increasingly prevalent, promoted mainly by both Google and Apple.

Finally, the game and platform reaches the end user, the consumer of the title and person that all companies hope will go onto promote the game among friends, buy additional content and any subsequent versions of the game. Word of mouth plays a crucial role in the industry, perhaps more so than any other. Users tend to lend their games to each other, spreading the word among the community. While Microsoft’s decision to restrict games to one user may have been justified in terms of preventing piracy and boosting sales, it also would have potentially damaged the ability for the reputation of games to spread.

Loss leaders
Many observers have speculated whether the new consoles from Microsoft and Playstation will be loss leaders, as has been the case in the past. Usually, manufacturers have taken a hit when selling new consoles because they’ve subsidised the cost. Sony is reported to have lost around $260 on each Playstation 3 console it sold, contributing to a loss of $1.2bn during 2008. This time, Sony has priced its new console in the US at a surprisingly low $399. According to reports, the components of the Playstation 4 cost a combined $332, not including packaging or a controller. Sony is attempting to capture market share, tying users into its ecosystem of services, which it hopes will make up for the losses made on the consoles.

Microsoft, on the other hand, has gone for the higher price of $499, hoping that its already considerable user base will enthusiastically buy the new machine. Marketing manager Yusuf Mehdi told GamesIndustry.biz in September that it was the company’s intention to at least break even. “The strategy will continue, which is that we’re looking to be break even, or low margin at worst, on the Xbox One, and then make money selling additional games, the Xbox Live service and other capabilities on top. And as we can cost-reduce our box, as we’ve done with the 360, we’ll do that to continue to reduce and get even more competitive with our offering.

Wooing developers
Getting developers onside to create the best games is crucial for both Microsoft and Sony. While Microsoft has been widely praised in the past for providing an open platform, Sony lost ground by complicating matters for smaller, more independent developers. Daniel Kaplan, business developer at Stockholm-based game-maker Mojang, says it remains to be seen how easy it is to develop for each platform. His company is the maker of the hugely popular Minecraft game, which has sold more than 45 million copies. He told the BBC, “Both Microsoft and Sony talk about the new platforms as indie-friendly and it will be interesting [to see] if that is the case.

“So far, for us it has been quite good but what I’m hearing from other developer friends, who are not in the same fortunate position of having had a bestselling game like Minecraft, is that there still seems to be a lot of forms to fill in to gain access to software development kits and tools.

Time taken to make $1bn

19 days

The Avengers (film)

3 days

Grand Theft Auto V (game)

Highest-grossing game of all time (incl. subscriptions):

$10bn+

World of Warcraft

The difficulty independent developers are finding is the need for two distinct development kits when designing for each platform, says Kaplan. “The idea that you need a separate development kit – a special version of the console that can be very expensive – to create games for the PS4 and Xbox One is quite bad for indies since a lot of them usually have very little cash at hand, so removing as much friction as possible would be ideal.”

He points to Google and Apple’s approach of having a standardised developer kit. “There is really no need of all of this behaviour since both Google Play and Apple’s App Store have shown that you can create open markets for all kinds of developers with the same deal for everyone.

“Giving more or less everyone the same opportunity is important for the indies. It allows their developers to focus their time on creating games and not on filling out forms describing different features or ordering developer kits for a lot of money that may not ultimately bear fruit for them anyway.”

He concludes, however, by saying that both companies are changing the way they operate and it will be interesting to see how open they become. “With that being said, both Microsoft and Sony are changing and I’m really looking forward to what will happen in the future.”

Wooing the developers for exclusive content is key for each company, and Sony’s new openness to independent developers and easy-to-use platform could give it an advantage, says Shimpi. “I suspect that’s what will happen this generation. At worst you’ll see parity between the two consoles, but at best you’ll see developers give PS4 versions of cross-platform games a slight edge. Where things get really interesting is what happens if a developer chooses to develop exclusively for the PS4 and go all out.”

There is unlikely to be a clear winner in the market, however, as both have developed consoles with distinct products. “Sony appears to have built the faster gaming machine, while Microsoft has built a system that might appeal to a broader audience and perhaps consume less power. There are strengths in both platforms – anyone hoping for a clean sweep will likely be disappointed.”

Cuba to ditch complicated dual-currency system

Posted on by Ashton Wenborn

Cuba has been undergoing a number of quiet but drastic reforms since Raul Castro assumed the presidency of the island nation from his brother, Fidel, in 2008. The latest, and perhaps most significant step towards modernising the country’s economy has been the announcement last month that Cuba would be doing away with it’s complicated dual currency system.

The arrangement has been very unpopular, and Castro has long since promised a solution, and now it seems like one might have arrived. Since 1994, the country has functioned with two currencies, one pegged to the dollar and one worth a fraction of it. The Cuban Peso (CUP) and the Convertible Cuban Peso (CUC) are both legal tender on the island, though neither are convertible in the foreign exchange markets. CUC is pegged to the dollar and most goods are valued in that currency, but the majority of people in Cuba are paid in CUP.

Restricted access
The complicated system has been used in Cuba since the collapse of the Soviet Union. Cuba had enjoyed an extremely beneficial trade agreement with the Eastern bloc, which had enabled it to bypass US embargos. So when the Soviet Union was dismantled, Cuba was left with limited access to hard currency, economically isolated and facing hardship.

Fidel was forced to legalise the dollar, reversing a decades old law that had made possession of the American currency punishable by prison. It was a momentous decision for Fidel Castro, both ideologically and practically.

[M]ost experts agree that a dual-currency system can never be anything but trouble

The legalisation of the dollar created a two tier economy that split those with access to the dollar from those that could only access the peso. State workers in particular, who were paid very little and in pesos, felt the brunt of this policy. With the dual-currency system, Fidel harboured a change in Cuba that had been exactly what he had fought against for so long; a country split by class, where a privileged minority could access luxury goods and benefit from the burgeoning tourism trade, and an underclass of state-workers who could only access the weak peso.

The CUC was brought in in 2004 to replace the dollar, but for many Cubans that was just a new name for an old problem. At the moment, the government controls almost all prices in Cuba, and companies must exchange their dollars and CUCs at official government exchanges, and neither CUCs nor CUP’s are exchangeable
outside the island.

The unification of the peso was announced by the official Communist Party newspaper Granma, which declared the move is “imperative to guarantee the re-establishment of the Cuban peso’s value and its role as money, that is as a unit of accounting, means of payment and savings.”

A historic divide
In 1994, Fidel Castro was backed into a corner and forced to accept the dollar as a viable currency or risk bankrupting his country, but most experts agree that a dual-currency system can never be anything but trouble. The issue is the exchange rate between the two currencies, which can either be left to be determined by the market, or be set by the local authority.

If the rate is market-determined, a second currency is only a way to inject liquidity into an economy. However, if the rate is set artificially and managed by an authority, the dual-currency system ceases to be dual as the overvalued currency will eventually replace the undervalued one. This is known as Gresham’s law, after Sir Thomas Gresham, a 16th century British financier who famously described the phenomenon: “Good money drives out bad money.”

The legalisation of the dollar created a two tier economy that split those with access to the dollar from those that could only access the peso

It is an ancient principle that had been predicted by Nicolaus Copernicus, and even by Greek philosopher Aristophanes at the end of the fifth century BC, before being coined by Gresham. The trouble in Cuba is that the government never allowed the more valuable currency, the dollar, the replace the undervalued currency, the peso, and in that it split the country’s economy in two.

The longer the system was allowed to exist, the more difficult the situation became to resolve, which is why currency unification has been a major goal of Raul Castro’s administration for the past few years.

At the time of the announcement the CUCs value was pegged to that of the dollar, and the CUP was worth around four cents. According to official Cuban statistics, most Cubans make around $20 a month in CUP’s. As the CUP’s are not accepted in most shops – particularly those selling sought-after imported goods – the dual currency system has long since been a major gripe for Cubans, who resent the restrictions.

“The currency unification isn’t a measure that will resolve on its own the current problems of the economy. But its adoption is vital to restoring value to the Cuban peso,” the announcement in Granma read. The announcement did include a date by which currency unification would be completed, but it has been speculated that the whole process might take over three years; the Cuban Central Bank will continue to back both currencies in the time being.

When the currencies are unified, Cuba will likely have to face up to a number of uncomfortable truths about the overall state of its economy. Many issues, such as an endemic lack of transparency and efficiency, have little or nothing to do with the dual currency system. But it will undoubtedly have the effect of improving Cuba’s credibility internationally.

The complete unification of the currencies is many months, maybe years, away from being fully achieved, but it could well be the policy that defines Raul Castro’s legacy as the reformer of Cuba

The news of the currency unification has already led to Russia and Cuba reaching an agreement to write off close to 90 percent of Cuba’s £32bn debt (acquired from the Soviet Union), putting an end to almost two decades of disagreements between the two countries. Though the agreement is still pending approval from the Duma – Russia’s Houses of Parliament – it would be a major step towards rehabilitation of the
Cuban economy.

The deal with Russia is the latest in a string of deals with other countries like China, Japan and Mexico which have helped Raul Castro re-structure Cuba’s active and commercial debt.

“The agreements with China, Japan, Mexico and Russia ease some outside financial restrictions on the Cuban economy and should facilitate trade ties with these countries,” Pavel Vidal, a former Cuban Central Bank economist now teaching at Colombia’s Javeriana University, told Reuters.

“The austerity measures adopted by the Government in 2009, and these accords to lower the foreign debt, help stabilise the island’s finances at a very important moment when a significant monetary reform over three years has begun.” Cuba’s situation is by no means unique, though.

China unified its official and swap market exchange rates in 1994, but the two currencies in Cuba are wound up much more tightly, and will thus be more difficult to fix. A major hurdle will be addressing the value of goods, which have long since been set by the government in dollars.

Though the Cuban Government has not offered details of the transition, it is likely that it will begin with some stores accepting CUPs as well as CUCs. Some state enterprises may start trading the two currencies using pre-set exchange rates. At the moment the rate stands as 25 CUPs to one CUC.

Defining Castro
In its announcement the Government has promised to make good on the peso, stating any of the inevitable devaluations before hand and giving people the opportunity to convert their holdings. It is likely that the new, unified peso will be valued at more than the CUP but less than the CUC, and for many Cubans that will represent an increase in spending power, which in turn could lead to inflation and shortages of some goods.

It is also likely that Cubans with access to that currency will meet the fall in the value of the CUC during the unification process with some resistance. Even before the announcement, rumours that a currency unification was on the horizon caused a palpable decline in the value of the CUC.

The Economist reported that big hotels in Havana have been offering to buy dollars, off the book and for above market rates, and that an underground network of currency traders is creeping up around the city. On the other hand, once the currencies are unified, Cuban state companies will be able to stop the practice of pretending that both types of pesos are the same value on their books and balance sheets. Though this practice has helped manage CUP inflation, it has also helped hide the many inefficiencies of state owned companies.

The complete unification of the currencies is many months, maybe years, away from being fully achieved, but it could well be the policy that defines Raul Castro’s legacy as the reformer of Cuba. If it was once feared that Raul would struggle to fill his brother’s shoes as president, it seems that by promoting prudent and timely economic reforms – which Fidel was so reluctant to do – the younger brother will have carved an even bigger name for himself in modern Cuban history.

Could Songdo be the world’s smartest city?

Posted on by Ashton Wenborn

Seoul, in South Korea, is one of the ‘smartest’ cities in the world; it boasts the most cutting-edge infrastructure as part of daily life. The metro is not only the most extensive subway system by length, but also boasts ultra-fast Wi-Fi. The transport network itself is meticulously timed, with arrival and departure times displayed clearly on laser panels outside stations and bus stops. But a new development 40 miles outside of the South Korean capital is so advanced that Seoul will look positively medieval by comparison. The Songdo International Business District, constructed on a new embankment on the Incheon waterfront, is a purpose-built ‘smart city’, designed for efficiency and convenience.

Songdo by numbers

$40bn

Cost of the Songdo development (to-date)

40%

Area dedicated to outdoor spaces

40miles

Outside Seoul

Building a city from scratch to fulfil a specific need is not a new concept; Canberra, Brasilia and Abuja were all built in the last 60 years as functional capital cities. But Songdo is unique, being built as an integrated hi-tech environment. Developers describe Songdo as a ‘global business hub’ and ‘home to a variety of residential and retail developments’, but at a cost of over $40bn, is Songdo just a glorified model neighbourhood?

The smart city occupies 1,500 acres of land ‘reclaimed from the Yellow Sea’, making it the largest private real estate development in history. But it’s not the geographical space that makes Songdo remarkable. The district was built as part of former President Lee Myung-bak’s drive to promote low-carbon and sustainable growth as the principal avenue for development in South Korea.

For over half a century, the country’s economy has been dependant on exports and South Korea has become known for its hi-tech industry. When the global economic crisis struck in 2007 and 2008, and foreign demand for South Korean products slumped, the government launched a stimulus package aimed at developing the country’s own infrastructure, with a particular emphasis on green investments.

Lee launched the Framework Act for Low Carbon Green Growth, a $38bn economic stimulus package, 80 percent of which was earmarked for green and sustainable investments. In 2010 the National Assembly of Korea increased the value of the Framework Act to over $83.6bn, to be invested over five years.

Songdo has been a huge part of the move towards sustainable growth. The city is a novel model – 40 percent of its area is dedicated to outdoor spaces. By comparison, Seoul and other South Korean metropolises are densely populated with few open-air areas for residents. Songdo is unique, offering city inhabitants something they have never had access to before: green space for leisure. The district has been heavily promoting its 16 miles of bicycle lanes, its central park, and its waterways, which are based on New York City’s Central Park and Venice’s canals, respectively.

Business and leisure
While South Koreans might not have been wooed by the district’s state-of-the-art urban infrastructure, it has certainly been a selling point for international investors. Songdo is the first district in Korea to receive Leadership in Energy and Environmental Design (LEED) accreditation, and the largest project outside the US to be included in the LEED Neighbourhood Development Pilot Plan.

This means the entire development adheres to the strictest environmental standards for energy consumption and waste. According to developers, over $10bn was invested in the design and build of the 100 main buildings in the district, including the Northeast Asia Trade Tower, which will be Korea’s “tallest building and most advanced corporate centre,” according to Songdo’s promotional material.

In many ways Songdo is a living organism. The city’s infrastructure contains sensors that monitor and regulate everything from temperature to energy consumption and traffic

Because the district was built from scratch, it has given developers the opportunity to invest heavily in technologies that have yet to debut in conventional cities. Take Songdo’s smart rubbish disposal system, a futuristic bit of hardware that spans the whole complex. No rubbish trucks will ever roam the leafy streets of Songdo, instead all household and office waste is sucked through a network of underground tubes to vast sorting facilities where it is all processed, deodorised and treated. The aim is to eventually convert all this sorted and treated waste into energy for the community, but the system is not yet fully operational.

In many ways Songdo is a living organism. The city’s infrastructure contains sensors that monitor and regulate everything from temperature to energy consumption and traffic. Essentially, the city can interact with residents on a one-to-one basis. Smart grids and meters are already fairly common in Europe and the US, but the technology in Songdo is more pervasive than anything in the West. Because it was designed to this specification and not converted later like most ‘smart cities’ in the rest of the world, Songdo is completely geared towards sustainability; even the water pipes are designed to stop clean water, suitable for human consumption, being used in showers and toilets, and all of the embankment’s water goes through a sophisticated recycling system.

Everything in Songdo might have been meticulously designed, but there is one key element that has not gone according to plan. Since it’s official launch in 2009, the sustainable district remains woefully under-occupied. Despite it’s enviable location close to Seoul and it’s international airport – “just 15 minutes driving time from Incheon International Airport and three and a half hours flying time to a third of the world’s population and regional markets such as China, Russia and Japan,” reads the brochure – less than 20 percent of the commercial space in the district has been occupied.

Ghost town
Pre-planned cities have been around for centuries, and they always face the same challenges: how to attract residents and businesses to a new, untested, and unpopulated area. China has faced this problem as the building boom of the early 2000s encouraged developers to invest in new cities and shopping districts that ultimately failed to attract buyers. Songdo is very well connected, and the business facilities are second to none, but attracting inhabitants may still be a slower process than developers hoped for.

In order to speed up the population process, developers have been investing heavily in top-quality international education centres. The hope is to entice a diverse international community. Before the end of 2014, four universities will inaugurate campuses in the business district, including the first overseas university to open a campus branch in Korea, the State University of New York, Stony Brook, as well as George Mason University and the University of Utah, all sponsored at least in part by the Ministry of Knowledge Economy. There is also an enormous, exclusive international school catering to children from kindergarten to high school.

Songdo is the city of the future; all that is missing are the residents

And while Songdo is not yet a hit with the international business community, young professionals have flocked to its leafy boulevards looking for a better lifestyle than the hectic streets of Seoul can offer. The district offers over 22,500 new housing units built to different specifications – from garden houses to sleek high-rises – all connected to the district’s energy, water and waste facilities.

But businesses may soon follow, attracted by the skilled workforce provided by the universities, the sustainability credentials and the tax breaks. “It’s the occupants who make a city,” Jonathan Thorpe, CIO of Gale International, the American developer behind Songdo, told the BBC. “You’re trying to create a diversity and a vitality that organic development creates, in and of itself,” he explained, “so it’s a challenge to try and replicate that in a masterplan setting. At the same time, with a masterplan you have the ability to size the infrastructure to make sure the city works – now and in 50 years’ time.”

And the brains behind Songdo have thought carefully about financial incentives for businesses. Companies relocating to the district will have access to tax reductions, estate support and subsidies. No property tax will be levied for 10 years, followed by three years where businesses need only pay 50 percent of taxes due; small- and medium-sized companies will also be considered for rent reduction; and employees of companies with over 30 percent international investment will be able to claim a variety of perks – from location subsidies to promotion results compensation.

For South Korea, Songdo is more than a hi-tech business district, but a template for future developments. It is the prototype for the green investment the government wants to build the economy on in the future. It is all designed to appeal to foreign investors, but its manicured gardens and glassy towers also give it an unmistakable air of luxury. This is the aspirational South Korea where everyone is wealthy and your mobile phone controls the temperature in your apartment. Songdo is the city of the future; all that is missing are the residents.

Mexico’s tax reforms: opportunities and obstacles

Posted on by Ashton Wenborn

Congregated along Mexico’s border with America are hundreds of factories known as maquiladoras, or assembly plants. Mostly foreign and in particular American-owned, they export their products under long-standing, favourable tax arrangements that have contributed greatly to Mexico’s economy.

According to Mexican research institute Colegio de la Frontera Norte, the maquiladoras account for 60 percent of all jobs provided along the frontier states. And in Mexico as a whole, the factories’ contribution to the economy is second only to that of oil giant Pemex, easily the biggest business in the country. The more than 5,000 maquiladoras in Mexico provide 1.9 million jobs, estimates the Congressional Research Office.

As Richard Rubin, a local businessman associated with the factories, told the Christian Science Monitor, “Mexico would be crazy to destroy the maquila [assembly] industry.”

Stormy passage
But that may be an unwanted consequence of a tax package that was voted through congress in late 2013 after a stormy passage that saw the opposition walk out in protest because, it warned, the measures would damage the economy. The wide-ranging changes affect most sectors, from finance and the stock market to retailers and manufacturing. The financial sector, for example, will be hit by new rules on write-offs for bad debt.

Withholding taxes

Most countries apply withholding tax to dividends paid on securities, such as shares held by non-residents. In most years they collect around $3.7bn – but most of these nations also give it back under bilateral arrangements known as income tax treaties negotiated between governments.

The right to make a claim – or rather, a reclaim – arises because the rate applied under these treaties is generally lower than the default withholding rate, normally around 15 percent, fixed by most foreign governments. Some countries charge more, such as Brazil and India, who withhold 25 percent. The five-star location for foreign investors is the UK, which allows 100 percent reclaims on investments made in British companies.

But things are not always how they seem. Differing national regulations can result in higher or lower reclaims than expected. For instance, under Canada’s tax treaty with Israel, the rate is 15 percent, while withholding tax on divvies issued by Israeli companies is 20 percent. So Canadian investors in Israeli companies should get back five percent? Wrong. They generally recover 11 percent because the actual rate works out at nine percent. This is one reason why foreign investors in Mexico should work through international accountants.

From January, banks are permitted to deduct these for tax purposes only after they are legally defined as uncollectable. And that can happen only when the government, in the form of the National Banking and Securities Commission, issues a specific authorisation.

In an attempt to increase the taxable income available to it, the government has also dragged insurance companies into the net. Until now, these firms have been allowed to create and deduct so-called technical reserves accumulated for risk, actuarial and other purposes, as Ernst & Young points out. But henceforth deductions will be accepted only for actual and verifiable losses.

Of huge importance to so-called ‘bird-in-the-hand’ investors are new measures on withholding taxes. These comprise a 10 percent tax on dividend payments and distribution of profits by Mexican companies. Some consultants have pointed out that, because the distributing company will henceforth be defined as the taxpayer, this could effectively sideline cross-border tax treaties that normally allow shareholders to claim deductions.

And accountancy firms are still trying to figure out the implications of the regulations on payments to related parties – but it will certainly hit them in the wallet. “This is a very broad rule that would appear to require that the taxable base of a non-resident recipient of income from Mexico [must] be calculated based on Mexican rules,” suggests Ernst & Young. Loopholes will be hard to find.

And finally, there will be a tax on stock market gains. The current exemption on the sale of publicly traded shares will be axed and replaced with a 10 percent impost. Whatever the full implications turn out to be, the combined rules are certain to make ‘bird in the hand’ investors – those who prefer to take their gains in regular dividends rather than wait for capital gains – think twice about putting their money into big listed companies.

Changing rates
Meantime, the maquiladoras are weighing their options. All of them will lose some of the preferential tax breaks that first brought them here in the 60s. First, they will have to pay a new 16 percent sales tax on all goods imported for assembly prior to export.

Although the tax, which is designed to thwart tax cheats, is reimbursable, it will certainly have an effect on cash flow. Second, retail sales tax – long fixed at 11 percent to attract business from Arizona, Texas, New Mexico and other US border states – will increase to 16 percent in line with the rest of the country. And for good measure they will also be hit by a Mexico-wide hike in corporate tax from 17.5 percent to 30 percent.

Fortunately dropped from the package were plans for a second import tax on the factories. However, some factory owners are still threatening to shut down their businesses and go elsewhere.

The country’s tax system is chronically top-heavy

It is not hard to understand President Enrique Pena Nieto’s dilemma. His most pressing economic problem is Mexico’s low tax take, in fact the lowest by some margin of all 34 OECD member countries. The total tax revenues at his disposal amount to just 19 percent of GDP. By comparison, the ratio for Greece, notorious for tax evasion, stands at 31 percent. As the OECD points out, the country needs to widen its tax base to provide the health, infrastructure and social projects considered essential to improve the quality of life of Mexico’s 120 million people.

But the reforms will fall far short, says Mexico-watchers who say the tax take has to increase by three or four percent to achieve what is needed. “Representing barely a one percent additional share of fiscal revenue, [the package] will be insufficient to begin the process of weaning the government off Pemex’s revenues”, points out Andres Rozental of American think-tank the Brookings Institution.

The problem with Pemex
The country’s tax system is chronically top-heavy. Governments have relied for years on Pemex, the state-owned oil giant with 2012 revenues of $128.7bn, to keep the country’s accounts topped up. Indeed, Mexico has shamelessly milked the energy company’s profits. As the University of Pennsylvania’s Wharton business school points out, “Pemex pays out more than 60 percent of its revenues in royalties and taxes to the government, providing some 30 percent of total tax revenues”.

No wonder the company loses money despite its vast revenues. Pemex forks out four times as much in taxes as it invests, adds EMPRA, a Mexico City-based consultancy specialising in emerging markets.

While all three main political parties agree something must change, nothing will happen overnight in what is a highly political issue

It could be though that these reforms are tackling Mexico’s tax problems the wrong way round, say economists. Take, for example, the underground economy. Like other countries in the region, Mexico has a high level of informal labour that falls outside the tax net. If the government were to find ways of gathering these wages, the tax take would increase substantially.

Then there is Pemex itself. An infamously poor performer among international energy giants, it produces less oil now than it did a decade ago. Projected production for 2013 is approximately 2.5 million barrels, compared with 3.4 million in 2004. Meantime, other oil-rich countries such as Colombia and Brazil have doubled and tripled production. The problem? “Mexico has one of the world’s most closed oil and gas sectors,” explains Duncan Wood, Mexico specialist at Washington DC-based research institute the Woodrow Wilson Centre.

Oil workers in Mexico
Derrick hands working on a Pemex exploration oil rig. Mexico has long been reliant on the nationalised oil giant for income

While all three main political parties agree something must change, nothing will happen overnight in what is a highly political issue. Mexicans see Pemex as an almost untouchable national asset whose nationalisation in 1938 – the year foreign oil companies were kicked out – marked a turning point in the nation’s sovereignty. “The Mexican government wants to maintain control of the commercialisation of the oil for political reasons,” adds Wood.

The overall package barely merits a pass from most consultants. “The main fault is that it does almost nothing to widen the taxpayer base,” concludes the Brookings Institute’s Andrés Rozental, pointing out that it targets a capital middle class that already pays taxes and corporations that will only pass their costs on to consumers. Once again it seems Mexico will fail to amass the taxes due a country of its size.

Economic effectiveness: how an interim manager can help

Posted on by Ashton Wenborn

According to certain economic indicators, Europe could be creeping out of recession. Throughout the continent the media has become more confident and entrepreneurs speak more bullishly about investment.

More importantly, the money to finance such investment is beginning to crawl its way towards economically worthwhile projects from the vaults of lenders where it has festered for years.

Things are still slow compared to the good old days, but we are comforted by the knowledge that, although crashes come overnight, recovery creeps back slowly. It’s a matter of confidence. If recovery isn’t officially here yet, we are now talking ourselves into it, and it will be here soon.

Preparing for the unknown
At the outset of the crisis I offered my thoughts as a professional in corporate troubleshooting and interim management, to companies facing the onset of a world economic slowdown.

These thoughts focused on the critical and difficult actions companies needed to take: selling off or closing down low margin businesses, slimming the profit and loss account to hack out those “nice to have” expenses that had built up and were easily ignored during the good times, and concentrating on core activities in which the company had a comparative advantage over others.

In the end, the key differentiator of many of the companies that successfully rode out the recession was the ability to re-engineer their strategic outlook with the key purpose of surviving, and, if possible, protecting profitability.

[T]he key differentiator of many of the companies that successfully rode out the recession was the ability to re-engineer their strategic outlook with the key purpose of surviving

For many it was a distant philosophy from the one of perpetually enriching shareholder value through growth and improved profitability, which had formed the conventional wisdom before the crisis.

As companies now consider the prospect of an improving economic environment, that drive for increasing shareholder value is back on the agenda. If it never left the agenda, at least now it seems an achievable goal.

Managers are looking at strategic adjustments, acquisitions, and entering new markets with existing and new products. The “in limbo” years of survival are over and the return of focus on enhancing shareholder value is back.

Management is being challenged to make the most of the new order in the knowledge that the first mover will often gain the advantage. There are, however, three key problems many companies will encounter in getting to the starting blocks to manage these complex new challenges.

Companies may have people who are competent at the tasks required, but they are usually busy on their day-to-day jobs and are not able to apply themselves diligently to the specific tasks that require undivided attention.

Some companies struggle where a number may have people who know what needs to be done, but have not had prior experience in that area. This makes implementation slower, riskier and a successful outcome less certain.

Over time, companies may have developed accepted wisdoms whose justification is dubious, and whose authority is rarely challenged. It is difficult to dispel these from within.

Outsourcing professional assistance
This is where the Interim Manager can come in and add a new dimension, as this person is not an ordinary temporary worker used to fill a casual vacancy. It is someone who can become central to a company’s push for innovation, growth and investment; providing management, for a limited period, with the oxygen needed to cope with major new projects and change, while allowing them to carry on running the business.

They are professionals who dedicate their career to the provision of relevant services to business and normally come in at middle to senior management level. Interim Managers are widely available nowadays, and can be located through networks as well as through executive search agencies with dedicated departments.

A recent assignment

Cross-border acquisitions and mergers are always complex. Unfamiliarity with a foreign business environment, the potential for misunderstandings, and simply missing culturally different nuances, explain why so many internationally negotiated deals are never as attractive as first envisaged.

I was recently appointed by a group to work, initially, alongside an overstretched CFO in the process of assessing an overseas company for acquisition. The work culminated in my taking full responsibility for managing the business case analysis, the financial, commercial and legal due diligence, and negotiating the purchase price and key contractual terms and conditions.

The acquisition went ahead successfully at a price and with prospects that were generally considered to be beneficial to the buyer. My client’s knowledge that I had successfully managed such projects previously, that I had international negotiation experience and spoke the language of the vendors, allowed them to entrust the project largely to me.

The overstretched CFO ended up being less stretched, and I am now being asked to assist in certain aspects of the integration process into the mother group. One task often leads to another.

Before a company decides to hire an Interim Manager, it will have assessed the value of the additional expense of bringing such an individual onto the team. Interim Managers will tend to cost more than an equivalent level employee, although the cost will be much more flexible.

The company will also need to overcome the risk of a bad cultural fit, so that the manager can integrate and carry existing employees with him or her to a successful completion of the project.

This will require a series of meetings or interviews with different candidates, rather as in the hire of a full-time employee. So what are the key traits of an Interim Manager and how can he or she help companies avert the problems referred to above? The Interim Manager is a business leader, usually with considerable experience in corporate environments, who appreciates the goals of top management and is often able to work alongside them and manage large and complex projects.

They have expertise; can be left to their own devices and do not need to be supervised closely. This frees up company management to get on with running the company, and may avoid the need to hire an eventually more expensive long-term employee.

The Interim Manager is usually asked to carry out tasks they have dealt with before, with no requirement for on-the-job learning and has experience of navigating the pitfalls that disrupt or delay so many projects taken on by inexperienced teams.

It is key that they are independent and come to the job with an open disposition, an absence of pre-conceptions, history, allegiances, favours owed or owing, and are able to search for long-term alliances.

These traits allow the Interim Manager to avoid the politics and “treading on eggshells” that often mire organisations and prevent the right decisions being taken, for fear of going against a fashion or longstanding wisdoms (the so-called “sacred cows”).

Connecting for greater fluidity
Additional to these traits, there is an aspect of using an Interim Manager that many overlook and which transcends all others in the quest for effectiveness. It permits a level of fluidity to decision-making and action that is often difficult to achieve within companies.

The Interim Manager is usually hired with one particular objective or task in mind and he or she will be utterly focused on ensuring its successful completion. It is this last aspect, when combined with the wealth of experience and independence offered, that will make the use of Interim Managers so important in tackling strategically important projects when economic recovery arrives.

It is a certainty that the recovery will come, just as, proverbially, death and taxation cannot be avoided. Companies should already be thinking about aligning resources and selecting their external advisors.

The advice of an Interim Manager can even help companies manage their taxation. Maybe not avoid it, but certainly manage it better, which is worth considering.