Month: February 2014

Can the ECB’s latest stress tests prevent another round of banking failures? | Video

Posted on by Ashton Wenborn

This year, the European Central Bank will conduct stress tests in an attempt to prevent against future banking failures. Gerard Lyons, Chief Economic Advisor for the Mayor of London, discusses whether this year’s stress tests are doomed to fail, whether lack of transparency threatens global recovery, and if being exempt from the tests gives London an advantage

Europe’s banking system is headed for an overhaul, with the European Central Bank set to supervise the largest banks in the Eurozone later this year. The move is aimed at preventing another round of banking failures that were said to contribute to the global financial crisis. I’ve come to speak to Gerard Lyons, Chief Economic Advisor for the Mayor of London, to see how the ECB supervision and stress test will affect the recovering banking sector.

World Finance: Well Gerard, the ECB will be conducting stress tests to gauge how the banks would fare if economic conditions deteriorated. Do you think the ECB should step in, or should there perhaps be greater demands made by shareholders?

Gerard Lyons: This whole process I think is a real positive development, a step in the right direction, not just in terms of Europe, but in terms of the global economy. The financial crisis was in many respects a banking crisis, and it became global, so there are many different aspects to that banking crisis that are being addressed and some that still need to be addressed. So what was seen here is the European Central Bank really addressing the issue head on.

This whole process I think is a real positive development

World Finance: How will these tests differ from previous ones, as Europe’s stress tests in 2010 and 2011 were said to have failed on all fronts?

Gerard Lyons: We have to bear in mind here that the European and indeed the world economy was in a very different shape a couple of years ago. The good news is that the economies are turning a corner, policy is being seen to work. The European Central Bank in terms of Europe I think has done an incredibly good job to basically prevent the self-feeding downward spiral that we saw a few years ago and to actually turn the European economy around. There are still problems, as the IMF pointed last week, in terms of demand and inflationary risks, but in terms of the banking sector itself this stress test is different, because there’s really two parts to it. There’s the first part that we had before, the actual stress test, how would the banks perform under different adverse economic scenarios. But the difference this time, the second part, is the asset quality review, the ability to actually see what the assets are worth.

World Finance: Well Europe’s economy depends on banks for credit much more than that of the States for example, making strong balance sheets vital for the banking system. Do you think there is enough transparency when it comes to balance sheets in Europe?

Gerard Lyons: The capital markets play a far bigger role in the States compared to Europe, and indeed one of the ongoing issues in recent years is whether Europe could benefit from moving more towards that US capital markets approach. But in terms of transparency, I personally don’t see an issue here. I think the real issue is not only the state of the European economy, and included within that the UK economy, but also the future role and the financial role in particular the banking sector plays.

[I]n terms of transparency, I personally don’t see an issue here

World Finance: Well as you just said, European bank tests are different than those applied in the United States, where do you stand on the argument that universal standards should be put in place?

Gerard Lyons: As we saw in the crisis, to coin the phrase of the former governor of the Bank of England, in life banks are international, in death banks became national. It was the taxpayer, the domestic economy shall we say, that became the backstop for the banks, not just in Britain but in terms of other countries. So it’s important from a domestic perspective that individual taxpayers, people, businesses, and policymakers are confident about the strength and the resilience of their own banking sector. But more particularly, in reference to your question, it was a global crisis, and we saw that banks were international. Therefore, ideally we want to have a global response.

World Finance: Obviously the UK is not part of the Eurozone, what does the UK have in place that’s similar to the ECB stress tests?

Gerard Lyons: The Bank of England put out a discussion paper at the end of last year about the whole stress test issue, and they were taking responses. The idea is to have an annual concurrent stress testing here in the UK, but given that we have a very strong financial regulatory environment in place, we’ve had big changes put in place here in Britain in the last few years, very much highlighted at The Bank of England. We now have a financial policy committee, we already had different institutional frameworks in place, with the same aim to make the financial sector resilient, and indeed as transparent as possible. But further annual stress tests look likely I would argue, or suggest, here in the UK.

World Finance: And will not being part of the ECB stress test give London, as a financial capital, an advantage over the rest of Europe?

Gerard Lyons: The UK being outside the Euro has led to this issue in the last couple of years about the Eurozone versus the non-Eurozone. But those challenges I think have been addressed in the last couple of months, and so London is Europe’s financial sector, it’s important that the UK in my view stays part of the EU, but we clearly in the UK will not join the Euro, so that relationship that seems to be working well at the moment between Eurozone and non-Eurozone members needs to work well in the future as well.

I think the key thing is…to make sure that the recovery continues to gather momentum

World Finance: Well if the perception of EU banks is weaker following the test, how will it affect Europe’s competitiveness on the world stage, and will this have a knock-on effect for the UK banking sector?

Gerard Lyons: I don’t think it’s about just the banking or financial sector, I think it’s about the economy overall, and the world economy is changing quite significantly. The world economy has grown pretty strongly in the last few years, we now have multi-speeds in terms of the speeds at which different countries are growing. Some of the emerging economies are slowing down, the US economy is picking up speed, the UK and European economies are also picking up speed at different rates. So I think the key thing is, from a policy perspective, to make sure that the recovery continues to gather momentum.

World Finance: Gerard, thank you. 

Gerard Lyons: Thank you.

KB Kookmin Bank: committed to good corporate governance in South Korea

Posted on by Ashton Wenborn

Corporate governance is important to non-financial corporates. But it is far more important in the financial services industry (FSI), as poor governance may disturb the stability of the overall economy of a nation, as well as its financial system. In particular, an efficient allocation of financial wherewithal through banks is a task of national significance that determines the competitive strength of a nation and the wealth of its people. In that regard, to ensure an equitable resources allocation, most countries restrain industrial capital from dominating the banking sector.

In the early 1980s, as part of the privatisation of the banking sector, the South Korean government introduced a policy that limited a single investor’s shareholding in banks lest any large company should use a bank as its own till. There were many changes to policy since then, and eventually the Banking Act limited the investment ceiling in a nationwide bank to 10 percent. This led to a dispersed share ownership which, in turn, gave rise to the absence of controlling shareholders. Thus, the role of the board of directors in supervising a company on behalf of its shareholders has become far more important in the FSI.

Corporate governance in South Korea
It was not until the Asian financial crisis in 1997, when some badly managed financial institutions with poor corporate governance went bankrupt, that a consensus was reached on the need to improve managerial transparency and the efficiency of the Korean FSI.

The effort to improve the corporate governance of the FSI is one of the buzz topics in South Korea

Since the crisis, corporate governance in Korea has improved a great deal in terms of its institutional framework. Alongside the release of the OECD’s Principles of Corporate Governance in 1999, Korea announced its own ‘Corporate Governance Standards’ that prescribed “improved rights of minority shareholders”, “bigger proportion of outside directors in the board”, “stronger independence of board”, “tighter disclosure”, and so on. In 2000, the “outside director requirements” were made mandatory.

In institutional terms, FSI boards began to be operated around outside directors. At the initial stage, however, some outside directors were not up to providing checks against and presiding over banks’ executive teams, as they lacked technical knowledge in bank management. As more sessions of orientation and education are given to outside directors, coupled with tightened qualification criteria, the original idea of “checks and balances” will gradually be satisfied over time.

Another issue concerns the independence of outside directors. This has already been addressed to some extent, as any element that might affect outside directors’ independence has been included in disqualifying criteria. Furthermore, their independence will be reinforced when the publication of corporate governance reports is made obligatory in the future.

The effort to improve the corporate governance of the FSI is one of the buzz topics in South Korea. The Financial Services Commission (FSC) is in the process of legislating on corporate governance for financial companies. The soon-to-be law sets out the basic principles in bare minimum with respect to corporate governance to take into account diversity and flexibility at individual company level. If passed, this law will make it mandatory for financial companies to disclose CEO appointment processes and publish annual corporate governance reports.

Corporate governance disclosure is sure to improve board operation, as it requires companies to make specific descriptions of the activities engaged in by the board to increase enterprise value. It also recommends the setup of the executive committee to ensure managerial transparency by requiring financial companies to take minutes during their major decisions, comparable to those of board meetings.

Besides, the law propounds bigger roles for the audit committee and improved rights for minority shareholders through the adoption of rights of shareholder’s proposal and less stringent requirements for filing class action suits. All these components clearly show that corporate governance in the Korean FSI has made great strides, not only in form but also in substance.

Leading the industry
KB Kookmin Bank is the largest affiliate of KB Financial Group (KBFG), which was established in September 2008 to cope with the changes in the financial climate, such as capital market growth and the increased need for integrated financial services. KBFG comprises 10 domestic subsidiaries and 16 overseas networks.

KB Kookmin Bank

21,600

Staff

27.42m

Customers (as of March 2013)

1,190

Sales outlets

$252bn

Assets (as of June 2013)

KB Kookmin Bank, a combination of two former state-owned banks that specialised in retail finances and home mortgage respectively in the 1960s, has grown into Korea’s leading bank. It has maintained a commanding lead in retail banking, which is a result of the merger of former Kookmin Bank and Housing and Commercial Bank, which had contributed immensely to the spectacular development of the Korean economy.

The remarkable feat of having been ranked first in the National Brand Competitiveness Index for the 10th consecutive year and in the Korean Industry Brand Power for the 15th consecutive year (both compiled by two different brand research firms) attests to the fact that KB Kookmin Bank, with its staff of 21,600, is leading the pack in brand power. The sheer size of its customer base also makes it a leading bank in Korea. As of the end of March 2013, 27.42 million customers, more than half of the Korean population, are banking with KB Kookmin Bank, which boasts of approx. 1,190 sales outlets and the biggest asset size in the country at $252bn (as of June 2013).

KB Kookmin Bank has the largest market share in deposit-taking and retail lending, and has developed a commanding lead in fee incomes from investment funds, bancassurance and trust products. Its strength is not confined only to retail banking. Trade Finance awarded KB Kookmin Bank an honour by selecting it as Korea’s Best Trade Finance Bank for three years running. It has also had the biggest market share of custody business for the past 10 years.

KB Kookmin Bank proved itself as the preferred bank of the Korean people by becoming the first Korean financial institution ever to have obtained the top position for eight consecutive years in the National Customer Satisfaction Index co-developed by Korean Productivity Centre and the US National Quality Research Centre of Michigan University.

Balance and appraisal
KB Kookmin Bank’s board of directors comprises a total of 10 members, six of whom are based outside the company. Its outside directors are specialists in the areas of economy, business management, law, etc., and are independent from either KB Kookmin Bank or its shareholders. To ensure transparent board of director activities, outside directors are subject to self-appraisal, peer and upward appraisal annually and the board of directors also makes a self-assessment of its activities every year.

KB Kookmin Bank has also separated the CEO post from the chairmanship, thereby reinforcing the independence of the board. Furthermore, it caps the tenure of outside directors at five years, even though the Banking Act does not prescribe the tenure of outside directors, on the supposition that long directorship may mar the independence of outside directors.

For the sake of efficient director operations, it commissions outside educational institutions such as KIOD (Korea Institute of Directors) to administer education to outside directors in addition to orientations given to them upon appointment. Workshops are held twice a year where directors can exchange views on management issues with the executive team.

A new breed of Korean banking
Good corporate governance contributes to the long-term and stable growth of a company and helps build mutual trust between the company and its shareholders and for that matter between the company and its customers. In order to support corporate governance in a company, a consistent culture must be embedded across the organisation.

In that sense, Mr Lee Kun-Ho, President and CEO of KB Kookmin Bank, upon his inauguration referred to a “great KB Kookmin Bank” as his management vision, “maximisation of value for customers” as his management target, and adopted “banking with story” as the bank’s methodology for realising his vision and targets.

‘Story’ here signifies the depth of customer relationship formed through interactive communication with customers. ‘Banking with story’ means providing products and services customised to its customers in a law-abiding and ethical manner based on a proper understanding of and long-term trusting relationship with its customers.

The idea is to go beyond the mere numerical information gleaned from a customer relationship management system to gain a broader and more in-depth understanding of customer needs by engaging in close communication with them. The very core of KB Kookmin Bank’s ‘banking with story’ is to have branch staff think how they can help customers achieve financial success instead of thinking how much they can make by foisting more lucrative products on them.

Instead of settling for just profit maximisation, KB Kookmin Bank is establishing robust corporate governance at its highest level, while introducing ‘banking with story’ to lay the foundation for achieving its management targets. KB Kookmin Bank is working to help build public confidence in the banking industry by inducing it to compete in terms of value proposition and to provide a more satisfying banking experience to customers.

Philippine economy shows resilience after Typhoon Haiyan

Posted on by Ashton Wenborn

Despite significant damage to infrastructure and agriculture at the hands of Typhoon Haiyan, one of the deadliest storms in history, the Philippine economy is expected to continue growing. In November last year, Typhoon Haiyan killed 6,100 people, displaced 4.1 million and damaged 1.14 million homes. The short-term effects of Haiyan are impossible to ignore. Economic Planning Secretary Arsenio Balisacan estimated that the typhoon could knock as much as 0.8 percent off the already depressed GDP, significantly slowing growth in the fourth quarter of 2013.

Furthermore, the currency reached its lowest point since 2010 at 45.25 pesos to $1 in January. Yet these impediments bear little importance in the longer term. Looking at the broader economic trajectory, the Philippine economy has continued to grow. In 2013 alone, its GDP growth rate stood at 7.4 percent, compared to 6.7 percent in 2012. The country’s economic growth rate has remained at a seven percent average since the third quarter of 2012, making it the second fastest-growing economy in Asia behind only China. Moreover, the Centre for Economics and Business Research forecast predicts that the country’s economy “will rise gradually from 42nd position in 2012 to 28th in 2028”.

In the months leading up to Haiyan, the Philippines suffered a series of other setbacks, including a 7.2-magnitude earthquake and political confrontation between Muslim rebels and government forces. Nevertheless, it has started the year strong, moving up eight places on the 2014 Index of Economic Freedom to 89th. Economic forecasts also remained positive, predicting growth of seven percent in 2013 and 6.7 percent in 2014.

Owing to the storm, however, the World Bank lowered its 2013 and 2014 forecasts to 6.9 and 6.5 percent respectively. The typhoon has marginally lowered these estimates for the time being, the reconstruction following the devastation is expected to boost the country’s economy in as early as 2015. Regardless of shaky economic forecasts for 2014, predictions for the country’s long-term economic success remain enviable.

Impacts on the larger and local scales
Although central areas of the Philippines have suffered catastrophic damage at the hands of Haiyan, economists believe that the financial impacts will be minimal. “Without doubt, the typhoon will have a negative impact on the country’s economic growth, but as callous as it sounds, the impact will probably not be all that big,” said Global Intelligence Alliance Managing Director, Aleksi Grym.

Despite the fact that many areas of the country were reduced to rubble, the economy’s strong structure remains intact

“The long-term outlook for the economy remains more or less unchanged. Investments into emerging markets like the Philippines are made with very long time-horizons in mind, and the risks, whether coming from natural disasters, political stability, or other sources, are more or less understood.”

Despite the fact that many areas of the country were reduced to rubble, the economy’s strong structure remains intact. For decades, the Philippines was dismissed as having little to no economic potential, yet under the governance of President Benigno Aquino III, the country has increased spending, decreased deficits and improved political administration, and emerged as a favourite destination for foreign investment.

The future of the Philippines still seems bright. Analysts say that these natural disasters could be an economic blessing in disguise as efforts to rebuild resilient infrastructure is a long-term investment could ultimately boost the regions hit the hardest by the typhoon, as well as the GDP.

Speaking to foreign correspondents in the wake of Haiyan, the governor of the Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), Amando Tetangco, said “as many analysts and other government officials have said, the economic impact is expected to be mild.”

He then continued to say that Haiyan could provide greater opportunity for government spending while also increasing remittances from Filipino workers abroad – already a significant source of income for the Philippine economy. With greater financial aid from family abroad, consumer spending is likely to increase. The government is injecting funds into the economy through relief and reconstruction. It is expected that Haiyan will not have a significant impact on inflation in the long-term, however, today limited supply has cranked up prices of even simple products; an egg, for example, costs twice as much as it did prior to the storm.

A vendor is reflected in the mirror of a motorcycle in Manila, Philippines. Shop owners are taking to the streets to continue commerce
A vendor is reflected in the mirror of a motorcycle in Manila, Philippines. Shop owners are taking to the streets to continue commerce

Additionally, the country’s changing demographic shows great economic promise. Previously, the Philippines had a large non-working population. With one dependent for every working-age Filipino, the country struggled.

“From 2013 to 2050, on average, there should be two working-age Filipinos for every dependent,” HSBC Asian economist Trinh Nguyen wrote in a report published at the end of 2013. “This should give the country a chance to significantly save and invest.”

Concern was expressed not for the economy but for the people affected by the typhoon. According to the United Nations’ Office for the Coordination of Humanitarian Affairs, 74 percent of fisherman and 77 percent of farmers lost their primary source of income.

Impact of Typhoon Haiyan

6,100

People died

4.1m

People displaced

1.1m

Crops destroyed

Haiyan caused approximately $700m worth of damage to infrastructure and agriculture, while obliterating more than half a million homes. The typhoon has had more acute implications for local business, with not only people’s houses being washed away, but also their livelihood. Many people who lost their income and have resorted to selling produce, in particular fruits, on the street.

Relocating – or staying put – has also become a business decision.

“More than 90 percent of the city has cleared out now, the people around are all journalists, aid workers, people from other places trying to get relief handouts, because it is easier in Tacloban. All the businessmen are gone,” Ronnie Ramirez told reporters at the Wall Street Journal.

Ramirez previously owned a successful computer sales and repair business, and despite suffering heavy financial losses, he believes that by staying put he stands to gain more in the future.

“People are coming back, I guarantee and when they do, they will realise it is great to do business here—we need everything, from power, to construction, baked goods and fruits.”

Before returning to his technology business, Ramirez sustains himself – and his 40 employees – by selling leafy greens and red chillies on the street.

Natural disasters like Haiyan test multinational corporations’ relationships with local communities such as these, which in turn can strengthen or weaken big businesses’ image, explains Grym. In the Philippines, most large multinationals have “provided financial aid and actively participated in the recovery effort”.

Commodities trading
“Reconstruction and disaster recovery usually affects the trade balance of a country in a negative way, as the country requires more imports,” said Grym referring to the typhoon’s impact on trade. The Philippine Stock Exchange (PSE) – the country’s sole market institution – has held plans for commodities trading until ample infrastructure is built, focusing instead on deepening the capital market.

“I think right now that particular [commodities trading] project is put a bit at the backburner,” said PSE president and CEO, Hans Sicat. “We will make sure we have the full platform and infrastructure. Then it might be easier at that point to look at commodities.”

The effects of Haiyan have significant implications for agriculture output. The super typhoon damaged approximately 600,000 hectares of agricultural land, while destroying an estimated 1.1 million tonnes of crops, previous employee of the Department of Agriculture Arsenio Balisacan told the Wall Street Journal. The agricultural region affected by the storm produces commodities such as rice, sugarcane and coconuts, accounting for 12.7 percent of the Philippine GDP. The rice subsector alone suffered $53m worth of damage.

In 2008, the Philippines were the world’s biggest importer of rice, buying over two million tonnes from abroad. Investing in rice seeds and irrigation, the country had hoped to achieve self-sufficiency, but in light of the typhoon’s recent damage this dream has been put further out of reach. It would require 19.03 million tonnes of rice to become self-reliant, but being particularly prone to natural disasters, it is unlikely that it will achieve this goal as soon as originally expected.

While fruit has become widely accessible since the storm hit, rice remains somewhat of a rarity. “There was significant damage to rice stock here. Rice in the warehouses has been damaged and [is] wet,” a spokeswoman for the United Nations’ World Food Program, Silke Buhr, told the Wall Street Journal.

The Food and Agriculture Organisation of the United Nations (FAO) estimates that the Philippines will need to import approximately 1.2 million tonnes of rice, 20 percent more than it did in 2013.

Source: International Monetary Fund. Figures post-2012 are IMF estimates
Source: International Monetary Fund. Figures post-2012 are IMF estimates

Even if the Philippines were to achieve self-sufficiency, it would still be required to import rice to fulfil its international trade agreements. Previously it was cheaper for the Philippines to purchase rice from Thailand, Vietnam and Cambodia than to produce it locally (see graph). Under World Trade Organisation and Association of the Southeast Asian Nation trade agreements, the Philippines is required to import a minimum of 350,000 tonnes of rice to meet its access volume. Thailand and Vietnam both offered bids to supply the Philippines with its requested 500,000 tonnes. In the November tender, Vietnam beat Thailand’s offer of $475 per tonne with its bid of $462.25 per tonne.

Unforeseen factors
So far, the Philippine government has appeared in control of the country’s repair, while the future of the economy seems relatively stable. The planned costs of reconstruction were put at $2bn for this year. However, it is now more likely that the figure will reach $3.1bn, as steps are being taken to safeguard against future disasters. In the next four years, it is likely that the costs will near $8bn.

The road to recovery

$2bn

Planned costs of reconstruction for 2014

$8bn

Estimated cost of reconstruction over the next 4 years

As well as building typhoon-resilient structures, the government is building temporary bunk houses to accommodate those displaced not only by Haiyan, but also the earthquake the month before. Though it cannot be known for certain, it is likely that such unforeseen costs will have adverse effects on the country’s finances.

While it is true that crises often result in a period of reform and revival, the government’s inability to factor in the extra 10-30 percent monetary investment needed for resiliency seems almost careless. The Philippines is hit by approximately 20 typhoons annually. Building resilient structures is a long-term investment, and one that the government initially overlooked.

Despite making four-year reconstructions plans, Aquino will leave office mid-2016. “We can say that we are doing our best to complete whatever we can do in the remaining two and half years,” Public Works and Highways Secretary, Rogelio Singson, said at a press briefing.

Moreover, Aquino’s popularity has been faltering recently due to allegations of corruption and oligarchic structures. Demands for proactive leadership are being made, and Aquino’s success with the Philippine economy is starting to be overlooked. Plans for the Philippines’ future are contingent on its government, and with $8bn in the air the fragility of the political situation could mean big changes to economic strategy.

The greatest risk to the Philippine economy, however, is not posed by monstrous typhoons or changes to political leadership, but regional foreign relations. After the Philippine coast guard shot a Taiwanese fisherman dead in disputed waters, Taiwain’s government threatened to close its borders to Filipino migrants. Similarly, Hong Kong Chief Executive CY Leung threatened the Philippines after eight Hong Kong tourists were killed after being taken hostage by a former Manila police offer. Hong Kong is a big employer of Filipino migrants, who constitute 1.9 percent of the population.

With overseas workers underpinning the country’s economy, these simple threats serve to highlight the country’s vulnerability. The Philippines may be susceptible to the devastating effects of typhoons and other natural disasters, but the true threat to the economy’s success story is down to the decision making of its people – political, migrant or otherwise.

Stress tests around the world

Posted on by Ashton Wenborn

The ECB will soon carry out a stress test in order to see how well the banking sector has reacted to the financial storm of the last few years. Other regulators around the world are also , but with different targets in mind.

US Federal Reserve
The Fed Res announced in November the scenarios it would be testing the 30 banks with over $50bn of assets, as part of its Comprehensive Capital Analysis and Review (CCAR). The results will be announced in March, including supervisory projections of capital ratios, losses, and revenues.

Monetary Authority of Singapore
The Annual Industry-Wide Stress Testing exercise usually takes place during the first quarter of every year. This time, Singapore’s regulator is looking at ways in which it can safely deflate its soaring housing market, which have surged 60 percent since 2009. It is thought that property prices might dip between ten and 15 percent in 2014.

China Banking Regulatory Commission
China’s regulator uses the CARPLES risk indicators framework, which was implemented in early 2012. This year the CBRC is ordering some of the country’s smaller banks to set aside more funds in order that they avoid shortfalls, after reports that a number of smaller institutions might be hit by higher borrowing costs and a slowing economy.

International Monetary Fund
Every year the IMF conducts its own stress testing of various countries banking sectors, with the aim of giving an independent overview of bank solvency. The Financial Sector Assessment Program (FSAP) was established in 1999, and insists that key financial sectors conduct a stress test every five years. This year it will focus on Barbados, El Salvador and Canada.

European Central Bank
This year will mark the first set of stress tests to be overseen by the ECB, with a focus on whether Europe’s leading banks can prove the strength of their balance sheets. This will included an eight percent baseline scenario, as well as a 5.5 percent in an adverse scenario. The review will be conducted alongside the European Banking Authority (EBA). According to Zach Witton of Moody’s Analytics, the ECB’s endeavour is “unprecedented in scope and scale”.

Why German real estate is a hot investment market

Posted on by Ashton Wenborn

The euro crisis dominated the 2013 investment market in Germany and throughout Europe. Economic instability in Europe, continuously low market interest and the prospect of an ongoing financial crisis led to a comparably slow investment market at the beginning of 2013. In spite of this, Germany remained economically stable, which led investors to start their investment engines again, causing a further significant increase in the overall transaction volume of the German ‘big seven’ (Hamburg, Frankfurt, Düsseldorf, Co-logne, Stuttgart, Munich and Berlin).

At the end of 2013, the German real estate investment market not only fulfilled but outperformed its market expectations. The real estate transaction market for commercial real estate in the German big seven increased by 7.8 percent from €15.2bn in 2012 to €16.3bn in 2013 according to German Property Partners.

The German real estate investment market saw less big scale transactions than in the boom years of 2006-07, but several multi-billion euro transactions were still made (GBW, GSW, Karstadt etc.). An increased interest in club deals became apparent and mezzanine financing became more important. All in all, 2013 was a positive year for the German real estate investment market and fostered an appetite for an even better 2014.

2014 investment environment
The economic signs and indicators support the vision for 2014 as an interesting and successful year for the German transaction markets, especially in the real estate sector. Although discussions continue about the still unresolved euro crisis, the German economy is growing continuously. Germany (along with Sweden) is expected to be one of the few major economies in Europe with an accelerated growth rate, according to Patrizia AG and Reuters. France, usually an important supporter for the stability of the European economy, is currently losing momentum.

The real estate transaction market for commercial real estate in the German big seven increased by 7.8 percent from €15.2bn in 2012 to €16.3bn in 2013

Market interest will remain very low, although perhaps not quite to the historical levels seen in 2013. The possibility of a slight increase in interest rates cannot not be excluded. The unemployment rate will also remain low, especially in comparison to various troubled European partner countries. All of which should clear the path for a booming and healthy investment market in Germany.

Outlook for German real estate
In 2014, Germany will remain one of the most attractive real estate investment markets in Europe, and throughout the world. The German market offers investment opportunities for all categories of investors: large and small; institutional; semi-private or private; fund of funds or funds; all either domestic or international.

Despite the positive economic indicators and the country’s continuously increasing rents, the German market is still challenging and requires educated and experienced investors and advisers. Investors with a comprehensive understanding of the market and the regional specifics will have clear advantages.

Core+ investors will continue to find attractive investment opportunities in the big seven, although it will become more difficult to generate attractive returns if inflation increases in the course of 2014.

We expect a significant increase in value added investments in order to allow for sufficient return. Foreign investors will stay with the German big seven or big six (without Stuttgart) and avoid B or C cities. Domestic investors continue to realise that attractive investment opportunities are available in B and C cities if the homework is done and regional knowledge is available or hired. Opportunistic investments may be found, for example, in development projects in rural areas. Mezzanine financing and club deals will become more and more important.

2014 may be seen as an investment year that clearly separates the wheat from the chaff. The high levels of interest in the German market and the increasing complexity of transactions – due, for example, to regulatory requirements and financing restraints – require a very educated investor type with an excellent knowledge of investment and an intelligent and individual strategy for each investment. The ‘one size fits all’ investor is clearly passé.

Germany is and remains a hot real estate investment market. In 2014, it will be open to all types of investors, foreign or domestic. The transaction volume will most certainly increase – again. The increasing challenges inflicted by the complexity of the regulatory environment and the demanding financing environment clearly play into the hands of experienced and/or creative investors with a sophisticated and individual vision for each investment. These investors demand comparable standards from their advisors, i.e. experience, individuality and creativity.

The A cities, especially Berlin, will remain the core focus of foreign investors. Domestic investors, meanwhile, will take advantage of their more intimate outlook on B and C cities. In summary, 2014 will be seen as an interesting and successful investment year.

For further information contact gzp-legal.de

Bitcoin’s biggest backers post-MtGox

Posted on by Ashton Wenborn

Coinbase
The San Francisco-based exchange facilitates various bitcoin transactions and is home to 990,000 consumer wallets and 24,000 merchants. The organisation’s objective is to simplify the complex business of cryptocurrency.

Kraken
The virtual currency exchange, which went live in September 2013, partnered with Fidor Bank late last year, which has since allowed conventional banking activities to be conducted via bitcoin.

Bitstamp
“Bitcoin is working and still has a bright future,” according to the UK-based bitcoin exchange, which has long stood as the European alternative to MtGox and is now one of the largest exchanges worldwide.

BTC China
BTC China boasts the highest trading volumes in China and claims to offer the most liquidity of any bitcoin exchange. The platform was rocked last year due to tighter restrictions, although it’s back to business-as-usual as of this year.

Blockchain.info
The most popular bitcoin wallet and block explorer worldwide, Blockchain.info regularly racks up 200m page views per month. The site’s security policy is to hold as little data as possible to protect against any breaches.

Zach Witton on the health of the eurozone economy | Moody’s Analytics | Video

Posted on by Ashton Wenborn

The health of the eurozone economy is often called into question. Economist Zach Witton discusses what the European Central Bank’s latest round of assessments indicate about confidence in the eurozone banking system, what challenges lie ahead, and how a culture of secrecy is affecting banks’ willingness to lend

World Finance: Zach, we’ve taken some time to talk about the stress tests, but I also want to hear about the overall health of the eurozone economy. In particular, you say in your report, “European banks’ balance sheets lack transparency, making the banks less willing to lend to one another.” Now can you tell me, do you think this culture of secrecy in Europe differs all that much from their American counterparts?

Zach Witton: The key aspect for European banks is that we don’t know which ones hold sovereign debt, and amid the eurozone crisis, that was a major issue. And that made banks particularly reluctant to lend to each other.

A good point coming out of the ECB’s comprehensive assessment is that for the first time they’re going to be quantifying what sovereign debt the banks are holding on their books. So hopefully that will increase confidence and inter-bank lending. The European Central Bank is also for the first time going to quantify illiquid assets and hard-to-value assets, so that’s another positive for the economy.

[F]or the first time they’re going to be quantifying what sovereign debt the banks are holding on their books

World Finance: Why does this matter across the region?

Zach Witton: I think the eurozone is different from other countries such as the US, because the eurozone economy relies on credit from banks a lot more than in the US. And so if banks aren’t lending in the eurozone, it matters a lot more than if they’re not lending in the US.

Now another observation of yours is that “Total outstanding loans from banks to households equated to more than 50 percent of GDP last year; well above 19 percent in the US.” Now tell me, why does that matter?

Zach Witton: I think in the situation in Europe, households and businesses have high debt loads. They’re in a situation where they have to pay off that debt, so rather than buying goods and services in Europe, they’ll just be paying the bank. Whereas in the US, their debts aren’t as high, so they’ll be able to run out and buy consumer durable goods such as cars and the like. So the prospects in that regard are better for the US economy than the eurozone.

World Finance: The ECB report of course covers 120 of the most significant banks in the eurozone, but do you think that the balance sheets of smaller banks matter in terms of evaluating the overall health of the region?

Zach Witton: I think they’ve actually taken the right approach. They’re looking at the banks that are really systemically important. Smaller banks can fail, they do collapse, but they might be more of a one-off problem. Whereas if one of these systemically important banks fails, then basically you could have a problem with the whole economy being in peril. So I think they are correct to focus on the larger banks.

I think banks should really focus on lending as much as they can to households and businesses at the moment

World Finance: In your opinion, what is the best way for a bank to hold its assets?

Zach Witton: That’s a very good question! I’m not a banker, I’m an economist; I think banks should really focus on lending as much as they can to households and businesses at the moment, to get credit flowing through the economies. Banks will benefit from that; greater economic activity will support their profit margins. So yeah, I would encourage banks to lend as much as they can.

Regarding what assets they should hold or should not hold, I think their holdings of sovereign debt are very high at the moment. But of course the uncertainty about how the European Central Bank in the stress tests is going to treat that; I think they should be very wary of taking on additional sovereign debt, and if possible they should try and get rid of what sovereign debt they’ve got.

World Finance: And finally, what are the major challenges ahead for the ECB?

Zach Witton: The ECB has a mountain to climb. What they’re doing is unprecedented in scope and scale. Another major challenge at the moment is that if they identify a bank as needing to be recapitalised, and that bank is unable to do it from private sources such as issuing debt, there’s a big question mark about how the public funds will step in.

European officials haven’t agreed at the moment for a public backstop, and it would be a catastrophe if banks had these capital gaps that were identified, and they couldn’t be filled. So basically, European officials need to agree some mechanism before the stress test results are released in October.

Is Europe’s stress testing too hard on the banking system? | Moody’s Analytics | Video

Posted on by Ashton Wenborn

Moody’s Analytics has unveiled its report on the latest round of assessments by the European Central Bank. How will the stress tests affect the banking system and the economy? Moody’s Analytics economist Zach Witton discusses how stress testing could restore confidence in eurozone banks.

World Finance: Can you tell me how the stress tests will help restore confidence in the eurozone banking system?

Zach Witton: Okay, well we have a system where banks at the moment aren’t willing to lend to each other. They’re scared that other banks hold bad assets, bad debts, on their balance sheets. And so, if the stress tests are credible, if people believe them, they will restore banks’ confidence to lend to each other. And that in turn will allow banks to ease credit conditions and to increase their lending to households and businesses; which will strengthen Europe’s economic recovery.

World Finance: You called the latest round of stress tests more rigorous than the earlier ones, can you tell me why?

Zach Witton: That’s correct. Okay, there’s two aspects. First, they’re looking at 120 banks – actually more than 120 banks – this time. Previously the European Banking Authority looked at around 90 banks, so you’ve got an extra 30 or so that are being covered.

Also the threshold that banks have to pass or fail this time is 5.5 percent, whereas previously it was five percent. So that means it’s that little bit harder for banks to pass it. We had this situation with the EBA tests, where some banks actually passed the stress tests but they subsequently in real life collapsed. So that’s why we really need the higher threshold, and the increased number of banks being examined, to increase confidence.

World Finance: Do you think it’s fair to have rigorous stress tests in the eurozone versus Asia as well as the US? Which are perceived as not having as strong a regulation in place?

I think it’s very crucial that Europe has rigorous stress tests. The reason is that Europe’s economy relies a lot more on bank credit than the US and other economies

Zach Witton: When you look at the US stress tests going at the moment and compare it to the European Central Bank’s comprehensive assessment, the ECB’s threshold is higher than the one that the US Federal Reserve uses, so, it is more stringent in that sense. You’ve also got the number of banks: the Federal Reserve looks at about 30 banks, whereas as I mentioned before, the European Central Bank is looking at more than 120.

I think it’s very crucial that Europe has rigorous stress tests. The reason is that Europe’s economy relies a lot more on bank credit than the US and other economies. You’ve got at the moment, banks aren’t lending to each other. That credit isn’t going through. So basically we need the tests to be rigorous so that banks lend to each other, and get the credit flowing again.

World Finance: And does the perception of the banking system in general then change because of these more stringent reforms?

Zach Witton: I think it really depends on the results. If the results are credible, I think the perception will improve. I think it’s important to remember that the US did some quite rigorous stress tests earlier on in about 2009, and the important thing was, they actually had a backstop. So some banks were identified as needing recaptalisation, and they weren’t able to get the money privately. And that government-backed backstop really reassured everyone that those banks wouldn’t fall over; they wouldn’t collapse. Unfortunately in Europe at the moment, we don’t have that same backstop, so that’s the major question mark over the whole tests.

World Finance: So what do you think will be the likely, or most likely, outcome of the EU stress tests?

You’ve got a situation where the tests have got to be credible. If no banks fail, their credibility will be brought into question

Zach Witton: That’s the $64,000 question! You’ve got a situation where the tests have got to be credible. If no banks fail, their credibility will be brought into question. So I think you’re going to have a number of banks failing. At the same time, if you have a large number of banks failing, you’ve got the risk of that triggering concern about the stability of the banking system in Europe. So the ECB has to really walk a very fine line between having some failures, but not too many. And I think in that sense, they’re really going to have a rigorous stress test, but one that isn’t too tough, or too onerous.

World Finance: Was there anything particularly surprising that you found in putting together this report?

Zach Witton: There’s really more information to come out from the ECB. They have to release their asset quality review details, and that’s going to be at the end of this month. And then at the end of April they’ll be releasing the details of the stress tests. Now that is going to provide a lot more information, and that could have a few surprises in them.

For instance, how sovereign debt is treated: at the moment, sovereign debt on banks’ balance sheets is treated as risk-free, but they might actually penalise banks for holding sovereign debt. There’s also a question over whether banks that have taken a lot of liquidity from the European Central Bank are going to be penalised. So there’s still a lot of unanswered questions, and things that will be revealed in the coming months.

Pirelli’s commitment to governance and sustainability

Posted on by Ashton Wenborn

Pirelli is the world’s fifth-largest tyre manufacturer based on revenues and one of the oldest Italian multinational companies. Over the years, the company has prospered not only because of its commitment to innovation and technological excellence, but because of its attention to its responsibilities as a member of the communities in which it operates, to the stakeholders with which it interfaces and an awareness of its global responsibilities. In other words, it also pursues excellence in corporate governance and sustainability.

At the end of 2013, Pirelli introduced its new industrial plan for the period 2013-17. The plan represents the strategic evolution of the company’s previous industrial plan, which began in 2011, and arrived in a very different macroeconomic context than its predecessor.

Foreseeing the market’s trend, Pirelli in 2011 had already identified the premium (high performance) tyre segment as the one with the best prospects. That segment, even in a difficult economic climate, continues to grow at a rate three times faster than the non-premium and, thanks to its high margins, has been one of the factors that most contributed to the company’s positive recent results. Overall, premium tyre sales (sizes equal 17 inches and above) represents over 53 percent of car business revenues and over 80 percent of profitability, which is seven percentage points higher, both in terms of revenues and profitability, compared with only two years ago. From 2011 to today Pirelli has:

  • Consolidated its partnerships with car makers, building a market share in ‘prestige’ original equipment;
  • Increased its weight within the premium segment of the car industry;
  • Achieved ‘best in class’ position in the industrial segment in terms of profitability, with an EBIT margin over 13 percent;
  • Consolidated its position in rapidly developing economies. Activities in these countries today represents over 56 percent of total revenues and more than 63 percent of profits;
  • Developed a structure suited to the implementation of a new business model focused on the shift from a logic of ‘volumes’ to one of ‘value.’

Pillars of governance
Pirelli has evolved in terms of its shareholder structure and governance. With regard to the shareholder structure, the weight of foreign institutional shareholders has grown from 16 percent in 2009 to 36 percent today; the free float has gone from 49.3 to 73.8 percent as a consequence of the dissolution of the Shareholder Block Agreement. Meanwhile, Camfin, with 26.2 percent, remains Pirelli’s biggest shareholder (see Fig. 1).

The system of governance at Pirelli is built on six key pillars: (i) the central function of the board of directors, responsible for the strategic guidance and supervision of the company’s overall business; (ii) the central role of independent directors, who represent the majority of the members of the board of directors; (iii) an effective internal control system; (iv) a pro-active risk management system; (v) a remuneration system; and (vi) strict discipline concerning potential conflicts of interest and solid principles of conduct to execute transactions with related parties.

For the execution of its activities, the board of directors has the support of four special board committees, two of which are entirely composed of independent directors. The other two committees are composed of all executive, non-executive and independent directors. Among its duties, the nominations committee has the task of examining the corporate processes relating to the identification, management and development of ‘talents’, which ensures the group has a ‘natural source’ of in-house growth over time, thereby ensuring a constant generational change.

Alongside its product range and the value of its name, the group’s corporate governance and sustainability have always contributed to value generation and responsible growth. Pirelli’s efforts were acknowledged in 1999 when it became one of the first Italian companies to fully comply with the recommendations of Borsa Italian’s Corporate Governance Code for Listed Companies. Since then, Pirelli has always aimed to be up-to-date with governance best practice.

An advanced sustainability governance system allows Pirelli to effectively manage the economic, social and environmental impact of its processes, products and services, with a constant focus on innovation and risk prevention. Pirelli has developed its sustainability model in accordance with the United Nations Global Compact of which Pirelli has been an active member since 2004, and the ISO 26000 guidelines.

With a vision for 2020, Pirelli’s sustainability plan was developed in accordance with the ‘value driver’ model inspired by the UN PRI (Principles for Responsible Investment) and UN Global Compact to encourage dialogue between investors and firms on sustainability issues. The key business metrics used to determine the return on investment of corporate sustainability activities in the 2013-20 plan include revenue growth from sustainability-advantaged products, savings and cost avoidance from sustainability-driven productivity initiatives and the reduction of sustainability-related risk exposure.

Revenues from ‘green performance’ products represented 42 percent of Pirelli’s tyre revenues in 2013, reduction of the injury frequency indicator was reached two years ahead of time and the recycling of production waste is in line with the targets of the 2011-13 plan. The company’s 2014-17 sustainability plan, which sets a number of targets for 2020, foresees:

  • Revenues from ‘green’ products in 2017 equal to 48 percent of tyre revenues;
  • 90 percent reduction in the injury frequency indicator by 2020 compared with 2009. This target will be reached thanks to investments in increasingly safer equipment, as well as programmes to reinforce the culture of security among employees;
  • 15 percent reduction in CO2 emissions by 2020;
  • 18 percent reduction in the specific energy consumption ratio by 2020;
  • 58 percent reduction in the specific water use ratio by 2020;
  • Recycling of production waste above 95 percent by 2020;
  • The maintenance of investment in research and development, equal to seven percent of premium revenues, dedicated to the development of safer products with low environmental impact.

Risk management model
Pirelli has adopted a proactive risk management model, based on a risk management process that permits a prompt and complete identification of risks, addressing risks in advance, rather than simply reacting. The model is built on three risk families, as outlined below.

[T]he company has prospered not only because of its commitment to innovation and technological excellence, but because of its attention to its responsibilities

Risks associated with the external environment in which the company operates, the occurrence of which is outside the company’s control. This category includes the risk areas related to macroeconomic trends, the development of demand, strategies adopted by competitors, technological innovations, the introduction of new legislation and the risks associated with the country (economic, political and environmental). The risk management objective is to monitor risk and mitigate potential impact. The control model is based on the adoption of internal/external tools to identify and monitor risk, stress tests to assess the robustness of the plans, the construction of alternative scenarios to the ‘base’ scenarios, business cases to assess the impact of significant changes to the environment conditions, and others.

The second type of risk is strategic risks; namely, risks characteristic of the reference business, the correct management of which is a source of competitive edge, or otherwise the cause of failing to achieve planned targets. This category includes the risk areas associated with the market, product and process innovation, price volatility of raw materials, production processes, financial risks and risks associated with M&A operations. The risk management objective is to manage the risk using specific tools and safeguards designed to reduce the probability of risk or to limit the impact if something occurs. The control model is based on identifying and measuring profit/cash flow/risk when preparing strategic/management plans; defining the risk appetite and the risk tolerance for the main risk events; introducing key risk indicators in group reporting; and monitoring the mitigation plan in relation to significant risk events in the absence of specific business safeguards that are already operational.

Third: operational risks. Specifically, those risks generated by the organisational structure, by the processes and by the group systems, assuming these risks do not produce any competitive edge. The main risk areas in this category refer to information technology, security, business interruption, legal and compliance, health, safety and environmental. The risk management objective is to manage these risks through internal control systems.

Finally, Pirelli’s incentive plan is designed to align top management’s pay with shareholders’ interests in order to generate value in the medium- to-long-term. Under the latest plan, payment of a part of the annual incentive is delayed and made subject to achievement of the group’s three-year targets, establishing a direct link between pay and sustainable long-term performance. In fact, more than 70 percent of the variable portion of management’s pay is link with medium- to long-term goals and a portion is also linked to total shareholder return, strengthening the link between management work and the generation of value for shareholders.

That segment, even in a difficult economic climate, continues to grow at a rate three times faster than the non-premium

Pirelli has taken its respected brand into over 160 countries. It has 22 production facilities located on four continents and counts about 36,000 employees. It is one of the leading producers of high-end and ultra-high-end tyres, segments in which it aims to become world leader by 2015. The company has a great commitment to research and development, an area in which it invests three percent of its total revenues and seven percent of its top-of-the-range revenues, one of the highest levels in the sector. In pursuing its goals, Pirelli has always aimed to combine economic profitability and social responsibility. And in line with its generations’ industrial tradition, Pirelli continues to invest in international expansion projects while at the same time maintaining strong local roots.

The group has more than 1,200 researchers and a number of R&D centres around the world. It also has research agreements with 14 universities worldwide and continues to attract talented people, both as employees and external collaborators, because of its ability to innovate, the quality of its products and the strength of its name. In fact, the Pirelli brand has been valued by independent analyst Interbrand at more than €2.2bn. That value stems primarily from the consistent quality of its products over the years, but is supported by a number of other high level and related activities, such as the Pirelli calendar, its involvement in motorsports, particularly Formula One, and, more recently, its return to industrial design applied top fashion.

The company has been active in sporting competitions since 1907 and this culminated two years ago with its return to F1 as sole supplier after an absence of 20 years. When Pirelli was awarded the F1 contract for the three-year period 2011-13, it came with the challenge of making the sport more exciting. This was done by providing the teams with a selection of tyres which, while performing optimally in terms of speed, grip and braking, was deliberately designed to degrade more quickly than regular tyres. This was no small technical challenge and its successful realisation has brought the tyre strategy to centre of the overall race strategy, further enhancing the company’s reputation.

Renewable energy in Saudi Arabia | ACWA Power | Video

Posted on by Ashton Wenborn

Increasingly, renewable energy is being pushed to the forefront of government agendas. Paddy Padmanathan, Thamer Al Sharhan and Rajit Nanda, from Saudi developer ACWA Power, discuss the future for renewable energy in the GCC region, the challenges and opportunities, and how their business is developing its portfolio

Energy, and more specifically renewable energy, is at the forefront of most governmental agendas, including oil rich nations like Saudi Arabia. I’m here with Paddy Padmanathan, Thamer Al Sharhan, and Rajit Nanda to speak about how and why this major policy change is going to be implemented.

World Finance: Well Paddy, let’s start with you, and of course Saudi Arabia is a leading oil producer, but there has been talk of it embracing its renewable energy policy. How likely is this to happen?

If we can develop this as a new source, we have an unbeatable opportunity to create a new industrial platform

Paddy Padmanathan: Firstly, we have abundant resources, and we have land that is available to deploy renewable energy. Secondly, we actually have the demand in our part of our world of electricity. Demand is growing at about nine percent per annum, so we need more and more new energy capacity. Provided we price fossil fuel, which is the alternative that we have available to generate electricity at the market price, already renewable energy is the most competitive solution for a segment of the demand curve. And of course, finally, we have a very young population that we need to provide employment opportunities and economic value creation strategies. If we can develop this as a new source, we have an unbeatable opportunity to create a new industrial platform.

World Finance: So Thamer over to you now, and how developed are renewables in the GCC region?

Thamer Al Sharhan: Currently not that much, we are having a lot of potential, we have the highest radiation in the world. Also, we are blessed with a lot of wind potential, geothermal, and we are waiting for this to get developed.

World Finance: So what are the major challenges for renewables in the region today?

Paddy Padmanathan: A lack of understanding of the true cost of producing electricity using what we use today, fossil fuels, not only by the public, but also even by some of the important policy makers. When you have got electricity retailing at 3 cents per kWh, and the cheapest cost of producing renewable energy is 12 US cents per kWh, of course common sense says how on earth is this going to be affordable, why do you think this is ever going to happen? Well the reality is that we are producing and dispatching electricity at three cents per kWh, only because we are consuming our own oil at $4.40 a barrel, instead of the world market price of $100, and we are consuming gas at 75 cents per mn BTU compared to whatever you want to take as a gas price.

[T]here is a solid case for moving into renewables, reduce oil consumption, and therefore diversify the energy mix

Rajit Nanda: What the policymakers have recognised is that obviously the demand for energy is growing at about nine percent, and therefore the consumption is also going to grow concomitantly, and therefore there is a need to look at alternative ways to save this fuel. At the same time, it coincides with a decline in the cost of producing renewable energy. So all of this put together, what it means is that there is a solid case for moving into renewables, reduce oil consumption, and therefore diversify the energy mix.

Thamer Al Sharhan: There is a healthy debate in the region about the use of renewable energy, from economical viability, technical suitability, and reliability for our market. We at ACWA Power encourage these healthy debates, and also participate in an educational campaign

World Finance: Well Rajit, ACWA Power set quite an ambitious target three years ago, that five percent of your portfolio would be renewable energy within the next five years. How is this going?

[M]ore than 30 percent of energy will start to get generated using renewable energy in the MENA region

Rajit Nanda: Today we’ve managed $23.5bn of generation and desalination water portfolio. Of this, about $1.5bn is in the renewables sector. Now what is happening is essentially all the procurers and generators in our target market have realised that renewable is an important component of the energy mix going forward, and there has been an escalation in terms of the requirement for energy coming from the renewables sector. Currently, over the next 12 months we are preparing investments to the tune of $15bn, of which about 50 percent is in the renewables sector.

Paddy Padmanathan: What’s interesting also from the experience you are seeing just with us is that it’s perfectly plausible, as you can see from this anecdotal evidence, if you extrapolate it, that within the next two decades, more than 30 percent of energy will start to get generated using renewable energy in the MENA region.

World Finance: Paddy, Rajit, Thamer, thank you.

All: Thank you.

The privatisation of electricity in Saudi Arabia | ACWA Power | Video

Posted on by Ashton Wenborn

It was not so long ago that governments owned and operated most infrastructure assets and delivered utility services such as electricity, water, telecoms, and sewerage management. But it is becoming more and more common for the private sector to take on this responsibility. ACWA Power is a company that has rapidly emerged from Saudi Arabia as a leading operator of electricity generation and desalinated water production. Paddy Padmanathan, Thamer Al Sharhan, and Rajit Nanda from ACWA Power discuss their successful business model.

World Finance: So Thamer, if I might start with you, who is ACWA Power and what’s your business model?

Thamer Al Sharhan: In 2004, the Saudi government encouraged the private sector to participate in huge investment in infrastructure, and utilities, power and water [were some] of the high cards on the agenda. The shareholders of ACWA Power saw this opportunity, and today ACWA Power is owned by eight large Saudi private companies and two government shareholders.

Paddy Padmanathan: Our business model is to sell electricity and desalinated water on bulk long term offtake contracts. We do that by developing our own power and desal water plants, or by acquiring and integrating them.

Rajit Nanda: We do that by basically getting together a multidisciplinary team, various specialists, who come together and formulate a business case, get the best partnership, the most value-adding partnership, structure competitive technology solutions, procure lump-sum turnkey construction contracts, and the most competitive cost-solution, and of course structure debt and equity around it to deliver the most competitive tariff.

World Finance: So what has ACWA Power achieved so far?

Within nine years we have consolidated a portfolio of 15,500 mW of electricity, and 2.45mn cubic metres of desalinated water per day

Paddy Padmanathan: Within nine years we have consolidated a portfolio of 15,500 mW of electricity, and 2.45mn cubic metres of desalinated water per day. In terms of investment, that portfolio represents about $23.5bn. We today, from our hub in Saudi Arabia, operate in the MENA region.

Thamer Al Sharhan: Part of ACWA business model, in 2005 we managed successfully to create our operating company, which is called First National Operation and Maintenance Company, which is NOMAC. NOMAC has the operating capacity for 2.2mn cubic metres desalinated liquid per day, and over 10,000 mW.

World Finance: So Paddy, obviously ACWA Power has gone from strength to strength, so what would you say the key to success is?

Paddy Padmanathan: By relentlessly focusing on our core mission, which is to reliably deliver desalinated water and electricity at the lowest possible price. We have consistently, transaction after transaction, achieved this, typically at about a twenty percent level, the tariff difference between the tenders that we have offered and that offered by the second bidder.

Rajit Nanda: The lowest competitive tariff solution is all based about staying engaged with different facets of the supply chain, and cultivating with them a trust-based partnership, so that all of them work towards a common goal of delivering a most competitive elements of the tariff solution.

World Finance: Well Paddy, ACWA Power has developed a large portfolio, is there anything noteworthy that happened in 2013?

Paddy Padmanathan: The real noteworthy stuff in 2013 is probably the two renewable energy plants that are both in construction, a 160 mW concentrated solar power plant, with three hours of storage in Morocco, and a 50 mW plant with nine hours of storage – that’s probably the longest storage in that technology in the world that’s under construction today, of concentrated solar power.

World Finance: Gentlemen, thank you.

All: Thank you.

Japan’s disappointing growth calls Abenomics into question

Posted on by Ashton Wenborn

News of Japan’s disappointing growth stats in the middle of February sparked further unrest among analysts and led many to believe that Prime Minister Shinzo Abe‘s aggressive fiscal and monetary measures will fall short of their intended effect. Granted, the short-term results with regards to inflation are encouraging, given that the BoJ looks on course to meet it’s two percent inflation target by 2015 and consumer prices grew at their fastest rate in five years late last year. However, having exhibited early signs of growth owing largely to exports, it’s now up to consumers to take the reins and lead the Japanese economy to long-term stability.

Japan’s last quarter

Up 1.7%

Exports

Up 0.5%

Household spending

Abenomics has succeeded in reeling the economy from impending collapse, although the vast majority of growth has come by way of exports, which picked up just 1.7 percent last quarter after a 2.7 percent annualised fall in the third quarter. For Japan to level out at the desired two to three percent annual growth outlined by Abe, internal consumption must see something of an uptick in the coming months and years ahead.

Household spending during the October to December quarter expanded just 0.5 percent, which, given that analysts expected 0.7 percent, illustrates just how cautious Japanese consumers are when it comes to spending. In order to boost private consumption and dispel the lingering air of caution, higher prices must be coupled with higher wages so as to lessen the squeeze. And whilst cash earnings saw an annualised rise of 0.5 percent in November, the ever-so-slight boost follows four months of consecutive decline and, when excluding bonuses, means that Japanese wages overall remain unchanged.

Whilst the economy this coming year looks on course to exhibit levels of growth unseen since 2010, rising costs alongside falling wages will see public support for Abenomics plummet for as long as this remains the case. As such, the government is pushing for companies to boost their wages come spring, although many will be hesitant to do so until they’re convinced of the economy’s emboldened prospects of long-term prosperity.

To compound problems in the consumer space, Japan’s sales tax is scheduled to rise to eight percent from five in April, in order to reduce the world’s highest debt burden. Not only will the tax hike impact growth on a short-term basis, but also serve to deter consumers from spending further still. The timing comes at an especially inopportune time here in light of Japan’s lacklustre growth, and the repercussions could serve to push consumer confidence to new lows.

Expect an uptick in private spending in the months ahead as consumers race to beat the rise, however, once the eight percent rate is put in place, Japan will be forced to contend with even lower sales, and the prospect of additional stimulus measures looks likely to say the least.

Can new CEO Erez Vigodman inject life back into Teva?

Posted on by Ashton Wenborn

The world’s largest generic medicines group, Teva, has in the last few months suffered such stark divisions among its board of directors that it has now appointed its fourth CEO in just seven years. After the sudden dismissal of previous head, Jeremy Levin, in October, Teva began searching for an agent of change to lead the company.

When it was announced in January that board member, Erez Vigodman would be ushered in as the new CEO in late February, broader questions about the company’s future came into focus. With a divided crew and rough seas ahead, appointing the man with a reputation for turnarounds hinted at a hole in the bottom of the ship.

Despite dealing in generic drugs, Teva’s most profitable product remains its patented product, Copaxone. The multiple sclerosis treatment brings in over half of the company’s annual profit and with its impending expiry in May 2014, its future has come under great scrutiny from its directors and shareholders. If the pharmaceutical giant is to stay afloat, its new man at the helm will have to find innovative solutions to fend off the increasingly hungry competition.

Supply and demand
Generic drug companies’ profit comes from launching less expensive versions of drugs whose patents have just expired. In recent years, an increased demand for cheaper drugs from governments and health insurers has benefited the generics industry. As one such company, Teva understands the implications of patent expiries, and the looming fate of Copaxone has faint echoes of poetic justice.

Growing tensions among the board of directors regarding the company’s future resulted in paralysing managerial decisions. Its chairman, Phillip Frost, was in favour of moving the company in the direction of specialty pharmaceuticals while other board members wanted to continue the focus on the generic drugs industry.

A managing partner at Sphera Global Healthcare Fund, a company whose own assets are invested in Teva, Ori Herschkovitz told Reuters of the state of the company. “[T]his division has wreaked havoc on the company in the last couple of years. It’s by far the worst positioned company in the pharmaceutical sector.”

Over the last two years, Teva’s shares have underperformed by nearly 40 percent, while its stock trades at eight times the forecast 2014 earnings.

The greatest conflict of opinion was between chairman and largest shareholder, Frost, and Levin. Rather than clashing over policy, tensions stemmed from the two men’s struggle for authority. In October last year, Teva’s executive committee pleaded for calm.

With a divided crew and rough seas ahead, appointing the man with a reputation for turnarounds hinted at a hole in the bottom of the ship

The committee wrote that it “respectfully urges the board to reassess their involvement in the ordinary course of business matters that in our opinion has been prevalent in recent months and hindered management’s ability to effectively manage Teva and implement the approved strategy”. Two days later, the board dismissed Levin.

Insiders have reported that Levin’s dismissal was not solely based on his differences with Frost and that he had irritated other board members by demanding greater autonomy and transparency. For Levin, this meant disclosing Frost’s annual compensations, including a $900,000 salary, $700,000 for use of his private plane and $412,000 for rented office space in Miami, where he is based.

Before his departure, Levin had announced plans to make 5000 employees redundant, 10 percent of Teva’s total workforce. Immediately following Levin’s removal, shares fell by a sharp 12 percent.

Investors, like the board, were split on Levin’s administrative decisions. Levin not only antagonised the board, but spent heavily on consultants, failed to meet earnings targets and threatened the company’s historic Israeli base by deciding to cut jobs. Furthermore, he failed to secure profitable acquisitions that would boost the company’s pipeline of new pharmaceutical products.

Over the last two years, Teva’s shares have underperformed by nearly 40 percent, while its stock trades at eight times the forecast 2014 earnings

Others thought his strategy logical, agreeing that Teva was ill-prepared for Copaxone’s patent expiry. Disappointing acquisitions, such as the $7bn purchase of the international biopharmaceutical company Cephalon, also contributed to dissatisfaction among investors. Its purchase was intended to reduce Teva’s reliance on Copaxone revenue, but Cephalon products failed to take off.

Levin may have been sacked, but he left behind pre-existing governance problems. The drug giant has grown exponentially while retaining a large, Israeli-focused board of directors, many of whom are without experience in the wider pharmaceutical industry. This view was reaffirmed by Benny Landa, an Israeli entrepreneur and one of Teva’s directors, who expressed his views to other investors.

“[T]he board is comprised – apart from chairman Phillip Frost and those on his payroll or who are otherwise beholden to him – entirely of local directors, none of whom have any pharma experience.” Landa had been fighting the battle for change, proposing to cut the board down to 12 members while reducing the influence of Frost and his allies over company decisions.

Frost joined the board when Teva acquired his generics company Ivax in 2006. He became chairman in 2010, after which the 16-member board has failed to demonstrate any great diversity of opinion. Preparing for demands by investors to shake up the board room, Frost told analysts during a conference call reported by the FT, that “the board has never attempted to manage the company; is not managing the company now; and is fully co-operating with the management with respect to their respective roles.”

New management
Following Levin’s dismissal last year, the board of directors has looked outside the company – and industry – for a new head. After Vigodman’s emergence as the favoured candidate for CEO, Teva’s previously disappointing stocks rose 3.4 percent. With a reputation for restoring companies’ profits, Vigodman has his work cut out for him. After taking over the role of CEO of the world’s biggest generic agrochemicals company, Makhteshim Agan Industries in 2010, Vigodman restored the company’s profitability by closing production lines, improving product offering, renewing research and development strategies, and pushing the company into new markets. From 2009 to 2012, MA Industries’ net income grew by 55 percent, a trend which continued well into 2013.

Erez Vigodman: ‘Turnaround Specialist’

3.4%

Amount Teva’s stocks rose when Vigodman was appointed CEO

55%

Amount MA Industries’ net income grew between 2009 and 2012, under Vigodman’s leadership

Analysts have, however, been quick to point out the gulf of differences between the pesticide and pharmaceutical industries. If Vigodman is to be successful in any of his endeavours, he will have to learn the ropes quickly while restoring investors’ confidence, many of whom remain unconvinced that such measures would offset Copaxone’s patent expiry. Prior to heading up MA Industries, Vigodman worked as President and CEO of Strauss Group, a food and beverage company. He turned Strauss into a global player by moving the company into emerging markets – Brazil in particular. Under Vigodman, Strauss doubled its sales from 2002 to 2008.

These accomplishments position Vigodman as a promising CEO. With Copaxone’s imminent patent expiry, the company needs a complete revival. Amir Elstein, Vice Chairman of the board and head of the committee leading the search for the company’s new CEO, was pleased with the result. “Erez is the right person to lead Teva. We evaluated a comprehensive list of internal and external candidates as part of our rigorous search and board process, engaging the international search firm Egon Zehnder.

“Erez stood out due to his impressive track record in transforming global and complex corporations and delivering breakthrough results. He is a change agent with an impressive strategic mindset and a proven ability to execute restructuring programmes, build organisational momentum, expand successfully in emerging markets, and work with the capital markets.”

At the request of Elstein, Landa met with Vigodman to discuss the company’s future challenges. After their four-hour meeting, Landa released a telling statement. “As critical as I am of Teva’s board, I think this time they got it right. Erez Vigodman is made of the right stuff to succeed. He is a strategic thinker with excellent managerial skills. My sense is that he has the courage to make tough decisions.”

Arguably, Vigodman already has some useful insight into the company’s management structures, having sat on its board since 2009. His first assignment will be to heal existing divisions in the board while initiating a series of cost cuts. With dwindling business opportunities and growing competition in the generics business, Vigodman will have to reduce reliance on ‘copycat drugs’.

With a reputation for restoring companies’ profits, Vigodman has his work cut out for him

Teva has difficulties with emerging markets, which casts further uncertainty over the company’s future. Hershkovitz told Reuters that the company will need to completely restructure its management, replacing existing executives with those experienced in turning around pharmaceutical companies. He then continued to say that as CEO, Vigodman will have to boost branded business through partnerships and acquisitions in the specialty drug sector, which is in keeping with chairman Frost’s vision for the company.

Despite Teva’s promising new management, it remains an undeniable fact that the company’s most profitable source of income is soon to become public property. It is unlikely that Vigodman’s short-term actions will differ greatly from those proposed by Levin, with cost cuts planned in preparation for Copaxone’s revenue loss. As the company’s new CEO, Vigodman will have to weather the storm before determining whether it has a future afloat, or if it is destined to sink.

Credit Suisse phases out its remuneration scheme

Posted on by Ashton Wenborn
Credit Suisse are phasing out their current bonus scheme, and replacing it with two bonus plans that will shift the bank's emphasis onto collective, rather than individual, performance
Credit Suisse are phasing out their current bonus scheme, and replacing it with two bonus plans that will shift the bank’s emphasis onto collective, rather than individual, performance

Credit Suisse has notified its employees that they might have to wait until 2021 to cash in on bonuses awarded two years ago. Under revised regulations, millions of pounds worth of rewards that were expected to mature by 2016 may be deferred for a further five years.

Bringing the bank’s reward scheme one step closer to getting rid of a reward system that was too closely linked to risky assets. Though the move was prompted by changes in capital regulations, it is certainly a step in the right direction for Credit Suisse.

By linking employees’ bonuses to the bank’s performance overall and in specific areas ensures that bankers work for the bank rather than for their bonuses

The bonus scheme being phased out was originally offered to around 5,500 senior bankers in 2012, all of whom must now chose a replacement plan. According to a memo sent to staff at the bank’s Canary Wharf outpost, the scheme was ‘linked to a portfolio of the bank’s credit exposures, and provided risk offset and capital relief to the bank. Due to regulatory changes, this capital relief is no longer available and accordingly, [bonuses] will be amended in accordance with its terms’.

Credit Suisse will offer two replacement bonus plans; a Contingent Capital Award (CCA), in which their bonuses would be awarded as bonds of sorts, which would be wiped out if the bank’s levels of capital drop below a certain point. “Settlement would occur either by a cash payment of the fair value of the CCAs at a time or a physical delivery of an actual contingent capital security able to be held thereafter or sold in the market,” explains the memo.

The second option is linked to a Capital Opportunity Facility (COF), in which bonus payments are linked to the a seven-year facility ‘that is linked to the performance of a portfolio of risk transfer and capital mitigation transactions chosen by the PAF management team,’ explains the memo.

By linking bonuses to performance and by deferring payments for several years means that these payments become more like rewards that must be earned rather than a negotiated part of a pay package. Though deferred pay is already widely practiced by most major banks, remuneration remains a contentious issue in the wake of the global financial crisis.

By linking employees’ bonuses to the bank’s performance overall and in specific areas ensures that bankers work for the bank rather than for their bonuses. Furthermore, by separating bonuses from risky derivatives employees are less attracted to these tools, and that can act as a powerful disincentive to overindulge in this type of activity.

Other banks like UBS in Switzerland and Barclays have already moved to paying bonuses in this type of scheme, but it is still far from the norm. Unfortunately.

Japan files criminal complaint against pharma giant

Posted on by Ashton Wenborn

On January 9, the Japanese Health Ministry filed a criminal complaint against pharmaceutical company Novartis, calling for an investigation into the drug company’s local unit. It is suspected that falsified data was used in the clinical trial of Novartis’ best selling drug Diovan. Japanese pharmaceutical affairs law strictly prohibits exaggerated advertising and this particular incident is a first for Japan.

The complaint has wider implications not only for the Japanese pharmaceutical industry, but also for the company’s international reputation. The Japanese scandal has drawn further attention to Novartis’ broader misconduct, following allegations of bribery in both the US and China. It also coincides with Diovan’s patent expiry in Japan.

Clinical trials of the hypertension drug were carried out at five Japanese universities. The accuracy of the university-led studies was brought into question last year after several medical journals retracted the findings of two Japanese universities, Kyoto Prefectural University of Medicine and Tokyo’s Jikei University School of Medicine.

Kyoto Prefectural and Jikei lost confidence in the drug’s supposed efficacy in preventing heart disease and strokes, both coming forward to suggest that the data used in the Diovan studies had been falsified.

Misleading advertising backfires
It transpired that a Novartis employee had assisted on all these clinical trials, the findings of which were cited in pamphlet advertising distributed to doctors across the country. The Novartis employee had failed to reveal his affiliation to the pharmaceutical company in published papers and it is suspected that Novartis continued to use advertise the benefits of the drug after discovering that the data had been manipulated.

It is suspected that falsified data was used in the clinical trial of Novartis’ best selling drug Diovan

Novartis Pharma KK has since accepted responsibility for its employee’s involvement, cutting the pay of its top executives in the company’s Japanese arm for allowing the ‘conflict of interest’ to occur. The company has also promised to improve oversight and training procedures.

In a late September 2013 news conference, the president of Novartis’ Japan operations, Yoshiyasu Ninomiya held up his hands. “We feel a heavy responsibility for creating a situation that may have allowed data manipulation to occur.” Nevertheless, Novartis continues to deny any intentional misconduct, arguing that it had no access to data, and consequently could not confirm if the findings had been manipulated and who might be responsible.

However, the Japanese Health Ministry found evidence to contradict the drug giant’s supposed ignorance. The Ministry panel discovered that Novartis had donated funds to two of the universities participating in the trials. A total of 570m yen – the equivalent of $5.4m – had been donated to Kyoto Prefectural and Jikei for ‘running classes’. However, it is expected that these funds were also used in the drug trials, making Novartis a sponsor of its own research. Chiba University denied such allegations of intentional data fabrication, yet failed to mention the 91m yen in scholarship donations it had received from Novartis from 2007 to 2009.

Novartis spokeswoman Yumi Ishii responded to the controversy. “Since last year, we’ve been saying in our news conferences that we need to regain any trust we’ve lost from the issue. That position does not change.” Attempts by Novartis to reinstate confidence in its brand might prove more effective were it not for its behaviour in other leading markets.

Questionable donations

570m ¥

Amount Novartis donated to Kyoto Prefectural and Jikei for ‘running classes’

91m ¥

Amount Novartis donated to Chiba University for scholarship donations between 2009 and 2010

In January, several US states sued Novartis for their kickback scheme relating to Exjade, the iron-reducing drug. The New York Attorney General filed a civil lawsuit against Novartis’ US unit after it was unearthed that the drug company was bribing specialty pharmacy BioScript in order to boost sales. Novartis allegedly paid BioScript to recommend refills of Exjade to its patients, some of whom had stopped using the drug. When doing so, BioScript often failed to warn patients about the potentially fatal side effects, including kidney failure and gastrointestinal haemorrhaging.

New York Attorney General Eric Scheniderman was forthcoming. “This arrangement between Novartis and BioScrip was dangerous for patients and is against the law. Our lawsuit against Novartis and our agreement with BioScrip sends a clear message: Drug companies cannot pay pharmacies to promote drugs directly to patients.” The complaint was filed in the federal court in Manhattan.

BioScript has already agreed to pay $15m to settle charges, reimbursing the tens of millions of dollars in false claims made to Medicare and Medicaid. Novartis disputes these allegations and will defend itself in litigation.

In another example of Novartis’ propensity to operate ‘above the law’, the company was accused of bribing doctors for its eye care unit Alcon in China. Novartis announced in September 2013 that it would investigate such allegations, which had been published in 21st Century Business Herald. The Chinese newspaper cited a whistleblower “Zorro”, who said that Alcon bribed doctors in over 200 Chinese hospitals to push sales of lens implants. The paper also alleged that Alcon had conducted bogus clinical trials on the lens using third party researchers and calling it a ‘patient experience survey’. The doctors subsequently received ‘research fees’. This was the second time in two months that Novartis had been accused of bribery in China alone. Investigations are still being carried out.

The future of Novartis
One of the world’s largest drug companies, Novartis, introduced Diovan to Japan in 2000 to treat hypertension, two years after it was approved in the US. The drug is currently licensed for use in over 100 countries. Diovan’s patent expired in Europe in 2011, followed by the US in 2012. The patent in Japan expired in September 2013, the same month in which Novartis KK were forced to investigate exaggerated advertising allegations.

sales still strong?

558.9bn ¥

Novartis’ revenue from Japan in 2013 – 9.5 percent of total global revenue

Diovan suffered a 28 percent drop in global sales following its patent expiry last year. This has greater implications on the Swiss drug giant; with one of its most important assets now open to competition from generic drug labels, Novartis stands to lose more than its reputation. In the quarter ending 30 September 2013 it experienced the biggest quarterly fall since January-March 2011, dropping to 22.03bn yen from 26.14bn yen the year before, and 28.9bn yen the year before that.

Japan is an important market for the pharmaceutical company. In October 2013, Novartis head David Epstein issued a statement saying that the scandal would not have a significant impact on Diovan sales. Prior to the controversy, Japan’s market accounted for a quarter of Diovan’s global sales, topping 100bn yen in annual sales since 2005. In 2012 alone, 558.9bn yen, 9.5 percent, of Novartis’ global revenue came from Japan, according to a Bloomberg study.

The future of Novartis’ sales in Japan stands to be effected by the exaggerated advertising allegations, but also points to a wider problem in the industry. The controversy has drawn attention to the problem of integrity in clinical research. Hospitals, universities and pharmaceutical companies are so closely linked that research into drugs has become increasingly lax.

Professor of Clinical Pharmacology of at the Graduate School of Medicine at University of the Ryukyus in Okinawa, Shinichiro Ueda told the Wall Street Journal that, “the filing of criminal complaints is a symbolic move. It not only hurts Novartis’ reputation, but also indicates how the Japanese medical community needs to raise the quality of its clinical research.”

[W]ith one of its most important assets now open to competition from generic drug labels, Novartis stands to lose more than its reputation

Although the results of the clinical trials in Japan were similar to those found in the US and 24 other countries, the severity of the matter stems from Novartis’ repeated willingness to cut corners and ignore laws in order to boost sales. Despite the results’ apparent accuracy, Japan does not recognise foreign clinical trials. The subsequently slow drug approval process continues to cause dissatisfaction with international pharmaceutical manufacturers.

They claim that Japan’s available treatments lag behind foreign competitors, thus handicapping Japanese businesses. Contributing to these concerns is the growing importance of the Japanese pharmaceuticals market with the nation’s aging population. These problems need to be dealt with head on to avoid unethical and illegal quick-fix solutions.

Masahiro Kami, professor and medical governance expert at the University of Tokyo had underlined a wider issue, stating, “You can’t take steps for prevention unless it becomes clear who did this for what kind of reason… This is really an issue for the broader industry.”

Legal proceedings
After months of leading their own investigations, the Japan Health Ministry filed the complaint with the Tokyo District Public Prosecutor’s Office, hoping their increased investigative powers would yield more information. If the prosecution does accept the claim and subsequently finds Novartis Pharma guilty of exaggerating the advertising of Diovan, the pharmaceutical company could face a fine of 2m yen and any employees involved could receive a prison sentence of up to two years – light punishments given the fraudulent nature of the crime.

Director of the Health Ministry’s Compliance and Narcotics Division, Jiro Akagawa told reporters that they had filed a criminal complaint with Tokyo prosecutors because its own investigations, aided by Novartis, had failed to expose who was involved in the alleged data manipulation.

After the ministry filed the complaint, a statement on the company’s website read: “Today, a criminal complaint was filed by the Health, Labour and Welfare Ministry against us over doctor-led clinical research on Diovan for alleged exaggerated advertising banned under the pharmaceutical law. We apologise deeply for causing tremendous worries and trouble to patients, their families, medical workers and the public. We take this incident extremely gravely and will continue to cooperate fully with the authorities.”

Novartis has a big year ahead, with the outcomes of its various international scandals eagerly awaited by the wider pharmaceutical industry. Its damaged reputation, in conjunction with the patent expiries of its best selling drug, puts Novartis in an extremely fragile position, both legally and financially. The bad behaviour of Novartis’ leading markets’ arms will soon add up, and what might have had a ripple effect on sales and brand integrity could reach tidal proportions.